* Chilly near-term weather supports market
* Mild mid-month forecasts limit upside
* Record production, storage keep buyers cautious
(Releads, adds analyst quote, spread data, updates prices)
By Joe Silha
NEW YORK, Oct 8 (Reuters) - U.S. natural gas futures ended higher on Monday, backed by forecasts for mostly chilly U.S. weather this week that should stir more heating demand despite concerns about record high supplies and an outlook for milder mid-month forecasts.
The front-month contract, which posted a 2012 high of $3.546 per million British thermal units last Tuesday, has climbed 20 percent in the last two weeks as traders anticipated the pick up in demand from 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.
"We ended up a little on the day because there's some cold weather around this week that is impacting demand, but expectations for above-average temperatures (in the extended forecasts) were weighing on the market," said Eric Bickel, analyst at Summit Energy in Kentucky.
After a chill over the next four to five days, private forecaster MDA EarthSat expects weather in the Northeast and Midwest, key gas-consuming regions, to warm to normal or above normal late in the week and next week.
Front-month gas futures
on the New York Mercantile Exchange ended up 0.7 cent at $3.403 per million British thermal units after trading between $3.327 and $3.431. Deferred months fared better, mostly settling between 1.5 and 4 cents higher.
Stronger support in forward contracts widened the January premium to November for a fourth straight day, with the spread gaining 1.1 cents to 44.7 cents. That spread is up about 21 percent in the last four sessions as milder extended forecasts prompted traders to focus on true winter months.
Concerns about competition from low-priced coal may also be weighing on prices. As prices for gas pushed well above $3 over the last two weeks, it became less competitive with coal and may have prompted some utilities that were burning cheaper gas for power generation to switch back to coal.
Most analysts agree gas prices need to be well below $3 this autumn to ensure switching back to gas. 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.
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 fell short of last year's projection and that of 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, John Wallace and Bob Burgdorfer)
Keywords: MARKETS NYMEX/NATGAS