(Adds cash prices, updates futures prices)
NEW YORK, Oct 8 (Reuters) - U.S. natural gas futuresremained lower early on Monday, pressured by milder mid-monthweather forecasts for the Northeast and Midwest despite chillytemperatures this week that should stir early heating demand.
The front-month contract, which posted a 2012 high of $3.546per million British thermal units last Tuesday, had climbednearly 20 percent in the last two weeks as traders anticipatedthe season's first cold snap.
But with inventories at record highs for this time of yearand production at or near an all-time peak, most fundamentaltraders remain skeptical of the upside, particularly with theearly chill expected to be short-lived.
"Temperatures, after the next five days of below towell-below normal conditions across the East, are expected toshift warmer in both the six- to 10- and 11- to 15-day forecastperiods," Addison Armstrong at Tradition Energy said in areport.
At 10:10 a.m. EDT (1410 GMT), front-month gas futures
on the New York Mercantile Exchange were down 2.9 cents, ornearly 1 percent, at $3.367 per million British thermal unitsafter trading between $3.327 and $3.414.
Early cash prices for Tuesday delivery at Henry Hub
, a key supply point in Louisiana, slipped 8 cents to$3.18 per mmBtu. They climbed to a 2012 high of $3.26 on Friday.
Early Hub differentials were pegged at about 14 cents underNYMEX, little changed from Friday morning levels.
Day-ahead prices for gas on the Transco pipeline at the NewYork citygate
fell 9 cents to $3.36 despite the cooloutlook for the week.
After a chilly week this week, private forecaster MDAEarthSat expects temperatures in the Northeast and Midwest, keygas-consuming regions, to warm to normal or above normal laterthis week and next week.
Competition from low-priced coal may also be weighing onprices. As gas prices pushed well above $3 over the last twoweeks, they became less competitive with coal and may haveprompted some utilities that were burning cheaper gas for powergeneration to switch back.
Loss of that demand, which helped prop up gas prices allsummer, would force more gas into a well-supplied market.
Most analysts agree gas prices need to be well below $3 thisautumn to ensure switching demand.
There are also concerns that if gas prices moved muchhigher, producers could opt to hook up wells that have beendrilled but not flowing because gas prices below $3 wereunattractive.
Baker Hughes data on Friday showed that the gas-directedrig count rose by two last week to 437 after sliding to another13-year low two weeks ago.
It was the second gain in three weeks, but only the eighthtime this year that the gas rig count has risen. The count isstill down 53 percent since peaking at 936 last October.
Drilling for natural gas has been in a near-steady declinefor the last year, but so far production has shown nosignificant signs of slowing.
While dry gas drilling has become largely uneconomical atcurrent prices, gas produced from more-profitable shale oil andshale gas liquids wells has kept output near record highs.
BEARISH STORAGE REPORT
Data late last week from the U.S. Energy InformationAdministration showed that domestic gas inventories for the weekended Sept. 28 rose by 77 billion cubic feet to 3.653 trillioncubic feet.
While the build cut the surplus relative to last year andthe five-year average, inventories are still at record highs forthis time of year and likely to end the stock-building seasonabove last year's all-time peak of 3.852 tcf.
At 86 percent full, storage is hovering at a level notnormally reached until the last week of October and still offersa huge cushion that can help offset any weather-related spikesin demand or supply disruptions from storms.
Early injection estimates for Thursday's EIA report rangefrom 76 bcf to 98 bcf versus a year-earlier build of 108 bcf andthe five-year average increase for the week of 84 bcf.
(Reporting by Joe Silha; Editing by Dale Hudson)
Keywords: MARKETS NYMEX/NATGAS