NEW YORK, Oct 5 (Reuters) - U.S. natural gas futures traded mixed early on Friday, with front-month contracts pressured by the previous day's bearish inventory report and milder mid-month weather forecasts despite cool temperatures over the next week that should stir demand.
Recent gains - the front contract has climbed 20 percent over the previous eight sessions - have been backed by forecasts for much cooler weather for the Midwest and East late this week and next week.
But with inventories at record highs for this time of year and production at or near an all-time peak, most fundamental traders remain skeptical of the upside, particularly with more moderate temperatures expected by mid-month.
"Pressure will continue to come from coal's competition with gas for electricity generation ... and forecasts for above-normal temps going into the fall and early-winter time frames," EOXLive's Tom Pawlicki said in a report.
At 9:15 a.m. EDT (1315 GMT), front-month gas futures
on the New York Mercantile Exchange were down 2.6 cents at $3.38 per million British thermal units after trading between $3.376 and $3.435. Most deferred months were up slightly.
The front contract posted a 2012 high of $3.546 on Tuesday.
Private forecaster MDA EarthSat expects temperatures in the Northeast and Midwest, key gas-consuming regions, to average normal or below normal for the next week or so, then moderate to seasonal or above seasonal levels by mid-October.
Competition from low-priced coal could also curb buying. As gas prices push well above $3, they become less competitive with coal and some utilities that were burning cheaper gas to generate power may switch back.
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 ensure 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.
BEARISH STORAGE REPORT
Data on Thursday from the U.S. Energy Information Administration showed that domestic gas inventories rose last week by 77 billion cubic feet to 3.653 trillion cubic feet.
Most traders viewed the build as bearish, noting it came in well above the Reuters poll estimate of 71 bcf.
But others noted it cut the surplus relative to last year by 24 bcf to 272 bcf, or 8 percent above the same week in 2011. It also slightly trimmed the excess versus the five-year average, reducing that surplus by 1 bcf to 281 bcf, or 8 percent.
(Storage graphic: )
A huge inventory surplus, which peaked in late March at nearly 900 bcf above a year earlier, has been cut by 69 percent as record heat this summer slowed weekly storage builds.
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 peak 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 98 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 due later 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.
(Reporting by Joe Silha; Editing by Dale Hudson)
Keywords: MARKETS NYMEX/NATGAS