With Hurricane Rita swirling through the Gulf of Mexico as a “strong hurricane” Friday afternoon, natural gas futures seemed to be marching to the beat of a different drummer. October natural gas explored lower during Friday’s regular session, settling at $12.324, down 46.6 cents on the day, but still $1.18 higher than the previous Friday’s close.

For most of Friday’s session, the prompt month hovered around $12.50 until it dropped off in afternoon trading. Late in the session, Hurricane Rita was downgraded to a Category Three storm, which sparked the October contract to a low of $12.20 before climbing slightly to settle.

The winter natural gas futures months also fell Friday, albeit by not as much. January and February 2006 each finished Friday 33.3 cents lower at $13.472 and $13.352, respectively. In addition, the petroleum futures complex also dropped off on Friday, with November crude settling $2.31 lower at $64.19/bbl. October unleaded gasoline slipped 5.38 cents to close at $2.0856/gallon, while October heating oil dropped 9.68 cents to finish at $1.9490/gallon.

With Rita’s impact to the Gulf of Mexico — let alone land — still to be assessed, some traders wondered where the weakness in the futures markets came from.

“One of our floor traders was complaining that all of the Houston traders were out of their offices and weren’t able to work their laptops, so all they were doing all day was calling for quotes,” a Washington, DC-based broker said. “However, the market’s behavior Friday was even more confusing than the people attempting to make technology work from remote locations.

It is beyond me why the market — especially the natural gas market — is selling off on any sort of weakness,” he added. “So Rita is a Category Three storm and it is not hitting Port Arthur, who cares about these things if you’re in the natural gas business. It is still cutting right through offshore natural gas assets. To sell off 50 cents on the day, I just don’t quite see the reason for it.”

The broker said some might argue that the city of Houston is going to be offline, which will destroy a lot more natural gas demand than New Orleans being offline with Katrina. “Ok I buy that I guess, but any intermediate damage done by this storm to offshore or onshore assets is the last thing the natural gas industry needs, especially because the industry doesn’t have an external answer the way liquids might, with options in Venezuela and Europe for emergency supplies.”

The broker said it was very confusing that futures would show weakness before confirmed bearish news hit the market, such as an ‘all clear’ report on damage. “There are shut-ins all over the place, so it seems like a lot of uncertainty and the market sold off in the face of it,” he said. “It just doesn’t make fundamental sense to me. Hopefully I am wrong, but I just don’t see how Rita coming through won’t have some significant impact that will be bullish on prices.”

As for the volume on the day, the broker said it was busier than many expected. “We had some marketers buying on behalf of end user clients, doing some really significant buying,” the broker said. “We were buying all day Thursday and Friday. At least on our end, I’d say we had some decent trade volumes coming in.”

As of Thursday, the storm had thinned the ranks of Houston traders, as many evacuated the city. That led much of Nymex price discovery in the hands of local traders willing to trade for small gains. Thursday’s trading was largely locally driven and pitted local bears against local bulls.

A New York floor trader noted that after an initial jump early Thursday, the market retreated, but the locals took a beating. “They got short off the bat and then reversed (long) at $13.05 and it came off right in their face. It was sort of ugly to watch. There were no trade and commercial accounts to buttress the moves and it was local against local,” he said.

The release of the usually pivotal EIA inventory report Thursday was largely lost in the storm furor. The EIA reported injections of 74 Bcf , about in line with trader expectations, and the New York floor trader noted the initial response to the EIA number was bearish, but traders soon realized that the build of 74 Bcf was within industry estimates. The New York Mercantile Exchange said Thursday that it planned to open Access trading early Sunday at 10 a.m. EDT to accommodate traders after the hurricane passes through (see Daily GPI, Sept. 23). Access trading normally begins at 7 p.m. EDT on Sunday.

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