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UPDATE 3-US natgas futures end up, front hits 2012 high

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* Light weekly inventory build seen as bullish, prices spike

* Mild outlook for next week keeps buyers cautious

* Record production, storage also limit upside

* Coming up: Baker Hughes rig data, CFTC trade data Friday

(Releads, adds analyst quote, updates prices)

By Joe Silha

NEW YORK, Oct 11 (Reuters) - U.S. natural gas futuressettled higher on Thursday for a fourth straight day, with agovernment report showing a weekly inventory build well belowmarket expectations driving the front contract to a new high forthe year.

The U.S. Energy Information Administration said domestic gasinventories rose last week by 72 billion cubic feet to 3.725trillion cubic feet.

Traders and analysts viewed the build as bullish, noting itwas well below the Reuters poll estimate of 80 bcf, the year-agoinjection of 108 bcf and the five-year average increase for thatweek of 84 bcf.

"This injection has provided a catalyst for the market tomake a move. There is clear buying pressure behind this move ...creating the potential for further gains, but today's priceresponse was a bit of an overreaction," Gelber & Associatesanalyst Aaron Calder said in a report.

Calder noted that inventories still look set to begin winterat record highs, and gas prices at current levels are likely, atsome point, to discourage more use by electric utilities.

Front-month gas futures

on the New York MercantileExchange ended up 12.9 cents, or 3.7 percent, at $3.604 permillion British thermal units after climbing early to a new 2012high of $3.628 shortly after the EIA report.

The nearby contract has gained more than 6 percent so farthis week, backed by cold Northeast and Midwest weather that hasstirred decent heating demand.

Nuclear plant outages, roughly averaging about 20,000megawatts this week, have also helped underpin prices, adding asmuch as 600 million cubic feet, or nearly 1 percent, to dailygas demand, according to data from Thomson Reuters Analytics.

But with inventories at record highs for this time of yearand production at or near an all-time peak, many fundamentaltraders remain skeptical of the upside, particularly with milderweather forecast for next week likely to slow demand.

Concerns are also growing that producers will hook up wellsthat have been drilled but not flowing to cash in on higherprices ahead of the peak-demand winter heating season.

Competition from low-priced coal may also temper buying. Gaspriced well above $3 has become less competitive with coal andcould prompt some utilities that were burning cheaper gas forpower generation to switch back.

Any let-up in that demand, which helped prop up gas pricesall summer, could force more gas into already-packedinventories.

LIGHT STORAGE BUILD

The weekly injection sliced the surplus relative to lastyear by 36 bcf to 236 bcf, or 7 percent above the same week in2011. It also trimmed the excess versus the five-year average,reducing that surplus by 12 bcf to 269 bcf, or 8 percent.

(Storage graphic:)

Despite the light build, inventories are still at recordhighs for this time of year and are likely to end thestock-building season above last year's all-time high of 3.852tcf.

Storage, now at 88 percent full, is at a level that exceedsthe average peak for the year of about 3.7 tcf typically hit inearly November. Without more unseasonably cold weather thismonth, stocks are likely to grow for four or five more weeks.

If weekly builds into early November match the five-yearaverage, inventories will begin the upcoming heating season atabout 3.97 tcf, 3 percent above last year's record high but 6.3percent below EIA's 4.239-tcf estimate for capacity.

Early injection estimates for next week's EIA report rangefrom 30 bcf to 60 bcf versus a year-earlier build of 106 bcf andthe five-year average increase for the week of 71 bcf.

HIGH PRODUCTION

Traders were waiting for the next Baker Hughes drilling rigreport on Friday.

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

But so far, production has shown few, if any, signs ofslowing.

(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.

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

On the demand side, the agency expects total consumption toclimb 4.7 percent this year but slip 0.2 percent in 2013 asexpected declines in electric power use offset increases fromresidential, commercial and industrial users.

(Reporting By Joe Silha; editing by Jim Marshall)

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

Keywords: MARKETS NYMEX/NATGAS