* Front month below recent six-month spot high
* Hot weather still on tap in 6- to 10-day outlooks
* Recent storage data, drilling rig data supportive
* Coming Up: API oil data Tuesday, EIA gas data Wednesday
(Adds cash prices, trader quote, updates throughout)
By Eileen Houlihan
NEW YORK, July 17 (Reuters) - U.S. natural gas futures
seesawed on either side of unchanged in early trading Tuesday,
with most traders expecting continued hot weather in longer-term
forecasts to limit the downside.
Others said prices will have a hard time breaking back above
their recent six-month spot high over $3 per mmBtu, a level
where gas tends to lose its appeal over coal for power
generation.
"We're up and down most days. There is definitely support
from the weather, but once the heat moves out of the forecast
this is going to move sharply lower," one Texas-based trader
said.
As of 9:42 a.m. EDT (1342 GMT), front-month August natural
gas futures on the New York Mercantile Exchange were at
$2.817 per mmBtu, up 1.6 cents.
The nearby contract rose to $3.06 in early July, the highest
mark for a front month since early January, according to Reuters
data.
Since posting a 10-year low of $1.902 twice in late April,
gas futures are up about 47 percent on signs that record
production is finally slowing and demand picking up as more
electric utilities switch from coal to gas.
With the heat expected to pull back slightly on Wednesday,
next-day gas bound for the NYMEX delivery point Henry Hub
NG-W-HH in Louisiana was heard early at $2.83 on active volume
near 723 million cubic feet, down 9 cents from Monday's average
of $2.92.
Early Hub cash deals were done at a 3-cent premium to the
front month contract, little changed from deals done late Monday
at a 4-cent premium.
Gas on the Transco pipeline at the New York citygate
NG-NYCZ6 was heard early near $3.26 on volume near 325 mmcf,
down 14 cents from Monday's average of $3.40 as the heat was
also expected to lessen in the Northeast.
BELOW AVERAGE BUILDS, BUT STOCKS STILL BLOATED
Last week's gas storage report from the U.S. Energy
Information Administration showed total domestic gas inventories
rose by 33 billion cubic feet to 3.135 trillion cubic feet.
The build was above Reuters poll estimates for a 26 bcf
gain, but fell well short of the year-ago and five-year average
gains for that week, the 11th straight week builds have fallen
below seasonal norms.
The trend has helped pull the surplus to last year - now at
about 548 bcf - down by 38 percent from late-March highs.
Traders, expecting strong weather-related demand ahead,
believe the trend will continue for at least another two
reports, further reducing the overhang.
The weekly build trimmed the surplus to last year to 21
percent above the same week in 2011 and also sliced the excess
versus the five-year average to 20 percent.
(Storage graphic: link.reuters.com/mup44s)
Lagging weekly builds have raised expectations that
record-high storage can be trimmed to more manageable levels in
the 18 weeks or so left before winter withdrawals begin.
But total storage is still at record highs for this time of
year and stands at about 76 percent full, a level not normally
reached until the first week of September. Producing-region
stocks are at 84 percent of estimated capacity.
The storage surplus to last year will have to be cut by at
least another 300 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.
Early injection estimates for this week's EIA report range
from 13 bcf to 46 bcf, with most in the low-30s bcf, versus last
year's build of 67 bcf and the five-year average increase for
the week of 74 bcf.
Concerns remain that the overhang could still drive prices
to new lows later this summer as storage caverns fill.
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 July short-term energy outlook released last week,
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 20 to a 13-year low of 522. It was the seventh
drop in the past eight weeks.
(Rig graphic: r.reuters.com/dyb62s)
A 44 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 Sunday again called for above-normal readings for nearly the
entire nation, with below-normal readings only on a slim portion
of the West Coast and some near-normal readings in the South.
Nuclear power plant outages were running at about 7,500
megawatts, or 7 percent, on Tuesday, up from 7,200 MW a year ago
and a five-year outage rate of just 4,900 MW.
The U.S. National Hurricane Center said tropical cyclone
formation was not expected over 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; editing by John Wallace and
Sofina Mirza-Reid)
