NEW YORK, Oct 8 (Reuters) - U.S. natural gas futures lost ground early on Monday, pressured by milder mid-month weather forecasts for the Northeast and Midwest despite chilly temperatures this week that should stir early heating demand.
The front-month contract, which posted a 2012 high of $3.546 per million British thermal units last Tuesday, had climbed nearly 20 percent in the last two weeks as traders anticipated the season's first cold snap.
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 the early chill expected to be short-lived.
"Temperatures, after the next five days of below to well-below normal conditions across the East, are expected to shift warmer in both the six- to 10- and 11- to 15-day forecast periods," Addison Armstrong at Tradition Energy said in a report.
At 9:20 a.m. EDT (1320 GMT), front-month gas futures
on the New York Mercantile Exchange were down 4.7 cents, or 1.4 percent, at $3.349 per million British thermal units after trading between $3.327 and $3.414.
After a chilly week this week, private forecaster MDA EarthSat expects temperatures in the Northeast and Midwest, key gas-consuming regions, to warm to normal or above normal later this week and next week.
Competition from low-priced coal may also be weighing on prices. As gas prices pushed well above $3 over the last two weeks, they became less competitive with coal and may have prompted some utilities that were burning cheaper gas for power generation to switch back.
Loss of that demand, which helped prop up gas prices all summer, would 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.
There are also concerns that if gas prices moved much higher, producers could opt to hook up wells that have been drilled but not flowing because gas prices below $3 were unattractive.
Baker Hughes data on Friday showed that the gas-directed rig count rose by two last week to 437 after sliding to another 13-year low two weeks ago.
It was the second gain in three weeks, but only the eighth time this year that the gas rig count has risen. The count is still down 53 percent since peaking at 936 last October.
Drilling for natural gas has been in a near-steady decline for the last year, but so far production has shown no significant 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 near record highs.
BEARISH STORAGE REPORT
Data late last week from the U.S. Energy Information Administration showed that domestic gas inventories for the week ended Sept. 28 rose by 77 billion cubic feet to 3.653 trillion cubic feet.
While the build cut the surplus relative to last year and the five-year average, 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.
(Storage graphic: )
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 Thursday'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.
(Reporting by Joe Silha; Editing by Dale Hudson)
Keywords: MARKETS NYMEX/NATGAS