* High inventories, record production also weigh on prices * Brief cold shot late this week limits downside By Joe Silha NEW YORK, Feb 11 Front-month U.S. natural gas futures ended higher on Monday for the first time in three sessions, backed by decent utility demand and technical buying after an early test of support held. "The fundamentals look poised to set up a rally. Electricity generators are likely to use more gas when prices are under $3.25 (per mmBtu) and more heating demand is on the way," Gelber & Associates analyst Aaron Calder said in a report. Traders said gas prices near current levels were likely to pick up support from utilities switching from coal to cheaper gas for power generation. In addition, they also noted that nuclear plant outages were running at more than 3,100 megawatts above average for this time of year. Gas-fired units are typically used to offset any lost nuclear generation, and the colder weather expected later this week and next should increase the need for replacement power. Front-month gas futures on the New York Mercantile Exchange ended up 0.7 cent at $3.279 per million British thermal units, after trading in a range between $3.207 and $3.295. The front contract lost 0.9 percent last week following a 4.2 percent slide the week before. But technical traders noted the near month tested and held the recent low in the $3.20 area, then closed higher, which could signal an upside reversal. Resistance was seen between $3.45 and $3.50. Despite the blizzard that pounded the Northeast over the weekend, some traders see only limited potential for an upside move. They note that winter is winding down, inventories remain high and production is still at or near an all-time peak. MDA Weather Services expects colder temperatures to move into the Midwest and East next weekend, but the private forecaster sees warmer readings returning to both regions in the 11-to-15-day outlook. ANOTHER BELOW-AVERAGE STORAGE DRAW U.S. Energy Information Administration data last week showed total domestic gas inventories for the week ended Feb. 1 fell by 118 billion cubic feet to 2.684 trillion cubic feet. Most traders viewed the report as bearish, noting the draw came in well below the Reuters poll estimate of 132 bcf. While the withdrawal widened the deficit relative to last year to 226 bcf, or 8 percent, it left storage relatively high at 351 bcf, or 15 percent, above the five-year average for that time of year. Withdrawal estimates for Thursday's storage report range from 128 bcf to 180 bcf. Stocks fell by 113 bcf in the same week last year. The five-year average drop for the week is 154 bcf. If withdrawals for the rest of winter match the five-year average, stocks will end March at 2.079 tcf, about 20 percent above normal but 16 percent below last year, when inventories finished a very mild heating season at a record high 2.48 tcf. DRILLING DECLINES, PRODUCTION FAILS TO SLOW Baker Hughes data on Friday showed the gas-directed drilling rig count fell last week for the fourth time in five weeks, dropping by three to 425. But while the gas rig count is hovering not far above the 13-1/2 year low of 413, hit three months ago, production has shown no significant signs of slowing. Producers have curbed dry gas drilling, but the associated gas produced by more profitable liquids-rich wells has kept gas flowing at or near a record pace.