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UPDATE 3-US natural gas futures end slightly up on early cold

* 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 endedhigher on Monday, backed by forecasts for mostly chilly U.S.weather this week that should stir more heating demand despiteconcerns about record high supplies and an outlook for mildermid-month forecasts.

The front-month contract, which posted a 2012 high of $3.546per million British thermal units last Tuesday, has climbed 20percent in the last two weeks as traders anticipated the pick upin demand from the 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.

"We ended up a little on the day because there's some coldweather around this week that is impacting demand, butexpectations for above-average temperatures (in the extendedforecasts) were weighing on the market," said Eric Bickel,analyst at Summit Energy in Kentucky.

After a chill over the next four to five days, privateforecaster MDA EarthSat expects weather in the Northeast andMidwest, key gas-consuming regions, to warm to normal or abovenormal late in the week and next week.

Front-month gas futures

on the New York MercantileExchange ended up 0.7 cent at $3.403 per million British thermalunits after trading between $3.327 and $3.431. Deferred monthsfared better, mostly settling between 1.5 and 4 cents higher.

Stronger support in forward contracts widened the Januarypremium to November for a fourth straight day, with the spreadgaining 1.1 cents to 44.7 cents. That spread is up about 21percent in the last four sessions as milder extended forecastsprompted traders to focus on true winter months.

Concerns about competition from low-priced coal may also beweighing on prices. As prices for gas pushed well above $3 overthe last two weeks, it became less competitive with coal and mayhave prompted some utilities that were burning cheaper gas forpower generation to switch back to coal.

Most analysts agree gas prices need to be well below $3 thisautumn to ensure switching back to gas. Loss of that demand,which helped prop up gas prices all summer, could force more gasinto 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 butnot flowing because gas prices below $3 were unattractive.

HIGH PRODUCTION

Baker Hughes data on Friday showed the gas-directed rigcount 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 sign of slowing.

(Rig graphic:)

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 fell short of last year's projection andthat of the five-year average, inventories are still at recordhighs for this time of year and likely to end the stock-buildingseason above last year's all-time peak of 3.852 tcf.

(Storage graphic:)

At 86 percent full, storage is hovering at a level notnormally reached until the last week of October and offers ahuge cushion that can help offset any weather-related spikes indemand 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, John Wallaceand Bob Burgdorfer)

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

Keywords: MARKETS NYMEX/NATGAS