Front month still above recent 10-year low * Cool weather in consuming regions moderates * U.S. crude futures edge higher in early trade * Coming Up: API oil data Tuesday, EIA oil data Wednesday NEW YORK, Feb 14 (Reuters) - U.S. natural gas futures were about 3 cents higher early Tuesday, edging up despite lingering concerns over a mild winter that has left inventories bloated as recent production cuts could start to help balance the market. Front-month March natural gas futures on the New York Mercantile Exchange were at $2.461 per million British thermal units in early U.S. activity, up 3 cents, or just over 1 percent. The front month fell in late January to $2.231, a contract low and the lowest price for a front month since March 2002, forcing some producers, like Chesapeake Energy, to announce production cuts. STORAGE CONCERNS TO LIMIT ANY PRICE GAINS High gas production, primarily from shale, has pressured gas prices in recent years, but with storage at record highs the focus has shifted to the huge inventory surplus, which could turn out to be an even bigger problem for prices in 2012. Last week's U.S. Energy Information Administration storage report showed total gas inventories fell by 78 billion cubic feet to 2.888 trillion cubic feet, widening the surplus to year-ago storage and the five-year average to more than 700 bcf, or 33 percent. With production still running at all-time highs and inventories likely to end winter at a record high, most traders remain cautious about any upside without much colder weather to kick up late-winter heating demand. The U.S. winter so far has been the second mildest since 1950, and scant heating demand has slowed inventory withdrawals by nearly 400 bcf, or 30 percent below normal. With no extreme cold on the horizon, more light inventory draws are expected in coming weeks, which will only add to the glut and possibly drive futures below their recent 10-year low. Early withdrawal estimates for this week's EIA report range from 100 bcf to 130 bcf, well below last year's drop of 230 bcf and the five-year average decline for that week of 178 bcf. Most analysts now expect inventories to end the winter near the all-time high for end-season storage of 2.148 tcf set in 1983, or nearly 40 percent above average. The huge cushion could also spell trouble for prices late in the summer stock-building season if inventory owners run out of room to store gas, forcing more supply into a glutted market. Estimates for U.S. working gas storage capacity range from 4.1 tcf to 4.4 tcf, a level that could be tested if storage builds from April through October match last year's 2.2 tcf. MORE FUNDAMENTALS High temperatures in key gas-consuming cities New York and Chicago were seen edging up from the 30s Fahrenheit in New York this weekend to near 50 degrees by late-week, while Chicago was seen rising from the 20s to the low-40s, according to the Weather Channel's weather.com. The National Weather Service six- to 10-day outlook issued on Monday called for below-normal readings for much of the western half of the nation, and mostly normal or above-normal readings in the East. Baker Hughes data last week showed the gas-directed rig count fell by 25 to a 28-month low of 720. It was the fifth straight weekly decline and reinforced expectations that low prices were finally forcing drillers to slow dry gas operations. The share of horizontal rigs drilling for dry gas has fallen sharply over the last two years to just 47 percent of the total due to much higher prices for oil and natural gas liquids (NGLs). That is down from 80 percent two years ago, according to Baker Hughes. While the rig count is well below the 800 level some said was needed to slow record output, analysts said the decline has yet to be reflected in pipeline flows. They said the shift to higher-value oil and gas liquids plays still produce plenty of associated gas that ends up in the market after processing. Tighter environmental rules on emissions and relatively cheap gas prices should prompt more demand from utilities and industry, but analysts say it will be difficult to balance the gas market without more serious production cuts.

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