With Tropical Storm Alex expected to spare Gulf of Mexico production as it heads on a more westerly course, August natural gas futures — in their first regular session action as the front-month contract — continued to back off the recent highs on Tuesday as hurricane premium dissipated. The August contract reached a low of $4.525 before closing the regular session at $4.548, down 18.5 cents from Monday’s finish.

According to AccuWeather.com, Alex is expected to make landfall south of Brownsville, TX, in northeastern Mexico on Wednesday night. As the rough seas began to move into the Gulf, ships currently skimming oil from the Deepwater Horizon spill were heading to port for safety.

“While Alex looks like he is headed to hurricane status, the storm doesn’t look like it is going to do much to the energy producing infrastructure in the Gulf,” said a Washington, DC-based broker. “I think the market has realized this over the last two days and that is why we’re seeing the drop in natural gas values. Importantly, we broke below $4.630, which was one zone of support. The next number is $4.490, which is not very far away. This setback doesn’t negate the recent bull run, but it does dissipate its strength. We’re not bearish here, but we’re definitely not as bullish.”

In addition to the latest Alex talk, the trading community was abuzz Tuesday with reports that BP’s energy trading operations were taking a beating as the British energy giant’s liability tied to the Gulf oil spill continues to grow. According to an article in the New York Times, some BP traders are jumping ship as trading partners are becoming wary of doing business with the embattled company, which in recent years has earned a reported $2 billion to $3 billion annually from its energy trading operations.

“The feds are doing a channel check with all the important financial institutions to find out what their exposure is to BP,” the broker told NGI. “A couple of the houses including Bank of America Merrill Lynch are issuing edicts not to do longer-dated trades with the company, which makes sense in my opinion. If you’re a trader and you know the other side has in essence unlimited money, they can either hold on until it comes back in their favor, or they can just keep putting on positions to blow you out of the water and force you out. That changes the way you have to deal with them.

“Now, BP’s pockets are a little lighter after $20 billion was taken out of the till to satisfy the spill claims fund,” he added. “Before, when BP called and said it wanted to do a bunch of swaps, traders were happy to do business with them Now, when BP calls and says they want to do 1,000 swaps, traders want to make sure they have some security that BP can meet its obligations. I’m sure back in the heart of the banking crisis, people were concerned whether JP Morgan or Goldman Sachs could meet their obligations, which is why those firms went and became bank holding companies, so that they could have access to money. BP doesn’t have that luxury, and no one is sure how many more checks the company is going to have to write.”

That said, the broker said he doesn’t expect BP to fail tomorrow. “There are legitimate concerns and market participants are going to have to evaluate the situation. It certainly changes BP’s trading parameters, especially because the company is viewed as one of the more active financial energy trading players,” he said. “At the end of the day, cash is king. If you don’t have cash, you’re dead. That’s what killed Lehman Brothers and Bear Stearns and what almost killed Morgan and Goldman. Once people in the market think you don’t have the money, they are going to run you until you are dead.”

Energy and financial markets are attempting to determine just how much muscle the current economy has, and although the natural gas market generally views broader macroeconomic trends through binoculars, it is not immune to the vagaries of employment, the housing market, interest rates, etc. Monday’s economic data was as expected. The Commerce Department reported May personal income rose 0.4%, just a shade below expectations of 0.5%, and consumer spending rose 0.2%, which was what traders had anticipated.

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