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NEW YORK (Reuters) - U.S. natural gas futures held modest gains on Tuesday, underpinned by short covering ahead of the October contract expiration on Wednesday, but high supplies, mild weather forecasts and slowing demand continued to limit the upside.
Many traders said they expect buyers to remain cautious until cooler temperatures arrive to stir more heating load, particularly with storage and production still running at or near record highs.
"This appears to be short covering - people are squaring positions ahead of the October expiration - but we've been in a sideways pattern for the last couple of weeks, and I don't think there's anything out there to move the market," said Tom Saal, senior vice president at INTL Hencorp Futures in Miami.
At 12:15 a.m. EDT (1615 GMT), front-month October gas futures on the New York Mercantile Exchange, which expire on Wednesday, were up 4.4 cents, or 1.5 percent, at $2.881 per million British thermal units after trading in a narrow range between $2.843 and $2.892.
Technical traders agree the market seemed trapped in a range between $2.70 and $3, waiting for a reason to break out.
Nuclear plant outages are running 6,200 megawatts above year-ago and may be giving gas demand from electric utilities a boost - gas-fired units usually replace any lost generation - but traders noted the impact was limited by milder temperatures that have slowed overall power loads.
Forecaster MDA EarthSat expects temperatures for the eastern half of the nation to range from normal to above normal for at least the next two weeks. Traders said readings in the high 60s and 70s Fahrenheit were not likely to generate much load.
Coal prices, too, may be a problem for would-be price bulls, with Central Appalachian coal trading at 2-12-year lows at the gas price equivalent of just above $2 per mmBtu.
Concerns persist that some utilities that have been burning cheaper gas to generate power could switch back to coal. Loss of that demand, which helped prop up gas prices all summer, could force more gas into a well-supplied market.
Most analysts agree gas prices need to stay well below $3 this autumn in order to underpin switching demand.
Total domestic gas inventories are still at record highs for this time of year and are likely to end the stock building season in late October or early November above last year's all-time high of 3.852 trillion cubic feet.
Record heat this summer helped cut a huge storage surplus relative to last year by 64 percent from its late-March high near 900 bcf.
But traders noted that weekly storage builds were likely to pick up as weather loads fade. Last week's 67 billion cubic feet gain reported by the U.S. Energy Information Administration was the largest weekly injection in more than three months and the third largest so far this year.
(Storage graphic: link.reuters.com/mup44s)
At 82 percent full, total stocks are hovering at levels not normally reached until the second week of October and still offer a huge cushion that can help offset any weather-related spikes in demand or supply disruptions from storms.
Early injection estimates for Thursday's EIA report range from 69 bcf to 81 bcf versus a year-earlier build of 104 bcf and the five-year average increase for the week of 76 bcf.
Drilling for natural gas has been in a nearly steady decline for the last 11 months, with the gas-directed rig count recently posting a 13-year low.
But so far, production shows few, if any, signs of slowing.
(Rig graphic: r.reuters.com/dyb62s )
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 stubbornly high.
The EIA expects marketed gas production in 2012 to hit a record for a second straight year, rising 4 percent from 2011 levels to 68.86 bcf per day.
Additional reporting by Eileen Houlihan; Editing by Sofina Mirza-Reid