* Warm weather headed for key Northeast, Midwest regions
* Storage, production data last week prop up prices
* Coming Up: Reuters weekly natgas storage poll Wednesday (Releads, adds quote, spread data, updates with closing prices)
By Joe Silha
NEW YORK, June 5 (Reuters) - U.S. natural gas futures ended higher on Tuesday for the second straight day, underpinned by tighter supply and demand fundamentals and forecasts for warm weather in the Northeast and Midwest later this week and next week.
The weather forecasts, particularly for the Northeast, will likely boost air conditioning demand. That plus bullish supply-side data last week on production, drilling and storage, had some traders expecting prices to be relatively well-supported at current levels.
But upside price moves may be limited in the near term as inventories remain at record highs for this time of year and monthly production has hovered just below an all-time peak.
"We saw a little follow-through buying from yesterday. The weather for the eastern part of the country looks pretty warm, at least for the next two weeks," a Pennsylvania trader said.
Front-month gas futures on the New York Mercantile Exchange ended up 3.1 cents, or 1.3 percent, at $2.446 per million British thermal units after trading between $2.383 and $2.477. The nearby contract has gained 5.2 percent so far this week after losing 9.4 percent last week.
Strength in the front contract narrowed spreads to winter months for a third day, with the December premium to July ending Monday at 72 cents, down 0.9 cent from Friday and 16 percent below its peak this year of 86.1 cents hit in mid-April.
Gas demand picked up sharply this year as prices slid to 10-year lows and prompted electric utilities to switch from coal to cheaper gas for power generation.
But as prices rose to a 3-1/2 month high of $2.759 in mid-May, some traders said the move up had made gas less competitive and could prompt some utilities to switch back to coal.
After a cool start to the week, AccuWeather.com expects temperatures in the Northeast and Midwest, key gas consuming regions, to warm to above normal later this week and most of next week, with highs rising above 80 degrees Fahrenheit (27 degrees Celsius).
LAGGING STORAGE BUILDS
Strong utility demand for gas has slowed inventory builds to below average in seven of eight previous weeks, with more below-average injections expected in at least the next two reports.
U.S. Energy Information Administration data last week showed natural gas inventories for the week ended May 25 rose by 71 billion cubic feet to 2.815 trillion cubic feet.
While the build was in line with market expectations -- the Reuters poll estimate was looking for a 70-bcf gain -- traders noted it was well below average for this time and again cut the surplus relative to last year and the five-year average.
The surplus to last year was trimmed by 18 bcf to 732 bcf, or 35 percent above the same week in 2011. The relatively light weekly build also cut 29 bcf from the excess versus the five-year average, reducing the total to 724 bcf, or 35 percent.
The storage surplus to last year has dropped 17 percent from late-March highs, but traders noted stocks remain at record highs for this time.
While most traders still expect stocks to end the injection season above last November's record of 3.852 tcf, some note that the steady stream of below-average builds has helped dampen concerns about storage reaching congestion before next winter.
(Storage graphic: link.reuters.com/mup44s)
The storage surplus to last year still has to be cut by at least another 480 bcf to avoid breaching the government's 4.1-tcf estimate of capacity.
Injection estimates for Thursday's EIA report range from 45 bcf to 75 bcf, with most in the mid-50s. Stocks rose an adjusted 81 bcf during the same week last year, while the five-year average increase for that week is 99 bcf.
SIGNS OF SLOWING PRODUCTION
Traders noted recent declines in dry gas drilling and planned output cuts by several key producers finally seemed to be taking a toll on gas production.
Energy Information Administration data last week showed gross gas production in March fell for a second straight month, dropping 260 million cubic feet per day, or 0.4 percent, from downwardly revised February output.
Output hit a record high 72.74 billion cubic feet per day in January but recent declines -- output has fallen three times in the last four monthly reports -- have stirred talk that low prices were finally forcing more producers to slow output.
But analysts said that the cuts so far were not enough to significantly reduce supplies, noting production in 2012 was still expected to set a record high for a second straight year.
Baker Hughes data on Friday showed the gas-directed rig count fell last week for the fifth time in six weeks, dropping by six to a 12-1/2 year low of 588.
The 37 percent drop in dry gas drilling since peaking at 936 in October has also raised expectations that producers were finally getting serious about stemming the flood of supplies.
The Baker Hughes report also showed that horizontal rigs, the type often used to extract oil or gas from shale, fell for a second straight week, but the count at 1,183 is still just below the all-time high of 1,193 set two weeks ago.
The shift away from dry gas to higher-value shale oil and shale gas liquid plays still produces plenty of associated gas that ends up in the market after processing. That has slowed the overall drop in dry gas output.
(Rig graphic: r.reuters.com/dyb62s ) (Additional reporting by Eileen Houlihan; editing by Jim Marshall)