By Joe Silha

NEW YORK, Dec 5 (Reuters) - Front-month U.S. natural gas

futures, shrugging off mild weather this week that has slowed

demand, held gains early Wednesday as forecasts for next week

changed to slightly cooler, particularly for the Midwest.

'We've got another cold front coming, so paper (futures) is

firmer,' a Houston-based cash trader said.

Prices have seesawed this week with changes in computer

weather predictions, but few traders expect much upside without

more sustained cold to boost heating demand, noting inventories

were still at record highs for this time of year and production

was flowing at or near an all-time peak.

At 10:15 a.m. EST (1515 GMT), front-month gas futures

on the New York Mercantile Exchange were up 6.1 cents, or 1.8

percent, at $3.60 per million Btu after trading in a range of

$3.507 to $3.619. Th e nearby contract hit a 13-month high of

$3.933 on Nov. 23.

AccuWeather.com expects temperatures in the Northeast and

Midwest, key gas-consuming regions, to mostly average above

normal for the next week. Cooler conditions are forecast for

next week, particularly in the Midwest.

Early cash quotes for Thursday delivery at Henry Hub , a key supply point in Louisiana, climbed 4 cents to

$3.42 per mmBtu. The Hub posted a 14-month high of $3.77 last

week.

Early Hub differentials firmed slightly to about 20 cents

under NYMEX versus a 23-cent discount on Tuesday.

Day-ahead prices on the Transco pipeline at the New York

citygate jumped 70 cents to $4.35 on the colder

Thursday-Friday outlook.

While technical traders said the market was oversold and due

for a bounce - the front contract slid nearly 9 percent last

week - most agreed it would take a close above the 40-day moving

average in the $3.62 area to point prices higher.

Some traders caution that if gas prices take another run at

$4, that could increase supply by encouraging producers to turn

on more wells and dampen demand by making gas less competitive

with coal for power generation.

INVENTORIES HOVER NEAR RECORD HIGHS

Data last week from the U.S. Energy Information

Administration showed domestic gas inventories for the week

ended Nov. 23 rose by 4 billion cubic feet to 3.877 trillion

cubic feet.

While a huge inventory surplus relative to a year ago -

which peaked in early April at nearly 900 bcf - has been almost

wiped out, storage is still at record highs for this time of

year and offers a comfortable cushion to meet any winter spikes

in demand or unexpected disruptions in supply.

(Storage graphic: http://link.reuters.com/mup44s )

Traders expect inventories in Thursday's EIA report to drop

below year-ago levels for the first time in 13 months.

Withdrawal estimates range from 51 bcf to 74 bcf, with most

in the mid-60s. Stocks fell 14 bcf during the same week last

year. The five-year average for that week is a 51 bcf decline.

Storage hit an all-time high of 3.929 tcf in early November.

This is the fourth straight year that gas inventories have

headed into the heating season at a record peak.

PRODUCTION SHOWS NO SIGNS OF SLOWING

Drilling for natural gas has mostly been in decline for the

last year, with gas rigs down nearly 55 percent since peaking

last year at 936 in October.

(Rig graphic: http://r.reuters.com/dyb62s)

The steep slide -- the Baker Hughes gas rig count is

hovering just above a 13-1/2-year low -- has stirred

expectations that producers might curb record output, but so far

production has not shown any significant signs of slowing.

The associated gas produced from shale oil and shale gas

liquids wells has kept dry gas flowing at or near a record pace.

EIA data on Friday showed gross natural gas production in

September rose to a record high of 73.05 billion cubic feet per

day, eclipsing the previous record of 72.74 bcfd set in January.

(Reporting By Joe Silha; editing by Sofina Mirza-Reid; Editing

by Grant McCool)

Keywords: MARKETS NYMEX/NATGAS

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

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