* Storage gain, mild weather outlook pressure prices
* Record production also weighs on sentiment
* Cool near-term forecasts limit downside
* Coming up: Baker Hughes rig data, CFTC trade data Friday
(New throughout; adds EIA data, analyst quote; updates prices, changes byline)
By Joe Silha
NEW YORK, Oct 4 (Reuters) - U.S. natural gas futures traded slightly lower on Thursday, pressured by milder mid-month weather forecasts and a government report showing a weekly inventory build well above market expectations.
The U.S. Energy Information Administration said domestic gas inventories rose last week by 77 billion cubic feet to 3.653 trillion cubic feet.
Traders viewed the build as slightly bearish, noting it was above the Reuters poll estimate of 71 bcf but below the 101 bcf build during the same week last year and the five-year average increase for that week of 78 bcf.
"The net injection was in the upper part of the expected range and close to the five-year average mark. It definitely points to a weaker supply/demand balance," Tim Evans, an energy analyst at Citi Futures Perspective, said in a report.
At 11:45 a.m. EDT (1545 GMT), front-month gas futures
on the New York Mercantile Exchange were down 2.1 cents at $3.374 per million British thermal units after slipping to an intraday low of $3.36 right after the EIA report.
Prior to the release of the weekly storage data at 10:30 a.m., the front month was trading in the $3.42 area.
The near contract, which posted a 2012 high of $3.546 this week, had gained 24 percent in the six sessions through Tuesday, backed by near-term forecasts that showed cool weather slipping into the Midwest and East later this week and next week.
But many fundamental traders remain skeptical of the upside, with storage and production still at or near record highs and the weather outlook for mid-October moderating.
Private forecaster MDA EarthSat in its 11- to 15-day outlook noted the trend continued to shift warmer, with seasonal temperatures expected for the eastern half of the country and above-seasonal readings forecast for the West.
Competition from low-priced coal could also curb buying. As gas prices pushed well above $3, they became less competitive with coal and some utilities that were burning cheaper gas to generate power may have switched back to the solid fuel.
Loss of that demand, which helped prop up gas prices all summer, could force more gas into a well-supplied market.
Most analysts agree gas prices need to be well below $3 this autumn to underpin switching demand.
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 unattractive.
STORAGE BUILDS GROW
The weekly build cut the surplus relative to last year by 24 bcf to 272 bcf, or 8 percent above the same week in 2011. It slightly trimmed the excess versus the five-year average, reducing that surplus by 1 bcf to 281 bcf, or 8 percent.
(Storage graphic: )
Record heat this summer helped trim a huge storage surplus relative to last year by 69 percent from its late-March high near 900 bcf. But inventories are still at record highs for this time of year and likely to end the stock-building season above last year's all-time high of 3.852 tcf.
At 86 percent full, storage is hovering at a level not normally reached until the last week of October and still offers a huge cushion that can help offset any weather-related spikes in demand or supply disruptions from storms.
Early injection estimates for next week's EIA report range from 76 bcf to 91 bcf versus a year-earlier build of 108 bcf and the five-year average increase for the week of 84 bcf.
PRODUCTION ALSO HIGH
Traders awaited the next Baker Hughes drilling rig report on Friday.
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 13-year low 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 last week 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.
(Additional reporting by Eileen Houlihan; Editing by Dale Hudson)
Keywords: MARKETS NYMEX/NATGAS