NEW YORK (Reuters) - U.S. natural gas futures edged lower early Wednesday after climbing in electronic trade to their highest level in nearly five weeks. Technical buying and expectations for another light weekly inventory build helped push prices above $3 per million British thermal units late Tuesday and in overnight electronic trade. But most traders remained concerned that prices cannot sustain a rally over $3, the level at which gas loses much of its appeal over coal for power generation, especially during the low-demand autumn "shoulder" period. In addition, most shut-in production from Hurricane Isaac had returned to normal this week. Shut-in offshore Gulf of Mexico gas from Isaac had been reduced to less than 5 percent of daily production, or 213 million cubic feet, by Tuesday, a government report showed. At the height of the outages in late August, the storm had shut more than 70 percent of daily offshore production, or more than 3.26 billion cubic feet. The U.S. Energy Information Administration on Wednesday said it revised upward peak U.S. working natural gas storage capacity by about 3.3 percent from last year's estimate. As of April 2012, EIA said demonstrated peak capacity - the sum of the highest working gas inventory level observed in each reporting facility over the last five years - climbed 136 billion cubic feet to 4.239 trillion cubic feet. As of 9:02 a.m. EDT (1302 GMT), front-month October natural gas futures on the New York Mercantile Exchange were at $2.967 per mmBtu, down 2.5 cents, or less than 1 percent. The nearby contract peaked at $3.277 in late July, its highest mark since December. The National Weather Service's six- to 10-day outlook issued on Tuesday again called for below-normal temperatures for most of the mid-Continent and above-normal readings along both coasts. On the nuclear front, outages totaled 9,100 megawatts, or 9 percent of U.S. capacity, on Wednesday, up from 8,900 MW a year ago and a five-year outage rate of about 7,400 MW. SMALL WEEKLY BUILD BUT STORAGE STILL BLOATED Shut-in gas production from Isaac curbed last week's inventory build and should do the same to this week's injection, traders said. Last week's EIA storage report showed domestic gas inventories rose the previous week by 28 bcf to 3.402 tcf. The build was below Reuters poll estimates for a 36 bcf build and well below the year-ago gain of 62 bcf and the five-year average increase for the week of 60 bcf. (Storage graphic: http://link.reuters.com/mup44s) It was the 18th time in 19 weeks that the weekly inventory build came in below the seasonal norm, having only exceeded the norm last week. While a huge inventory surplus from the start of the injection season has been sliced by more than half, storage remains 395 bcf, or 13 percent, above last year's levels and 329 bcf, or nearly 11 percent, above the five-year average level. Stocks are at levels that still offer a huge cushion that can help offset any weather-related spikes in demand or further supply disruptions from storms. Early injection estimates for this week's EIA storage report range from 22 to 37 bcf, versus a year-earlier gain of 80 bcf and a five-year average build of 72 bcf for that week. DRILLING RIGS SINK TO 13-YEAR LOW Baker Hughes gas drilling rig data last week showed the number of rigs drilling for natural gas in the United States slid by 21 to a 13-year low of 452. (Graphic: http://r.reuters.com/dyb62s) The count was down for the 14th time in 16 weeks. The nearly steady decline in gas-directed drilling over the last 10 months has fed expectations that producers were getting serious about stemming the flood of record supplies. But so far there is little evidence that gas output is slowing. (Reporting by Eileen Houlihan; Editing by John Wallace)

Source