October natural gas futures started the morning lower as traders were exploring sub-$5 prices again Wednesday while news surrounding the losses at hedge fund Amaranth Advisors LLC continued to unfold (see related story). After recording a low of $4.850 in morning trade, traders put in a high of $5.040 in the afternoon before the October contract settled at $4.931, down 7.5 cents on the day.

The real action once again was in the winter months, which continued to close the gap with October futures. The December contract dropped 22.1 cents to close at $7.662, while the January and February contracts declined by 23.6 cents and 23.1 cents, respectively, to close at $8.207 and $8.242. After peaking at $4.700 recently, the October-January spread as of Wednesday afternoon was down to $3.276.

The complexities caused by Amaranth’s losses may be closer to resolution. According to a Bloomberg report, Citadel Investment Group LLC is in talks to take over some energy trades from Amaranth, the hedge fund whose trades lost up to $5 billion this month, sources knowledgeable of the discussions said (see Daily GPI, Sept. 19; Sept. 20). A letter from Amaranth to its investors obtained by Reuters Wednesday afternoon confirmed that the fund completed negotiations to transfer its energy portfolio to “a third party,” but the name of the third party was not disclosed.

Gyrations in natural gas prices last week turned Amaranth into the latest hedge fund meltdown since MotherRock’s collapse a month ago. Amaranth, which managed $7.5-9.2 billion in assets and was long the natural gas market, told investors on Sept. 18 that year-to-date losses might exceed 35% of its capital due to slumping natural gas prices.

“The energy playing field has gotten leveled lately, and by leveled I don’t just mean to prices which are more inline with existing fundamentals but leveled as in dropping like a hot knife through butter,” said Jay Levine, a broker with enerjay LLC. “Thank a surprisingly mild hurricane season (so far) and thank the ‘world’ for taking a U.N. General Assembly break from the geopolitical strife which has added what many feel has been a $10-$20 premium to the price of oil…and natural gas suffering the effects of too much supply, not enough demand, and little or nothing on the radar screen with which to alter the course of continuing ever-lower prices.”

Levine said the recent difficulties of a certain hedge fund has only put more emphasis on the downside. “Reports of large spec liquidating — whether by choice or force, and the latter is far more telling and/or damaging — merely greases the wheels for what was already in place, which is to say a market struggling to maintain support at any price.”

He added that early reports of upcoming winter temperatures being below normal “should help” stem the tide of aggressively lower prices. “I suspect a ‘snap’ rally is somewhere coming, not unlike a rubber band getting stretched to the limits before snapping, and at this point it’s anyone’s guess if and when these markets truly find support and renewed buying.” As a wild card, Levine said, there is also the fund or funds that may or may not be done with liquidation. “It’s a curveball being thrown, which doesn’t necessarily have a projected course.”

Working up to Thursday morning’s Energy Information Administration (EIA) storage report for the week ended Sept. 15, Levine said he would leave the buying and selling of October natural gas to liquidation only. As for the November natural gas contract, Levine said he sees support at $5.995, $5.875 and $5.510, followed by $5.305. Resistance is seen up at $6.450, $6.700 and $7.025, followed by $7.500.

Market technicians saw a glimmer of hope for the bulls with Tuesday’s close higher. October natural gas futures need to close just moderately higher in order to set the stage for additional gains. “To open the door for further upside, natural gas needs to close above the 0.7862 retracement of the $5.274 to $4.880 decline at the $5.190 level,” said Walter Zimmerman of United Energy. If that doesn’t occur, he sees the market as “range-bound” and forming a congestion pattern “as part of a bear market rest stop.”

Tom Saal in his work with Market Profile sees the October contract in a period of “horizontalness,” sometimes referred to as congestion. In Market Profile parlance periods of horizontalness lead to periods of verticalness, i.e. sharp price advances or declines. In the case of natural gas, Saal looks for the market to test “value areas,” first $4.942 to $5.067 followed by $5.450 to $5.547 and then $5.641 to $5.840.

Bulls may need all the help they can get. Analysts suggest that much of the elevated level in energy prices was due to a “risk premium” that has little basis in fundamental supply and demand. That could easily change. “If the recent drop in crude, natural gas and other commodity prices, not to mention hedge fund collapses, spook investors, much of the risk premium could come out of energy prices sooner rather than later,” said James Williams at WTRG Energy Economics. “Expect OPEC to announce a production cut before the end of the first quarter.”

With last week’s EIA report of a surprise 108 Bcf storage injection for the week ended Sept. 8 still fresh in the minds of traders, the industry is cautiously awaiting the EIA’s report Thursday morning for the week ended Sept. 15. Last week’s report dropped front month futures below $5 for the first time in two years.

A Reuters survey of 21 industry players is calling for an average injection of 90 Bcf, while the ICAP derivatives auction held after the close of Nymex floor trading Wednesday revealed a consensus estimate of an 87.8 Bcf build.

Golden, CO-based Bentek Energy said it is expecting a storage injection of 89 Bcf, resulting in 3,173 Bcf of gas in storage. If 3,173 Bcf is achieved with this week’s report, Bentek pointed out that working gas in storage would be 12.3% above the five-year average and 7.6% over the five-year high. The company said it sees 57 Bcf added to the East region while 21 Bcf and 11 Bcf are expected to be injected in the Producing and West regions, respectively.

Thursday’s storage number will be compared to last year’s 76 Bcf injection for the week and the five-year average injection for the week of 83 Bcf.

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