UPDATE 3-US natgas futures end down 7.9 pct, biggest loss in 3 yrs

* Front month slides near 8 percent after bearish EIA stock
data
* Extended forecasts turn cooler after near-term heat
* Record storage, high production still concerns for bulls
* Coming Up: Baker Hughes rig data, CFTC trade data Friday

(Releads, adds trader quote, updates prices)
By Joe Silha
NEW YORK, Aug 2 (Reuters) - U.S. natural gas futures ended
sharply lower on Thursday as the cooler trend in weather
forecasts and a flood of long liquidation after a bearish weekly
inventory report drove the front-month contract to its biggest
loss in nearly three years.
The U.S. Energy Information Administration reported that
total domestic gas inventories rose last week by 28 billion
cubic feet to 3.217 trillion cubic feet.
While the build came in above the Reuters poll estimate of
23 bcf and was viewed as bearish, some traders noted it again
fell well short of last year's gain and the five-year average
increase for that week.
"The (EIA) build came in above consensus, but forecasts have
been trending cooler and there was a lot of new length in the
market after the recent run up," a Massachusetts-based trader
said, noting long liquidation pressured the complex.
Front-month gas futures on the New York Mercantile
Exchange ended down 25.1 cents, or 7.9 percent, at $2.92 per
million British thermal units after sinking late to a two week
low of $2.912.
It was the third straight loss for the nearby contract and
its biggest one-day drop since an 8 percent slide in September
2009.
Gas prices hit decade-lows below $2 this spring but had
rebounded by about 65 percent as record heat this summer and
increased demand from utilities switching from coal to cheaper
gas to generate power tightened the supply/demand balance.
Widespread heat has slowed storage builds below the seasonal
norm for 14 straight weeks and pulled a record inventory surplus
to year-ago down nearly 47 percent from late-March highs.
But as gas prices pushed above $3, traders said utilities
that opted to use more gas for power generation may have moved
back to coal, which would slow overall usage and likely lead to
bigger weekly storage injections in coming weeks.
Many traders had remained skeptical about the upside in
prices, noting peak summer heat will likely fade in a few weeks
and storage and production are still at or near record highs.
MDA EarthSat expects temperatures in the Northeast and
Midwest to remain above normal for the next five days.
But in its morning report, the private forecaster noted that
the 6-10 day and 11-15 day outlooks continued to shift cooler,
particularly for northern states, a factor that likely prompted
some new longs to take profits.
Traders continued to shrug off Tropical Depression Five in
the western Atlantic. The U.S. National Hurricane Center said
some strengthening was expected as the system moved into the
Caribbean later this week. Early computer runs show TD5 tracking
towards the Gulf of Mexico.

ABOVE CONSENSUS BUILD
While the weekly injection came in above expectations, it
did trim the surplus to last year by 15 bcf to 472 bcf, or 17
percent above the same week in 2011. It also sliced 28 bcf from
the excess versus the five-year average, reducing that surplus
to 407 bcf, or 14 percent.
(Storage graphic: link.reuters.com/mup44s)
But total storage remains at record highs for this time of
year and, at 78 percent full, stands at a level not normally
reached until mid-September. Producing-region stocks, which lost
6 bcf last week, are at 83 percent of estimated capacity.
There is still about 475 bcf more gas in inventory this year
than last year, a huge cushion that can help offset any
weather-related spikes in demand or Gulf Coast supply
disruptions from storms. (Storage graphic: link.reuters.com/mup44s)

Concerns remain that the storage overhang could drive prices
to new lows later this summer if inventories climb to levels
that would test the government's 4.1-tcf estimate of capacity.
The EIA estimates that gas storage will climb to 4.002 tcf
by the end of October.
Early injection estimates for next week's EIA report range
from 20 bcf to 32 bcf versus last year's build of 31 bcf and the
five-year average increase for the week of 45 bcf.

HIGH PRODUCTION
Traders were waiting for the next Baker Hughes drilling rig
report on Friday after last week's data showed the gas-directed
rig count fell for the ninth time in 10 weeks, hitting its
lowest level in 13 years.
(Rig graphic: r.reuters.com/dyb62s )
Dry gas drilling has become largely uneconomical at current
prices, and a 46 percent drop in the gas rig count over the last
nine months has fed expectations that producers were getting
serious about slowing record output.
But drillers have moved rigs to more-profitable shale oil
and shale gas liquid plays that still produce plenty of
associated gas that ends up in the market after processing.
EIA's gross gas production report on Tuesday showed that May
output was unchanged from April at 72.39 bcf per day, just shy
of January's record of 72.74 bcfd.
Traders have been looking for signs that relatively low gas
prices might finally slow record output, but production is still
at 3 bcfd, or 4.3 percent, above the same year-ago month.

(Reporting By Joe Silha; editing by Jim Marshall)