UPDATE 3-US natgas futures reverse course, end up on weather

* Cool Northeast, Midwest forecasts underpin futures

* Front month hits highest mark since early December 2011

* Concerns grow that gas becoming less competitive with coal

* Coming up: Reuters weekly natural gas storage poll Wednesday

(Releads, adds analyst quotes, spread data, updates prices)

By Joe Silha

NEW YORK, Oct 2 (Reuters) - U.S. natural gas futures ended higher on Tuesday for a sixth day, as cool forecasts for the Northeast and Midwest and rising demand offset early profit taking and technical selling after recent strong gains.

"There is likely to be an above average level of heating related gas demand over the next several weeks which has brought in a new round of buyers while sending the next layer of shorts to the sidelines," Energy Management Institute's Dominick Chirichella said in a report.

But he added, "Whether or not this little taste of winter-like temperatures will be enough to keep prices firm for an extended period of time is still a major question."

Front-month gas futures

on the New York Mercantile Exchange ended up 5.1 cents, or 1.5 percent, at $3.531 per million British thermal units after climbing overnight to a new 2012 high of $3.546.

But despite prospects for some early heating load, particularly in the Midwest, many traders and analysts remained skeptical of the upside.

For one, supplies are brimming with storage and production still running at or near record highs.

Competition from low-priced coal could also curb buying enthusiasm. As gas prices push well above $3 per million British thermal units, gas could become less competitive with coal and some utilities that have been burning cheaper gas to generate power could switch back to coal.

Loss of that demand, which helped prop up gas prices all summer, could force more gas into a well-supplied market.

Producers, too, could be tempted if prices move much higher, opting to hook up wells that have been drilled but not flowing because gas prices below $3 were not very attractive.

Front-month futures have gained more than 24 percent in the last six sessions, their biggest six-day run in three years.

Chart traders noted futures open interest increased nearly 35,000 contracts during the move up through Monday, a sign that new buying, not short covering, was fueling much of the upside.

But some said the front month was due for a pullback with the 14-day exponential relative strength index climbing into very overbought territory near 85, its highest in more than 4/1/2 years.

Strong buying up front narrowed the January premium to November for a second day, with the spread slipping 4.3 cents, or 10 percent, to 36.8 cents. In late July, that spread settled at 34.2 cents, its narrowest in about a year.

After a fairly mild week this week, private forecaster MDA EarthSat expects temperatures next week to cool to normal or below normal for the eastern two thirds of the nation, with the coolest anomalies focused in the Central U.S.


Energy Information Administration data last week showed that total gas inventories for the week ended Sept. 21 rose by 80 billion cubic feet to 3.576 trillion cubic feet, a record high for this time of year. It was the biggest weekly injection so far in 2012.

(Storage graphic: )

While record heat this summer trimmed a huge storage surplus relative to last year by 67 percent from its late-March high, storage builds in autumn are likely to pick up if weather-related demand remains moderate.

At 84 percent full, total stocks are hovering at a level not normally reached until the third week of October and still offer a huge cushion that can help offset any weather-related spikes in demand or supply disruptions from storms.

Injection estimates for Thursday's EIA report range from 55 bcf to 75 bcf, with most in the high-60s. Stocks rose an adjusted 101 bcf during the same week last year, while the five-year average increase for that week is 78 bcf.

Gas inventories are still likely to end the stock-building season above last year's all-time high of 3.852 tcf.


Drilling for natural gas has been in a near steady decline for almost a year, with the gas-directed rig count down some 54 percent since last October and posting a new 13-year low just last week.

But so far, production shows 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 stubbornly high.

EIA gross natural gas production data on Friday showed that July output climbed 0.4 percent from June to 72.58 bcf per day, just below January's record high of 72.74 bcfd.

(Reporting By Joe Silha; Editing by Marguerita Choy and Alden Bentley)

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