* Front month at highest level since December * Some heat still on tap in long-term outlooks * Recent storage data, drilling rig data supportive * Coming Up: API oil data Tuesday, EIA oil data Wednesday By Eileen Houlihan NEW YORK, July 24 (Reuters) - U.S. natural gas futures were little changed to slightly higher in early trading Tuesday, hovering near a seven-month spot chart high as continued heat and ongoing nuclear power plant outages boosted demand. As of 9:22 a.m. EDT (1322 GMT), front-month August natural gas futures on the New York Mercantile Exchange were at $3.142 per million British thermal units, up 2.5 cents. The nearby contract rose as high as $3.153 in electronic trade, the highest mark for a front month since late December. But 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. Since posting a 10-year low of $1.902 in late April, gas futures are up 65 percent on signs that record production is finally slowing and demand picking up as more electric utilities switch from coal to gas. 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 28 billion cubic feet to 3.163 trillion cubic feet. The build came in below Reuters poll estimates for a 34 bcf gain and fell well short of 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 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 more 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. Early injection estimates for this week's EIA report range from 19 bcf to 50 bcf versus last year's build of 48 bcf and the five-year average increase for the week of 61 bcf. 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 on Friday 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 Monday called for above-normal temperatures for much of the eastern two-thirds of the nation, with below-normal readings only on the West Coast and some normal readings in the South and New England. On the nuclear front, total outages tallied 9,400 megawatts, or 9 percent of total U.S. capacity on Tuesday, down from 10,200 MW out on Monday, but well above the 3,400 MW out a year ago and a five-year outage rate of 4,800 MW. The U.S. National Hurricane Center said a non-tropical low pressure system east-northeast of Bermuda had a low, 10 percent chance of further development 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 Sofina Mirza-Reid)

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