While the stock market tumbled lower Wednesday on more financial crisis news, energy futures and other commodities headed in the opposite direction on the day as investors sought refuge in tangible goods. In the second worst session of the year, Dow industrials fell more than 400 points, while October natural gas surged 63.1 cents higher to close at $7.910/MMBtu and October crude gained $6.01 to finish at $97.16/bbl.

The significant boost in natural gas futures was seen as an important move by some traders because it penetrated and closed above resistance, which had been placed as being anywhere between $7.600 and $7.850. Whether the bulls can seize on the momentum remains to be seen.

Following the recent news of the Lehman Brothers implosion and the acquisition of struggling Merrill Lynch by Bank of America, Wall Street’s troubles worsened Wednesday after the U.S. government said it would step in to rescue insurance behemoth AIG. The news of the government intervention reinforced and expanded concerns that the U.S. financial system is deeply troubled. The two remaining independent financial institution giants also took hits Wednesday. Goldman Sachs dropped $23.01, or 17%, to close at $110/share and Morgan Stanley declined by $7.52, or 26%, to close at $21.18/share. Of note is that both financial companies reported better-than-expected third quarter results on Tuesday.

“Looking at the markets on a whole, which includes commodities, the Dow, S&P and NASDAQ, what we are seeing is pure insanity,” said Ed Kennedy of Commercial Brokerage Corp. in Miami. “Energy futures climbed as we saw the unwinding of a lot of positions. Don’t forget, one of the biggest swaps dealers out there was AIG. I don’t know who was on the other side of the counterparty risk there, but we are sure to find out. We have been warning people for years about this unregulated swaps market. I’m hearing that Lehman and some of these other firms were leveraged at 30-to-1, but I am thinking the number at certain firms might have been 50-to-1. It is not the mortgages that are defaulting that are at an all-time high, it is the crap that is written against them. That is the true problem. Capitol Hill has a role in this whole swaps mess. Under the Sarbanes-Oxley Act of 2002, if the swaps dealers won’t buy the swaps back, then you have to value them at zero. What politician came up with that? The answer is [Paul] Sarbanes and [Michael] Oxley…one Democrat and one Republican voted for this, so they are forcing people who hold real assets to value them at zero and that is forcing the company out of business. That is dumb legislation, or the lack of regulation of the swaps market.

“That is what we saw Wednesday as there was the unwinding of hedges,” he added. “On the other side, there is damage to rigs. We are getting to the end of the storage injection season and the forecast is for a below-normal winter, so the bulls have some traction here. There was very good buying from the utilities at the lows, and I think the market is realizing there is limited downside here.”

Prior to Wednesday’s session, analysts suggested that the current lack of market direction might favor the bulls. According to Walter Zimmerman of United Energy, Tuesday’s trading resulted in a candlestick pattern known as a “spinning top,” which is indicative of a trendless market. “It was trading day No. 10 spent in a very narrow range with congestion just above the lows. The big question from here is who will blink first, the bears growing impatient for new lows or the bulls wondering where the heck the rally is. As this is the window for the seasonal cycle low, one market proverb might just apply here: never sell a quiet market. It is difficult to imagine a more quiet natgas market than this,” he said in a Wednesday morning note to clients.

While shut-ins in the Gulf of Mexico are still significant following the twin hurricanes of the last few weeks (see related story), it appears the industry has a lot of faith in onshore production levels. Looking at Thursday morning’s natural gas storage report, traders and analysts are calling for a build in the low 60s Bcf area, which if confirmed would not be far off last year’s 63 Bcf injection or the five-year average injection for the week of 88 Bcf.

Golden, CO-based Bentek Energy said its flow model indicates an injection of 62 Bcf, bringing stocks 6.1% below the five-year high and 2% above the five-year average.

As the remaining weeks of the injection season tick by, it is becoming more apparent that a new season-ending record is moving out of reach. “Last year’s injections averaged 53 Bcf between now and the end of the injection season, and the five-year average is 55 Bcf for the same time period,” according to Bentek. “If injections average 81 Bcf for the next eight weeks, inventories will reach a new high.”

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