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

* 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 futures settled higher on Thursday for a fourth straight day, with a government report showing a weekly inventory build well below market expectations driving the front contract to a new high for the year.

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

Traders and analysts viewed the build as bullish, noting it was well below the Reuters poll estimate of 80 bcf, the year-ago injection of 108 bcf and the five-year average increase for that week of 84 bcf.

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

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

Front-month gas futures

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

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

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

But with inventories at record highs for this time of year and production at or near an all-time peak, many fundamental traders remain skeptical of the upside, particularly with milder weather forecast for next week likely to slow demand.

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

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

Any let-up in that demand, which helped prop up gas prices all summer, could force more gas into already-packed inventories.

LIGHT STORAGE BUILD

The weekly injection sliced the surplus relative to last year by 36 bcf to 236 bcf, or 7 percent above the same week in 2011. 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 record highs for this time of year and are likely to end the stock-building season above last year's all-time high of 3.852 tcf.

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

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

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

HIGH PRODUCTION

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

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

But so far, production has shown 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 near record highs.

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

On the demand side, the agency expects total consumption to climb 4.7 percent this year but slip 0.2 percent in 2013 as expected declines in electric power use offset increases from residential, commercial and industrial users.

(Reporting By Joe Silha; editing by Jim Marshall)

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

Keywords: MARKETS NYMEX/NATGAS