NEW YORK, July 31 (Reuters) - U.S. natural gas futures, hit by profit-taking after an overnight run to a 7-1/2-month high, lost ground early on Tuesday, but still-warm weather forecasts and expectations for another light inventory build on Thursday limited the downside. At 8:55 a.m. EDT (1255 GMT), front-month gas futures on the New York Mercantile Exchange were down 2 cents at $3.194 per million British thermal units after climbing early to $3.254, the highest for the nearby contract since mid-December. The nearby contract has gained nearly 15 percent in the last two weeks, driven by widespread heat that has stirred demand and slowed storage builds to below average for 13 weeks. With more heat on the horizon, traders expect weekly storage builds to remain below average and further whittle down the still-huge surplus to a year ago and the five-year average. "Weather forecasts continue to provide support for gas prices, with above to well-above normal temperatures expected across the most of the East in the coming weeks," Addison Armstrong at Tradition Energy said in a morning report. AccuWeather.com slightly moderated its extended outlook for the Northeast and Midwest, key gas-consuming regions, but still expects temperatures mostly to average above normal. Traders mostly shrugged off a U.S. National Hurricane Center report that said a tropical wave west-southwest of the Cape Verde Islands had a 20 percent chance of further development over the next few days as it moved westward. Decade-low prices below $2 per mmBtu this spring tightened the supply/demand balance for gas by prompting many electric utilities to switch from coal to cheaper gas for power generation. Then record heat this summer, particularly in the Midwest but also at times in the East, lifted demand further and helped drive gas prices up nearly 70 percent from those lows. But despite recent gains, many traders harbor doubts about further upside, noting peak summer heat is likely to fade in the next few weeks and storage and production are still at or near record highs. A Reuters quarterly price poll on Monday showed analysts expect Henry Hub gas prices to average $2.57 this year, little changed from the previous quarter's consensus estimate of $2.55 and still about 36 percent below 2011's average of $4.02, according to Reuters data. [ID:nL2E8IBC76} Traders also caution that, as gas prices push above $3, many utilities that opted this year to use gas for power generation could move back to coal, further slowing demand. ANOTHER LIGHT WEEKLY BUILD AHEAD Early injection estimates for Thursday's Energy Information Administration report range from 16 billion to 28 billion cubic feet, well below last year's build of 43 bcf and the five-year average increase for the week of 56 bcf. It would be the 14th straight week in which the storage injection has fallen below the seasonal norm. Data last week from the EIA showed that gas inventories for the week ended July 20 climbed to 3.189 trillion cubic feet, still a record for this time of year. While last week's build again trimmed both the surplus to last year and the five-year average, there is still almost 500 bcf more gas in inventory this year than last year, a huge cushion that can help offset any weather-related spikes in demand or Gulf Coast supply disruptions from storms. (Storage graphic: link.reuters.com/mup44s) Storage stands at about 80 percent full, a level not normally reached until mid-September. 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. The EIA estimates that gas storage will climb to 4.002 tcf by the end of October. STILL-HIGH PRODUCTION Traders were waiting for the EIA's monthly gross natural gas production report due later on Tuesday, looking for signs that record- or near-record-high output was finally slowing. Data from Baker Hughes on Friday showed the gas-directed rig count fell last week by 13 to 505, the eighth decline in nine weeks and the lowest count since July 1999. (Rig graphic: r.reuters.com/dyb62s ) Dry gas drilling has become largely uneconomical at current prices, and a 46 percent drop in the gas rig count over the last nine months has fed expectations that producers were getting serious about stemming the flood of record gas supplies. But drillers have moved 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. While U.S. gas production may have slowed slightly this year, analysts note that output is still flowing at near an all-time peak, primarily due to shale drilling. (Reporting by Joe Silha; Editing by Dale Hudson)

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