Natural gas futures crashed lower for a third consecutive session Wednesday amid rumors that a large commodity trading firm was rapidly exiting its positions. August natural gas traded as low as $11.920 before closing out the day’s regular session at $12.006, down 36.2 cents from Tuesday’s finish.

Wednesday’s drop brought the August natural gas brought the contract’s three-day decline to $1.571. However, August crude — backed by a supportive inventory report — was able to stop its recent decline by closing almost unchanged. The prompt-month contract ended up gaining a penny to $136.05/bbl.

With Hurricane Bertha flopping as a threat, the energy market was abuzz Wednesday instead with rumors of a large market participant exiting energy positions in a hurry. “The rumor out there is that Lehman Brothers is liquidating their positions in energy commodities,” a New York trader said. “While the rumor is unsubstantiated, I am hearing it from a number of people in the market. Platts apparently pulled the credit on them on their server.”

Commercial Brokerage Corp.’s Ed Kennedy loaned the rumor some credibility. “It looks like some large position holder is liquidating their positions in the energies,” he said. “There are allegations about who that might be, but I am not at liberty to say.”

Kennedy noted that energy bulls are having trouble finding their traction here. “We had a bullish crude inventory report on Wednesday, but traders still sold it,” he said. “However, a Wall Street Journal piece reported that some of the Asian companies are pulling their subsidies on gasoline, which would result in a big drop in demand. Back home, demand data from the Department of Energy showed that gasoline demand dropped 2% last week, which is huge! We may be coming to the day of reckoning here. If we take out $134/bbl in crude, we really could put the pain to a lot of these funds with a major sell-off down to $110-120/bbl. CNBC is calling it the worst quarter for hedge funds since 1990. The funds have a lot of profits in crude and they may try to ring the register to make their performance look a little better.”

In natural gas, Kennedy said $11.800 is the next support zone on the way down. “We could head a little lower here, but we still haven’t hit the meat of the Atlantic hurricane season,” he said. “It is going to be a few weeks, if not months, before we get an idea of how the Gulf of Mexico will fare, so price action will still have that uncertainty hanging over its head in the meantime.”

Following the twin 60-cent tumbles of Monday and Tuesday, market technicians were scrambling to determine where the market might find support and regroup to continue the once-dominant uptrend.

Prior to Wednesday’s session, Walter Zimmerman of United Energy saw support for the August contract at $11.770 and said it “will almost certainly be vigorously tested on Wednesday. And perhaps decisively broken.” However, if $11.770 held, then Zimmerman contended that technical factors are still in play that are able to carry the market significantly higher into early 2009.

“The time cycle influences in natgas are maximum bullish into Q1 of 2009. If the past influence of these time cycles is still relevant, then natgas will make new all-time highs before the Q1 of 2009,” he said. Zimmerman places the most bullish support zone for natural gas at $11.770 as a 0.382 retracement of the $8.664 to $13.694 rally on down to $11.075 as a 0.382 retracement of the $6.838 to $13.694 advance. “From here we do not see a solid case for a decisive break below $10.265 as 50% of the $8.664 to $13.694 rally,” he said in a Wednesday morning note to clients.

Retracement analysis is one of a broad family of analytical techniques such as the Dow theory, Elliot Wave, Fibonacci and others that rely on the matching of observed price trends with predetermined cycles, which adherents claim can be used for market timing and price projection.

Retracements or not, weather bears see conditions in their favor. In its Wednesday morning six- to 10-day forecast MDA EarthSat saw cooler temperatures in major Midwest and eastern energy markets. “The cold push in the Midwest is even stronger in today’s models as strong high pressure settles directly over the area,” said meteorologist Matt Rogers. He added that the strong high pressure would allow low temperatures “to fall into the mid to upper 50s for a couple of nights in Chicago and Cincinnati. The East Coast has the cold front approaching at the beginning of the period and highs are held down by a significant rain event along the front and then on the back side of the front drier air allows for cooler lows.”

Turning attention to Thursday’s natural gas storage report for the week ended July 4, Kennedy said he is expecting a 95 Bcf injection, which is also the average expectation of 20 industry players in a Reuters survey. The poll produced expectations of a build of 90-106 Bcf. The number revealed Thursday morning at 10:35 a.m. EDT will also be compared to last year’s 98 Bcf injection and the five-year average build of 103 Bcf.

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