Natural gas futures values took their second consecutive session beating on Monday as Wall Street investment bank concerns dominated the chatter among traders. April natural gas dropped 76.8 cents Monday to close at $9.100, while April crude shrank by $4.53 to close at $105.68/bbl.

Traders on Monday were debating whether Bear Stearns’ Bear Energy subsidiary — which allegedly liquidated its physical natural gas inventory and used natural gas futures to raise cash — was responsible for the 36.2-cent drop in natural gas futures on Friday. The story got a lot bigger Monday as other prominent investment houses began to show cracks (see related story). Some futures traders noted that futures markets on the whole had lost sight of key indicators.

“No one is talking anything about fundamentals,” said a Northeast trader. “It is all about Wall Street right now and the fear of who is creditworthy and who is not.”

A Washington, DC-based broker said the drop in natural gas futures was just a mirror of everything else that is going on in other futures markets and on Wall Street. “Crude was down $4.53 and gasoline was down 18 cents,” he said. “Natural was holding up in the morning, but then came the liquidation. I am not so sure it was bearish fundamentals coming to the fore in the natural gas market as much as it was bearish financials coming to bear on everything else in the system.

“I think there were people having to meet large margin calls all across the system. Some people were having to raise cash in some places and commodities is certainly where a lot of the money has flowed into, so that is where it has to flow from. We certainly had normal risk management sell-stops going off as we moved lower. Our technical system will probably be in the sell mode after this, so there might have been some fresh technical selling on Monday’s move. The funds are net short natural, so you would think they would be buying to liquidate, but who is to say?”

Commercial Brokerage Corp.’s Tom Saal said, “The drop was pretty ferocious Monday. I’m not really sure what to make of it. Lately the funds have been rumored to be the ones that are moving the market around here, so I wouldn’t be surprised if they were at fault once again.”

Looking back on Friday’s retreat, Rafferty Technical Research’s Steve Blair said the chart had technical significance. “Natural gas had an outside reversal day on Friday, where we had a higher high, a lower low and a lower close. That is a technical reversal, but I think we have a lot of fund profit-taking,” he said. “Looking at the most recent CFTC [Commodity Futures Trading Commission] report, you’ll see liquidation of longs as well as liquidation of shorts. I think some of these longs are taking advantage of these shorts that are being pushed out on the fund side.”

Prior to Monday’s session, some risk managers were looking for spots to add to short sales. Mike DeVooght of DEVO Capital, a Colorado-based trading and risk management firm, recommended holding on to current short positions and waiting for an opportunity to sell more. “On a trading basis, we will hold current positions and are monitoring the market for any signs that we should be taking a more aggressive short position. We are looking for further weakness and a technical breakdown (a close below $8.750) to add to our short position,” he said Monday morning in a note to clients.

DeVooght suggested that trading accounts should stay short April futures at $8 and continue to hold a short October-long January spread at 70 to 75 cents. End-users should stand aside and producers should hold short a summer strip at $7.900 to $8 for a small position and also a summer strip at $8.250 to $8.350 for 50% of production.

A long-time trader, DeVooght is not optimistic about the sudden interest in natural gas and other commodity markets. “Recently commodities, especially energy assets, have been the favorite new market.” Long-term, DeVooght sees underinvestment in hard assets like commodities, “but most of the commodity markets are relatively small in relation to the financial markets and the tremendous influx of capital has created a speculative bubble that in our opinion is going to burst soon.”

Commodities priced in dollars, such as crude oil and natural gas, are receiving investor interest as the value of the U.S. dollar continues to depreciate relative to other foreign currencies. According to Bloomberg, the dollar fell 6% in the past month against a basket of six major currencies, the fastest pace of decline since May 2006. It fell to a record low against the Euro of $1.5903 in trading Monday.

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