In May the US government and private forecasters warned of another dire Atlantic hurricane season. Coming on the heels of hurricanes Katrina and Rita, the forecasts kept oil prices near a record for months. They scared away some insurance investors in a year the companies may end up turning in higher profits. And hedge funds like Amaranth Advisors gambled heavily that natural gas prices would climb - and lost.

No hurricanes have struck the US coast so far this year, deflating natural gas prices. Last week one of the most closely watched forecasters, Colorado State University, said it had overstated the hurricane risk. The bungled forecasts shed light on what happens when energy traders, investors and, in some cases, the news media, rely too heavily on an inexact science.

"That's the nature of the game when it comes to forecasting," says Philip Klotzbach, the 26-year-old research associate who is the lead author of the Colorado State hurricane report.

Colorado State is part of a cottage industry of weather forecasters, from governments and universities to private firms. A US National Weather Service Web site lists 322 "commercial weather vendors."

Their reports are pored over by traders in the natural gas futures market which is worth US$6 billion (HK$46.8 billion) a day, insurers calculating what to charge policyholders, investors judging how much to pay for insurance stocks and, of course, coastal residents.

The university's hurricane reports have been considered a bellwether because of the reputation of their founder, William Gray. He got his start as a US Air Force meteorologist in the 1950s and developed the first seasonal forecasts for tropical storms in the 1980s.

In many years, Dr Gray's Tropical Storm Forecast, the Colorado State Web site where the free report is updated monthly during the hurricane season, proved uncannily accurate. Early in 2002, 2003 and 2004, the reports correctly predicted the number of named storms in the Atlantic Ocean and Gulf of Mexico for the entire year. The National Weather Service gives tropical storms a name once they sustain winds of 63 kilometers per hour. The storms are classed as hurricanes when winds exceed 117kph.

Last year, when a record 28 named storms formed in the Atlantic, the Colorado State report sounded an early alarm, warning in May 2005 of "a well-above-average hurricane season" and predicting 15 named storms. That track record is one reason this year's first forecast, published in April, drew so much attention.

The forecast predicted 17 named storms, five of them intense hurricanes. The paper said there was an 81 percent chance of a major hurricane striking the US coastline. It put the risk of one of them hitting the Gulf Coast, the center of US oil production, at 47 percent. Other reports took a similar view.

The price of crude oil futures reached a record US$78.40 in July. Hurricane fears also propped up natural gas prices, which touched a record US$15.78 in December. At one point after Katrina and Rita, all of the Gulf's oil production and 80 percent of its gas output was closed. While natural gas prices fell through midyear, as of late August they were still about US$7, several times higher than the pre-Katrina lows.

"Worries of a repeat were a major factor in keeping prices high this summer," says Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts.

Insurers raised prices to recoup last year's losses. Katrina alone cost US$40.6 billion. All 2005 hurricanes cost US$57.3 billion, according to Insurance Services Office, which surveys insurers.

Prices for insuring commercial properties along the US coast rose as much as 500 percent in the second quarter this year, according to a survey by the Council of Insurance Agents and Brokers.

Storm worries prompted insurers to sell a record number of catastrophe bonds, which pay out in the event of specific disasters. The protection comes at a price: high interest rates. When Swiss Re sold US$950 million of the bonds in June, it offered yields as much as 39 percentage points over the London interbank offer rate, or LIBOR, says Martin Bisping, head of risk-sharing at the Zurich- based reinsurer. The industry expects US$4 billion of the bonds to be sold this year, triple the number in 2005.

Yet little in the way of storms materialized.

As of last week, no hurricanes had made landfall in the US. Hurricane Ernesto briefly threatened the Florida coast in August before weakening to a tropical storm and causing US$100 million in damage in Virginia. Only nine named storms formed in the Atlantic.

The Colorado State researchers said in an October 3 report that the greatest danger to the US from hurricanes this year was over.

Some energy traders were also rethinking. Natural gas futures in late September touched a four-year low of US$4.20.

Klotzbach says he and Gray still are not sure why their forecast was so wrong.

The main factor may have been an unexpected El Nino, a warming of Pacific Ocean waters that suppresses the formation of Atlantic hurricanes, Klotzbach says. The warming had never occurred so suddenly and so late in the hurricane season he says. The phenomenon led to dry air in the Atlantic and fewer thunderstorms.

He and Gray thought incorrectly conditions in 2006 would match other years with similar ocean temperatures, Klotzbach says. To make next year's forecast more accurate, they are including data going as far back as 1900 in their statistical models.

Journalists may have oversimplified the storm forecasts, Klotzbach says. The April Colorado State report noted that it would be statistically unlikely to have as many hurricane landfalls as in 2004 and 2005. "Storms make for good news," Klotzbach says.

They can also create financial winners and losers. Among the winners was Nephila Capital, a Bermuda-based hedge fund that bought some of the catastrophe bonds. "This area has been and will be an attractive one," says partner Barney Schauble. "People were looking for coverage."

Perhaps the biggest loser was Amaranth. After gambling that gas prices would rise, Amaranth lost US$6.5 billion as they tumbled. The fund is closing.

BLOOMBERG