* Natural gas prices near highest level since July 2011
* Early cold weather provides momentum; more expected
* EIA report shows stockpiles lower than average (Updates cash and futures prices at settlement)
By Joe Silha
NEW YORK, Dec 12 (Reuters) - Early winter cold and depleting stockpiles pushed natural gas prices to near two-year highs on Thursday, breathing life into a market flattened for years by oversupply.
Chilly weather has driven natural gas prices up 25 percent over the last six weeks and left less gas in storage than normal, a trend some expect to continue with more freezing temperatures on the way.
While U.S. natural gas prices tend to rise in winter due to heating demand, and some see limits to the recent rally, this year's cold has offered the kind of early boost not seen in years. Prices Thursday were 30 percent higher than a year ago.
"The market is being driven because demand is strong so gas inventory in the ground is low," said Anthony Yuen, analyst at Citigroup in New York. "The end of winter inventory looks relatively low, which will be supportive of the market."
Front-month gas futures on the New York Mercantile Exchange settled 7.2 cents higher at $4.409 per million British thermal units, after a weekly government storage report showed inventories fell more than normal. Prices earlier rose to $4.434, the highest since May and only a penny off a two-year record.
A boom in drilling for natural gas in shale formations since last decade has pushed output in the United States to record highs, driving prices in 2012 to below $2 per mmBtu, the lowest level in ten years. Since then, prices have rebounded but often balked around the $4 mark.
Some technical traders said the rally may not last for long, noting the market was at its most "overbought" in nearly 10 years, based on the 14-day RSI basis which measures market momentum.
The U.S. Energy Information Administration reported on Thursday that total gas inventories fell last week by 81 billion cubic feet to 3.533 trillion cubic feet, well above last year's draw of 8 bcf and exceeding the five-year average for that week of 76 bcf.
The weekly draw widened the storage deficit relative to last year to 273 bcf, or 7.2 percent. It also increased the shortfall to 3 percent versus the five-year average.
While stockpiles are still at comfortable levels, traders said cold forecasts through December were likely to lead to more above-average inventory draws.
Private forecaster MDA Weather Services said it expects strong cold across the nation in its 11- to 15-day outlook. Thomson Reuters natural gas analytics group expects higher heating demand for the next two weeks.
Analysts are expecting a huge inventory draw next week, with early estimates ranging from 180 bcf to 229 bcf compared to a 70 bcf drop a year-ago and a five-year average decline of 133 bcf.
In the cash market, gas for Friday delivery at the NYMEX benchmark, Henry Hub <GT-HH-IDX> in Louisiana, rose 16 cents to $4.40, according to ICE. Late deals were at a 3-cent premium over the front-month contract, firming from those done late Wednesday at a 3-cent discount.
Gas on the Transco pipeline at the New York citygate <E-TSCO6NY-IDX> dropped to $6.72 from Wednesday's 10-month high average near $17, according to ICE. In Chicago, prices rose 7 cents to $4.65.
Data from the U.S. Nuclear Regulatory Commission showed about 7,200 megawatts, or 7 percent of U.S. capacity, was offline on Thursday, down from 7,900 MW out on Wednesday, 12,225 MW out a year ago, and a five-year average outage rate of 8,871 MW. (Reporting by Joe Silha, Eileen Houlihan and Julia Edwards; Editing by Edward McAllister, John Wallace, Jeffrey Benkoe, Chris Reese and Jim Marshall)