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Quiet Friday Caps Wild Week; Talk Continues on Hedge Fund’s Demise
After a tumultuous week that saw wide price swings in both directions, significant heat, the coming and going of a tropical storm and the demise of a prominent hedge fund, September natural gas futures on Friday took a much deserved rest, trading within a slim 22-cent range before settling at $7.246, down 4.6 cents on the day and 6.2 cents lower than the previous week’s finish.
With Tropical Storm Chris continuing to weaken overnight Thursday to a tropical depression, traders — who earlier in the week had a quiver full of bullish fundamentals — found themselves Friday looking for solid footing. Thursday morning’s storage report also failed to back up the bulls’ case as the Energy Information Administration reported that 19 Bcf was injected for the week ended July 28, a far cry from the 7 Bcf surprise withdrawal a week earlier.
The September contract went on a little bit of a roller-coaster ride during the week as storm concerns and unrelenting heat gripped the U.S. On Monday, the prompt month soared $1.027. However, Wednesday’s 22.5-cent addition, Tuesday’s 63.7-cent decline and Thursday’s 50.7-cent decline were almost enough to bring the week back to even. The September contract’s regular session trading range during the week was $7.120 to $8.545.
“[Thursday]’s EIA storage [report] of a 19 Bcf injection was basically in line with expectations but with Chris being downgraded, natural gas prices are being downgraded as well,” said Jay Levine, a broker with enerjay LLC. He noted that based on all the recent volatility, September natural gas remains in a state of flux, if not confusion.
“Reason enough to give any buys and/or sells an extra-wide berth. Basically natural gas looks like it wants to head lower on this move, and I’d be looking for support first in the $7-teens, and likely closer to, if not slightly below, $7,” Levine said. “That’s the way it looks to me even if I still feel the risk/reward is up.”
Breaking down Friday’s inaction, a Washington DC-based broker summed up trading as “mostly a snorer” as traders regained their breath from a wild week. “Interestingly, we seemed to hang around in Fibonacci neighborhood,” he said. “We ended up right around a 38.2% retracement [$7.417] of the move [$5.470-$8.619] on the perpetual chart. We couldn’t break much below there.”
The broker added that the market saw it all during the week. “We had one outright bullish day, two outright bearish days and a camouflaged bearish day Wednesday,” he said. “Although we finished 22.5 cents higher on Wednesday, we were well off of the day’s highs. I still think we are seeing a fourth wave correction with a final fifth wave upward to come. The fifth wave — when it comes — should exceed that $8.619 high recorded in after-hours Nymex Access trading on Tuesday.”
The trading community was abuzz Thursday and Friday with the news that energy hedge fund MotherRock LP was closing its doors following an alleged $200+ million in natural gas trading losses over June and July (see Daily GPI, Aug. 4). The fund was founded by former Nymex President J. Robert “Bo” Collins, former Nymex vice president of strategy John D’Agostino and former Nymex trader Conrad Goerl in late 2004 and began operations in 2005 with great fanfare. The fund was a significant natural gas futures player with approximately $430 million in assets under management at its peak.
According to the DC broker, it was business as usual on the trading floor Friday. “Nobody is harmed except for MotherRock,” he said. “The exchange is not going to collapse and nobody else is going to have any problems. Might the fund move the market around? No one can tell, but there is no threat to the system despite somebody losing a very large sum of money. To my knowledge there has been no malfeasance, just bad trading. The system worked and those of us who were long were happy to collect our money from MotherRock.”
Word swirling around the market Thursday was that MotherRock got caught taking a bearish stance during the market’s recent spate of volatility. “The trader talk I heard said MotherRock was short and got caught in this last run-up,” the broker said. “The thing I am not clear on is what put them under duress before that. The rumor was is they were suffering some declines and some investor redemptions over the last couple of months so they made a big play. Nobody knows what happened except Mr. MotherRock and maybe some investors.
“The most important thing about the whole situation is it showed the strength of Nymex’s clearing system and exchange-traded instruments. The fund can lose on trade and blow-up, but it still has to pay its margin call,” he said. “The fund has a Nymex broker that it holds its positions through and that broker is saying every day, ‘Send me money.’ What happened here is MotherRock has had to send so much of its investable cash over there that it now has none left, so MotherRock decided to close the fund rather than go deficit.”
The broker added that MotherRock’s main problem was that it wasn’t a natural gas producer that was selling against production. “If MotherRock was a producer, it could have sold its natural gas at a higher price to fund its futures losses, which is called hedging,” the broker explained. “MotherRock, as a speculator, did not have that other side of the equation, that is why you have to close the fund when you are that wrong in the market.”
MotherRock refused to comment Thursday and Friday when reached at its offices in New York.
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