October natural gas futures traders couldn’t make up their minds on price direction Monday as some pinned last week’s landslide-like decline to news of significant losses at a sizeable hedge fund. After trading within a range from $4.880 to $5.140, the prompt month ended up closing at $4.942 on Monday, down 4 pennies on the day.

The winter months, which had been falling even faster than the front month, put in mixed results Monday with the December contract closing 3.2 cents higher at $7.806, while January and February 2007 posted losses of 16.8 cents and 17.8 cents to close at $8.336 and $8.391, respectively.

Reports surfaced Monday that Greenwich, CT-based Amaranth Advisors LLC — which has $7.5 billion in assets under management — has year-to-date losses possibly exceeding 35% (more than $2.625 billion) due to last week’s plunge in natural gas prices (see related story).

“We beat this market up pretty well, and now with this Amaranth news, we at least have some rationale for what has been causing the big sell-off over the last few days,” said Tom Saal, a broker with Commercial Brokerage Corp. in Miami. “I don’t think anyone knows quite what to do here due to that Amaranth situation. The market has been trending lower so Amaranth was likely long. I think we could still work a little lower.”

Saal noted that he still finds the $4.60 area to hold significant weight. “We traded below $4.60 for 10 years. Once we got to staying over $4.60, we never dropped below it…at least on a monthly settlement basis,” he said. “The $4.60 area is huge. That is technically the only number I am looking at right now because the market is going haywire with all of the volatility in it. When the ask-bid spread goes out 2-4 cents, that is a clear sign that the liquidity is drying up. We are definitely oversold, but this market could stay oversold at least a few more weeks.

“Sooner or later, the people who are short are going to have to get out,” Saal added. “We already know somebody who was long that had to get out. Now we have the hedgers/commercial traders pretty short, so in their framework they will probably wait till next week to move. We will have to see.”

Some traders note that the market is due for an upward correction and suggest a rebound from a technically oversold condition. Mike DeVooght, president of DEVO Capital, a Colorado trading and risk management firm, attributes the weakness in natural gas to a larger than expected injection into storage (108 Bcf vs. market expectations of 90 Bcf), a weakening oil complex, and liquidation by tired holders of long positions.

“One thing new last week (our guess) was the selling in the winter contracts by producers. A lot of producers have been shrugging off the weakness in the spot market because of the lofty prices the deferred contracts were holding,” he suggested. DeVooght contends that the thinking was that “there’s no reason to hedge now because come winter, we will be just fine even though our break-even levels have risen dramatically over the past couple of years.”

The price collapse last week of the winter contracts changed all that. “Last week, that psychology seemed to change when we started to crack the $10 level in the winter months. Last week, the feeling was ‘I can’t afford to wait, I need to sell it now.’ On a trading basis, we will hold current positions. This market has come off a long way, and is probably due for some type of bounce, but fundamentally, there is no reason this market cannot work lower in the weeks to come,” he said.

DeVooght advises trading accounts to maintain a spread position consisting of short October crude oil and long October natural gas, end users are advised to stand aside, and producers should hold a short October natural gas position at $8.45. Producers should also stay short 30% to 50% of winter 2006-2007 production established earlier at $13.95.

Closer to the action New York floor traders are confused, but see a solid bearish tone to the market. “The winter months were hit Friday for 50 cents and the front month went up,” noted Eric Bolling, a Nymex floor trader. “If that does not tell you that there is a huge perceived bearish sentiment out there, nothing does. I am having a hard time figuring out where this market is headed. It’s acting so crazy, and many of the spreads are moving in different directions. There’s no rhyme or reason for what is going on.”

Hurricane Helene has reached Category 3 strength at 125 mph and was located 1,090 miles east-southeast of Bermuda. It was moving to the northwest at 9 mph and meteorologists are attempting to figure how far east of Bermuda it will track.

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