* Front month down from highest level since December * Some heat still on tap in long-term outlooks * Recent storage data, drilling rig data supportive * Coming Up: EIA natgas storage data Thursday (Adds cash prices, updates throughout) By Eileen Houlihan NEW YORK, July 26 (Reuters) - U.S. natural gas futures rose about 1 percent in early trading Thursday, lifted by expectations for another light weekly inventory build and ongoing heat across much of the nation. But prices were down from this week's seven-month spot chart high, and most traders expect prices will have a hard time remaining above the $3 level, where gas tends to lose its appeal over coal for power generation. Most traders and analysts expect weekly gas storage data from the U.S. Energy Information Administration to show a build of about 26 billion cubic feet when it is released today at about 10:30 a.m. EDT (1430 GMT) a Reuters poll showed. Stocks rose an adjusted 48 bcf in the same week last year, while the five-year average build for that week is 61 bcf. As of 9:26 a.m. EDT (1301 GMT), front-month August natural gas futures on the New York Mercantile Exchange, which expire on Friday, were at $3.096 per million British thermal units, up 2.6 cents, or about 1 percent. The nearby contract rose as high as $3.196 on Tuesday, its highest mark since December. Since posting a 10-year low of $1.902 in late April, gas futures are up 63 percent on signs that record production is slowing and demand picking up as electric utilities switch from coal to gas. In the cash market, gas bound for the NYMEX delivery point Henry Hub NG-W-HH in Louisiana was heard early at $3.13, down 6 cents from Wednesday's average of $3.19, also at its highest level since December. Early Hub cash deals were done at a 3-cent premium to the front month, even with deals done late Wednesday. Gas on the Transco pipeline at the New York citygate NG-NYCZ6, however, was heard early near $3.49, up 3 cents from Wednesday's average of $3.46. BELOW AVERAGE BUILDS, BUT STOCKS STILL BLOATED Last week's EIA gas storage report showed total domestic gas inventories rose by 28 bcf to 3.163 trillion cubic feet. The build came in below Reuters poll estimates for a 34 bcf gain, last year's gain of 67 bcf and the five-year average increase for that week of 74 bcf. It was the 12th straight week builds have fallen below seasonal norms. The trend, expected to continue in this week's report, has helped pull the surplus to last year - now at about 509 bcf, or 19 percent - down by 38 percent from late-March highs, raising expectations that record-high storage can be trimmed to manageable levels in the 17 weeks left before winter withdrawals begin. Storage now stands 470 bcf, or 17 percent, above the five-year average. (Storage graphic: link.reuters.com/mup44s) But total storage is about 77 percent full, a level not normally reached until the second week of September. Producing-region stocks are at 84 percent of estimated capacity. Concerns remain that the 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 260 bcf to avoid reaching 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. PRODUCTION STILL HIGH While gross U.S. gas production has slowed some from January's record highs, output is still flowing at near all-time peaks despite declines in dry gas drilling and planned output cuts by several key producers. In its recent July short-term energy outlook, the EIA raised its estimates for marketed gas production and consumption growth in 2012. The agency expects marketed natural gas production in 2012 to rise by 2.8 bcf per day, or 4.2 percent, to a record 68.98 bcfd. Consumption this year is seen climbing by 3.3 bcf daily, or 4.9 percent, to 69.91 bcf daily. Data from Baker Hughes last week showed the gas-directed rig count fell by four to a 13-year low of 518. It was the eighth drop in the past nine weeks. (Rig graphic: r.reuters.com/dyb62s) A 45 percent drop in dry gas drilling in the last nine months has stirred expectations that producers were getting serious about stemming the flood of record gas supplies. But horizontal rigs, the type most often used to extract oil or gas from shale, are hovering just shy of the record high 1,193 hit in May. Drillers continue to move rigs to more profitable shale oil and shale gas liquid plays that still produce plenty of associated dry gas that ends up in the market after processing. MORE FUNDAMENTALS The National Weather Service's 6- to 10-day outlook issued on Wednesday again called for above-normal temperatures for much of the eastern two-thirds of the nation, with below-normal readings on the West Coast and some normal readings in parts of the South and Midwest. On the nuclear front, total outages tallied 7,500 megawatts, or 7 percent of U.S. capacity, on Thursday, up from 7,200 MW on Wednesday, and well above the 2,600 MW out a year ago and a five-year outage rate of 3,800 MW. The U.S. National Hurricane Center said tropical cyclone formation was not expected during the next 48 hours. The Atlantic hurricane season runs from June 1 through Nov. 30. The latest government statistics show the Gulf of Mexico accounts for 6 percent of U.S. gas production and just over 20 percent of U.S. oil production. (Reporting by Eileen Houlihan)

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