With the Wall Street bailout bill failing at the House of Representatives level at midday Monday, worries over a potential repeat of the Great Depression translated into energy demand reduction signals for many traders as energy futures crashed on the day, led by a 10% drop in near-month crude futures.

November crude, which closed at $106.89/bbl on Friday, dropped $10.52 on Monday to finish the regular session at $96.37/bbl. The drop in natural gas futures paled in comparison, but was significant in its own right. In their first regular session action as front-month, November natural gas futures dropped 40.7 cents (5%) to close at $7.221.

On the day the House rejected the government’s $700 billion bank bailout plan, the Dow industrials recorded a 778-point drop, which is the largest single-day point loss ever (see related story).

“It’s not everyday you get to see the stock market drop 700 points during the day,” said a Washington, DC-based broker. “I think there are two worries. There is the financial worry, which is the Wall Street problem, and there is the economic worry, which is the larger thing here. I think the finance impacts the economy, but I think crude is down $10 on worries that the U.S. is in a recession, meaning money is tight and the numbers for crude oil demand need to be revised even lower.

“The real interesting thing here is crude is down 10% and natural gas is not down nearly as much. It appears we have come down to this $7 floor on natural gas, which is supporting us. We really have been oscillating between $7 and $8 and we are kind of in the competitive range with coal pricing near the bottom of this range. On the other side, oil is still well above its historical ratios of six-oil to natural and certainly two-oil to natural. Oil obviously has a lot more room to fall than natural gas to be considered to be within its normal trading parameters.”

The broker warned that there is a lot of market uncertainty for energy trading in the near term. “We’ve got so many big balls moving right now, it is hard to forecast very far ahead. If crude drops another $10, at some point we could get a liquidation of all financial assets. I don’t think we will, but we are in some uncharted waters here in the larger financial system. I don’t know if these fluctuations are affecting anyone that is still playing in these energy markets. We are also getting to the point where this banking crisis could start to feed back into energy futures. People who can’t get their loan, can’t meet their margin calls. Someone might need to liquidate some of their positions just to pare back because they won’t meet their margin call in their full position. They don’t want to liquidate, but they can’t afford to get blown out either.”

Most top traders agree that the course of natural gas and petroleum prices this week will be determined by conditions in U.S. financial markets. They are looking for selling opportunities. “[Natural gas] futures prices will most likely be determined by the same factors that will be impacting the [petroleum] complex,” said Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm. “On a trading basis we feel any substantial rallies above the $8.000-8.300 level on the spot market should be viewed as a selling opportunity,” he said in a summary report to clients.

Even if the bailout had been approved by Congress, DeVooght said he believed the U.S. economy would still be in trouble. “Even if taxpayers bail out the financial institutions, it seems unlikely that a government-sponsored bailout is going to substantially revive the U.S. economy. The only thing that is going to give the U.S. consumer a substantial boost is a significant drop in the major commodity markets — especially the energy markets.”

For natural gas accounts he advises traders and end-users to stand aside. Producers and physical market longs should hold a long winter 2008 $10 put strip established earlier at 65 cents.

Bulls might find some support for their case later in the week as unseasonably cool temperatures penetrate the Midwest and trickle into the Mid-Atlantic and Northeast.

“The leading edge of unseasonably cool air will spread into the Great Lakes during the day Tuesday,” according to Brett Anderson, senior meteorologist for AccuWeather.com. “Ahead of the cool air, warm air will surge northward through the East during the afternoon, setting the stage for thunderstorms. A line of strong thunderstorms is expected to form from Pennsylvania down through the Virginias and western North Carolina. The biggest threat from these storms will be damaging winds and large hail in addition to the lightning.”

©Copyright 2008Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.