* Front month futures end up in seesaw trade
* Fairly warm forecasts for the next two weeks help back gains
* Record inventories, high production keep buyers cautious
* Coming Up: Baker Hughes rig data, CFTC trade data Friday (Releads, adds analyst quote, technical data, updates prices)
By Joe Silha
NEW YORK, July 26 (Reuters) - U.S. natural gas futures ended higher on Thursday in a seesaw session, underpinned by a slightly supportive weekly inventory report and fairly warm weather forecasts for the next two weeks that should continue to lift demand and slow storage builds.
The U.S. Energy Information Administration report showed total domestic gas inventories rose last week by 26 billion cubic feet to 3.189 trillion cubic feet.
While the build matched the Reuters poll estimate and was viewed as neutral by some, others saw it as supportive, noting it fell well short of last year's gain of 48 bcf and the five-year average increase for that week of 61 bcf.
Front-month August gas futures on the New York Mercantile Exchange, which expire on Friday, ended up 3.5 cents, or 1.1 percent, at $3.105 per million British thermal units after swinging between $3.018 and $3.129 after the EIA report.
It was the sixth gain in seven sessions for the front contract, which is up about 11 percent during that period.
Widespread heat has slowed storage builds to below average for 13 straight weeks and pulled a record inventory surplus to year-ago down nearly 45 percent from late-March highs.
"Above normal temperatures still are a positive for natural gas prices even though the current forecast is not as severe as the temperatures actually were back in June," said the Energy Management Institute's Dominick Chirichella.
Chirichella also said that while the weekly storage injection matched consensus estimates, it was supportive versus bigger builds seen last year and in the five-year average.
Technical traders said profit taking after recent gains at times pressured the complex today, particularly with the August contract set to expire on Friday.
They noted that futures open interest declined by nearly 20,000 contracts in Wednesday's 4 percent sell-off, a sign that long liquidation, not new selling, mostly drove prices lower.
Early this year, decade-low prices below $2 helped tighten the supply/demand balance for gas by prompting many utilities to switch from coal to cheaper gas to generate power.
Record heat this summer, particularly in the Midwest but also at times in the Northeast, lifted demand further and helped drive gas prices up nearly 65 percent from spring lows, hitting a seven-month high near $3.20 earlier this week.
But many traders see only limited upside from here with peak summer heat likely to fade in the next few weeks and storage and production still at or near record highs.
MDA EarthSat expects heat to continue, particularly for the Midwest. "The forecast for this (11-15 day) period has held steady, keeping a broad coverage of aboves in place. The core of the anomalous warmth remains focused over the Central U.S."
Some traders also caution that as gas prices push above the $3 mark, many utilities that switched this year from coal to cheaper gas to generate power could move back to coal.
ANOTHER LIGHT WEEKLY BUILD
The weekly injection trimmed the surplus to last year by 22 bcf to 487 bcf, or 18 percent above the same week in 2011. It also sliced 35 bcf from the excess versus the five-year average, reducing that surplus to 435 bcf, or 16 percent.
(Storage graphic: link.reuters.com/mup44s)
But total storage stands at about 80 percent full, a level not normally reached until mid-September. Producing-region stocks are at 84 percent of estimated capacity.
Concerns remain that the storage overhang could still drive prices to new lows later this summer as storage caverns fill.
The storage surplus to last year must be cut by at least another 240 bcf to avoid breaching the government's 4.1-tcf estimate of total capacity. Stocks peaked last year in November at a record 3.852 tcf. EIA estimates that gas storage will climb to 4.002 tcf by the end of October.
Early injection estimates for next week's EIA report range from 18 bcf to 33 bcf versus last year's build of 43 bcf and the five-year average increase for the week of 56 bcf.
PRODUCTION, STILL NEAR RECORD HIGHS
Traders were waiting for the next Baker Hughes drilling rig report on Friday after last week's data showed the gas-directed rig count fell for the seventh time in eight weeks, hitting its lowest level in 13 years.
(Rig graphic: r.reuters.com/dyb62s )
Dry gas drilling has become largely uneconomical at current prices, but drillers have been moving rigs to more profitable shale oil and shale gas liquid plays that still produce plenty of associated gas that ends up in the market after processing.
Baker Hughes data last week showed that horizontal rigs, the type used to extract oil or gas from shale, fell for a second straight week. But the horizontal count at 1,164 is still not far below the all-time high of 1,193 hit nine weeks ago.
The shift to more horizontal drilling has slowed the overall drop in dry gas output. (Reporting By Joe Silha; Editing by Marguerita Choy and Andrew Hay)