UPDATE 3-Technical buying drives US natgas futures up 6 pct

* Mostly mild weather ahead for consuming regions this week
* Production shut ins from storm Isaac nearly back to normal
* Coming up: Reuters natural gas storage poll on Wednesday

(Releads, adds quote, spread data, EIA data, updates closing
prices)
By Joe Silha
NEW YORK, Sept 11 (Reuters) - U.S. natural gas futures ended
sharply higher on Tuesday for a second straight day, driven by
technical buying and expectations for another light weekly
inventory build despite moderating U.S. weather this week that
should slow air-conditioning demand.
Traders, noting open interest climbed more than 25,000 lots
during Friday's 3.4 percent slide then slid more than 14,000
contracts on Monday's 4.8 percent gain, said short covering
seemed to be fueling most of the gains.
They noted buying picked up sharply early on Tuesday when
prices at the floor open blew through technical resistance at
the spot 40-day moving average in the $2.88 per mmBtu area.
Volume on Tuesday was very heavy at an estimated
650,000-plus contracts, the third or fourth largest this year.
"I think there's been a lot of technical buying this week,"
a Pennsylvania-based trader said, noting recent shorts, now out
of the money, were likely getting "squeezed" by the move up.
Traders said expectations for another light weekly storage
build on Thursday also backed some of the buying, noting
lingering production cuts from Hurricane Isaac and strong air-
conditioning demand likely slowed injections last week.
Front-month gas futures on the New York Mercantile
Exchange ended up 18 cents, or 6.4 percent, at $2.992 per
million British thermal units after climbing late to $3.004, the
first time above the $3 level in nearly five weeks.
The front contract has rallied 11.6 percent in the last two
sessions, notching its biggest two-day gain in three months.
Chart traders said the market was rebounding from an
oversold condition after prices slid 6 percent in three straight
losing sessions late last week.
The two-day run up, led mostly by the nearby contract,
crushed spreads to winter months, with the January premium to
October shrinking 8.5 cents, or about 16 percent, to 45.8 cents,
its smallest in nearly 2-1/2 months.
Traders shrugged off a newly formed tropical depression in
the Atlantic Ocean on Tuesday. Early computer tracks show it
steering north, not towards the United States.
But traders were still keeping a close eye on the tropics,
noting the peak of the storm season typically occurs this month.
With inventories still at record highs for this time of year
and production flowing at or near an all-time peak, most traders
remain skeptical of the upside, particularly with summer heat
finally starting to fade.
In its 6-10 day and 11-15 day outlooks, private forecaster
MDA EarthSat expects temperatures for most of the eastern
two-thirds of the nation to average normal or below normal.
In addition, most analysts agree that gas prices need to
stay well below $3 heading into autumn in order to encourage
utilities to burn gas rather than coal to generate power.
A loss of utility demand could lead to larger weekly storage
builds and renew concerns about inventories testing total
capacity before winter.

LIGHT STORAGE BUILD AHEAD
Injection estimates for Thursday's U.S. Energy Information
Administration report range from 22 billion to 37 billion cubic
feet, with most in the low-30s. Stocks rose an adjusted 80 bcf
during the same week last year, while the five-year average
increase for that week is 72 bcf.
Traders noted that Gulf of Mexico production shut-ins last
week from Hurricane Isaac totaled more than 11 bcf.
EIA data last week showed that gas inventories for the week
ended Aug. 31 climbed to 3.402 trillion cubic feet, still a
record high for this time of year.
(Storage graphic: link.reuters.com/mup44s)
A huge inventory surplus, which peaked in late March at
nearly 900 bcf above a year earlier, has been cut by 55 percent
as record heat this summer slowed weekly builds.
But at 83 percent full, stocks are at levels not normally
reached until the first week of October, and offer a huge
cushion that can help offset any weather-related spikes in
demand or Gulf Coast supply disruptions from storms.
With summer heat winding down, concerns remain that the
storage overhang could drive prices to new lows this autumn if
inventories test the government's 4.1 tcf estimate of capacity.

RIGS DECLINE, PRODUCTION REMAINS HIGH
While the Baker Hughes gas drilling rig count has fallen in
14 of the last 16 weeks to a 13-year low, traders say there is
little evidence so far that gas output is slowing.
(Rig graphic: r.reuters.com/dyb62s )
Dry gas drilling may be largely uneconomical at current
prices, but the associated gas produced from more profitable
shale oil and shale gas liquids wells is likely to keep gas
production at a record high for a second straight year.
In its short-term Energy Outlook on Tuesday, EIA slightly
raised its estimate for gas production this year, expecting
total output in 2012 to climb to a record 68.86 bcf per day. The
agency trimmed its estimate for total demand.

(Reporting by Joe Silha; Editing by John Wallace, Marguerita
Choy and Sofina Mirza-Reid)