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UPDATE 2-US natural gas futures near flat, mild forecasts weigh

Wednesday, 10 Oct 2012 | 1:27 PM ET

* Chilly near-term weather, nuclear outages lend support

* Mild outlook for next week keeps buyers cautious

* Record production, storage also limit upside

* Coming up: EIA, Enerdata natural gas storage data Thursday

(Releads, adds trader quote, Reuters storage poll, EIA STEO, updates prices)

By Joe Silha

NEW YORK, Oct 10 (Reuters) - U.S. natural gas futures were trading nearly flat on Wednesday in a seesaw session, with some follow-through buying after the previous day's rally offset by milder Northeast and Midwest weather forecasts for next week that should slow demand.

The front-month contract, which posted a 2012 high of $3.546 per million British thermal units early last week, has climbed 22 percent in a little over two weeks as traders anticipated a pickup in demand this week from the season's first cold snap.

While reports on Tuesday that the 11- to 15-day weather model had turned colder drove prices up 2 percent, traders noted that predictions out that far were unreliable and the changes cited were small, with fairly mild weather still expected for most of the nation for at least the next two weeks.

"Some short-lived cooler variability was added to the forecast during early next week from the Midwest to East. This comes in between surges of warmth for these same regions, which still dominate the pattern overall," private forecaster MDA EarthSat said in its morning report.

At 1:05 p.m. EDT (1705 GMT), front-month gas futures

on the New York Mercantile Exchange were up 1.9 cents at $3.486 per mmBtu after trading between $3.431 and $3.511. Some deferred months declined slightly.

Nuclear plant outages have lent some support to prices. The roughly 20,000 megawatts of nuclear generation offline for maintenance this week have added about 600 million cubic feet, or nearly 1 percent, to daily gas demand, according to data from Thomson Reuters Analytics.

But despite recent gains, most fundamental traders remain skeptical of the upside. Inventories are at record highs for this time of year, production is at or near an all-time peak and milder temperatures are expected soon to slow overall demand.

"I don't see any weather (demand) next week, there are no signs that production is slowing, and at these prices why won't producers turn more gas on," a Texas-based trader said, noting winter prices were near $4.

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

Competition from low-priced coal may also be weighing on sentiment. As gas prices push well above $3, they become less competitive with coal and could prompt some utilities that were burning cheaper gas for power generation to switch back.

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

STORAGE BUILDS PICK UP

Traders and analysts were waiting for the next U.S. Energy Information Administration storage report on Thursday, with most expecting stocks to have gained 80 billion cubic feet last week, according to a Reuters poll on Wednesday.

Stocks rose an adjusted 108 bcf during the same week last year. The five-year average increase for that week is 84 bcf.

EIA data last week showed that domestic gas inventories for the week ended Sept. 28 climbed to 3.653 trillion cubic feet, still a record high for that time of year.

(Storage graphic: )

A huge inventory surplus, which peaked in late March at nearly 900 bcf above a year earlier, has been cut by 69 percent as record heat this summer slowed weekly storage builds.

But 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.

Inventories are still expected to end the stock-building season above last year's all-time peak of 3.852 tcf.

HIGH PRODUCTION

Drilling for natural gas has been in a near-steady decline for the last year, with the gas-directed rig count down some 53 percent since last October and posting a 13-year low just two weeks ago.

But so far, production has shown 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 near record highs.

In its short-term energy outlook on Wednesday, EIA still expects marketed natural gas production in 2012 to be up about 4 percent from 2011's record levels, with a smaller 0.5 percent gain predicted in 2013.

On the demand side, the agency expects total consumption to climb 4.7 percent this year but slip 0.2 percent in 2013 as expected declines in electric power use offset increases from residential, commercial and industrial users.

(Reporting by Joe Silha; Editing by Dale Hudson and Jim Marshall)

((joe.silha@thomsonreuters.com)(+1 646 223 6071)(Reuters Messaging: joe.silha.reuters.com@reuters.net))

Keywords: MARKETS NYMEX/NATGAS