UPDATE 2-US natural gas futures edge higher in seesaw trade

* Chilly near-term weather helps underpin gains

* Mild mid-month weather outlook limits upside

* Record production, storage also keep buyers cautious

(Recasts, adds byline, analyst quotes, updates prices)

By Joe Silha

NEW YORK, Oct 8 (Reuters) - U.S. natural gas futures edged higher at midday Monday in seesaw trade, underpinned by chilly U.S. temperatures that have stirred early heating demand.

But record high supplies and a milder mid-month weather outlook helped limited the upside.

The front-month contract, which posted a 2012 high of $3.546 per million British thermal units last Tuesday, has climbed nearly 20 percent in the last two weeks as traders anticipated the season's first cold snap.

But with inventories at record highs for this time of year and production at or near an all-time peak, most fundamental traders remain skeptical of the upside, particularly with the early chill expected to be short-lived.

"It's all about weather and this is the first good slug of (cold) weather we've had. But (longer-term) forecasts don't look that supportive," said Tom Saal at INTL FCStone in Miami, noting that some forecasters are calling for a mild start to winter.

After a chill over the next four to five days, private forecaster MDA EarthSat expects temperatures in the Northeast and Midwest, key gas-consuming regions, to warm to normal or above normal late in the week and next week.

At 1:10 p.m. EDT (1710 GMT), front-month gas futures

on the New York Mercantile Exchange were up 2.8 cents, or nearly 1 percent, at $3.424 per million British thermal units after trading between $3.327 and $3.431.

Concerns about competition from low-priced coal may also be weighing on prices. As gas prices pushed well above $3 over the last two weeks, they became less competitive with coal and may have prompted some utilities that were burning cheaper gas for power generation to switch back to coal.

"The market seems unsure about where to go from here as the scope of heating demand or gas-to-coal switching isn't yet evident," Gelber & Associates analyst Aaron Calder said.

Most analysts agree gas prices need to be well below $3 this autumn to ensure switching demand. Loss of that demand, which helped prop up gas prices all summer, could force more gas into already-packed inventories.

There are also concerns that if gas prices move much higher, producers could opt to hook up wells that have been drilled but not flowing because gas prices below $3 were unattractive.

HIGH PRODUCTION

Baker Hughes data on Friday showed the gas-directed rig count rose by two last week to 437 after sliding to another 13-year low two weeks ago.

It was the second gain in three weeks, but only the eighth time this year that the gas rig count has risen. The count is still down 53 percent since peaking at 936 last October.

Drilling for natural gas has been in a near-steady decline for the last year, but so far production has shown no significant sign 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 near record highs.

BEARISH STORAGE REPORT

Data late last week from the U.S. Energy Information Administration showed that domestic gas inventories for the week ended Sept. 28 rose by 77 billion cubic feet to 3.653 trillion cubic feet.

While the build cut the surplus relative to last year and the five-year average, 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.

(Storage graphic: )

At 86 percent full, storage is hovering at a level not normally reached until the last week of October and offers a huge cushion that can help offset any weather-related spikes in demand or supply disruptions from storms.

Early injection estimates for Thursday's EIA report range from 76 bcf to 98 bcf versus a year-earlier build of 108 bcf and the five-year average increase for the week of 84 bcf.

(Reporting by Joe Silha; Editing by Dale Hudson and John Wallace)

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Keywords: MARKETS NYMEX/NATGAS