* Cool near-term forecast lends support to prices
* Big storage build seen as bearish, prices briefly slip
* Record production, storage continue to limit upside
* Coming up: Baker Hughes rig data, CFTC trade data Friday
(Releads, adds analyst quote, updates prices)
By Joe Silha
NEW YORK, Oct 4 (Reuters) - U.S. natural gas futures ended slightly higher on Thursday in a seesaw session, as traders shrugged off a bearish weekly inventory report and focused instead on cooler weather forecasts for next week and better heating demand as winter approaches.
Data from the U.S. Energy Information Administration showed that domestic gas inventories rose last week by 77 billion cubic feet to 3.653 trillion cubic feet.
Traders, noting the build came in well above the Reuters poll estimate of 71 bcf, viewed it as slightly bearish and prices initially declined.
But others noted the injection fell below the year-ago figure and the five-year average for that week, resulting in another reduction in the surpluses relative to both of those benchmarks.
"The prompt NYMEX natural gas contract sold off immediately after the EIA revealed a larger than expected ... injection into storage," Mike Tran, at CIBC World Markets, said in a report.
But he added, "The market is now keenly looking past the fall shoulder season and forward to the winter. A cold start to the winter will certainly provide another boost."
Front-month gas futures
on the New York Mercantile Exchange ended up 1.1 cents at $3.406 per million British thermal units after slipping to an intraday low of $3.36 right after the EIA report. Prior to the release of the data, the front month was trading in the $3.42 area.
The near contract, which posted a 2012 high of $3.546 on Tuesday, has gained 20 percent over the last eight sessions, closing lower only once during that period.
Gains have been backed by near-term forecasts for much cooler weather for the Midwest and East later this week and next week.
But many fundamental traders remain skeptical of the upside, with storage and production still at or near record highs and the weather outlook for mid-October moderating.
Private forecaster MDA EarthSat in its 11- to 15-day outlook noted the trend continued to shift warmer, with seasonal temperatures expected for the eastern half of the country and above-seasonal readings forecast for the West.
Competition from low-priced coal could also curb buying. As gas prices push well above $3, they become less competitive with coal and some utilities that were burning cheaper gas to generate power may switch back.
Loss of that demand, which helped prop up gas prices all summer, could force more gas into a well-supplied market.
Most analysts agree gas prices need to be well below $3 this autumn to underpin switching demand.
Producers, too, could be tempted if prices move much higher, opting to hook up wells that have been drilled but not flowing because gas prices below $3 were unattractive.
STORAGE BUILDS GROW
The weekly build cut the surplus relative to last year by 24 bcf to 272 bcf, or 8 percent above the same week in 2011. It slightly trimmed the excess versus the five-year average, reducing that surplus by 1 bcf to 281 bcf, or 8 percent.
(Storage graphic: )
Record heat this summer helped trim a huge storage surplus relative to last year by 69 percent from its late-March high near 900 bcf. But inventories are still at record highs for this time of year and likely to end the stock-building season above last year's all-time peak of 3.852 tcf.
At 86 percent full, storage is hovering at a level not normally reached until the last week of October and still offers a huge cushion that can help offset any weather-related spikes in demand or supply disruptions from storms.
Early injection estimates for next week's EIA report range from 76 bcf to 91 bcf versus a year-earlier build of 108 bcf and the five-year average increase for the week of 84 bcf.
PRODUCTION ALSO HIGH
Traders awaited the next Baker Hughes drilling rig report on Friday.
Drilling for natural gas has been in a near-steady decline for almost a year, with the gas-directed rig count down some 54 percent since last October and posting a 13-year low last week.
But so far production shows few, if any, signs of slowing.
(Rig graphic: )
While dry gas drilling has become largely uneconomical at current prices, gas produced from more-profitable shale oil and shale gas liquids wells has kept output stubbornly high.
EIA gross natural gas production data last week showed that July output climbed 0.4 percent from June to 72.58 bcf per day, just below January's record high of 72.74 bcfd.
(Additional reporting by Eileen Houlihan; Editing by Dale Hudson)
Keywords: MARKETS NYMEX/NATGAS