Oct. 6 (Bloomberg) -- The weatherman got it wrong again, and this time he disrupted more than a picnic.

In May, U.S. 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 LLC gambled big that natural gas prices would climb -- and lost.

No hurricanes have struck the U.S. coast so far this year, deflating natural gas prices. This 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. ``We did the best we could with the information we had.''

Colorado State, based in Fort Collins, is part of a cottage industry of weather forecasters, from governments and universities to private firms. A U.S. National Weather Service Web site lists 322 ``commercial weather vendors.''

Their reports are pored over by traders in the $6 billion-a- day natural gas futures market, insurers calculating what to charge policyholders, investors judging how much to pay for insurance stocks and, of course, by 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 U.S. Air Force meteorologist in the 1950s and developed the first seasonal forecasts for tropical storms in the 1980s.

`The Pioneer'

``He's the pioneer,'' says Joe Bastardi, a meteorologist at AccuWeather Inc. in State College, Pennsylvania, which sells forecasts to oil companies, energy traders and hedge funds, among others.

Gray, 76, has lately ceded some responsibility for the reports to Klotzbach, a graduate student in atmospheric sciences, and has spent more time researching whether global warming is intensifying hurricanes. By contending there is no connection between global warming and hurricanes, Gray has drawn criticism from some colleagues in the field. ``There are a lot of mixed feelings about him,'' says Cliff Mass, a professor of atmospheric sciences at the University of Washington in Seattle, who doesn't make hurricane forecasts.

Track Record

In many years, ``Dr. Gray's Tropical Storm Forecast,'' the title of a 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, running through the alphabet each year starting with A, once they sustain winds of 39 miles (63 kilometers) per hour. The storms are classed as hurricanes when winds exceed 73 mph.

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.

``We foresee another very active Atlantic basin hurricane season,'' Klotzbach and Gray wrote. They predicted 17 named storms, five of them intense hurricanes. The paper said there was an 81 percent chance of a major hurricane striking the U.S. coastline. It put the risk of one of them hitting the Gulf Coast, the center of U.S. oil production, at 47 percent.

NOAA Prediction

Other reports took a similar view. The federal government's National Oceanic and Atmospheric Administration in May predicted 13 to 16 named storms. Risk Management Solutions of Newark, California, which helps insurers set rates, said in March that an insurer that expected $100 in annual storm claims for a property in the U.S. Southeast before 2004 should assume an average of $150 a year through 2010.

The price of crude oil futures reached a record $78.40 in July. Hurricane fears also propped up natural gas prices, which touched a record $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 shut. While natural gas prices fell through midyear, as of late August they were still about $7, several times higher than the pre-Katrina lows.

`Bullishness'

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

Gray's forecast helped seal the case for some traders, says Guy Gleichmann, president of United Strategic Investors Group, a futures broker in Hollywood, Florida.

``When you get a specialist like that and others saying there's going to be a very active storm season, it did build up the bullishness,'' he says.

Insurers, already reeling from Katrina, raised prices to recoup last year's losses. Katrina alone cost $40.6 billion. All 2005 hurricanes cost $57.3 billion, according to the Jersey City, New Jersey-based Insurance Services Office Inc., which surveys insurers.

Prices for commercial properties along the U.S. 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. The biggest U.S. commercial property insurance unit of American International Group Inc., the world's largest insurer, raised rates an average of 50 percent.

Finding Reinforcement

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 $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 $4 billion of the bonds to be sold this year, triple the number in 2005.

Some investors stayed away from insurers. The Standard & Poor's 500 Property & Casualty Insurance Index fell 2.8 percent this year through Aug. 15, compared with a 3 percent advance in the S&P 500 Index.

``After two years of catastrophe losses, people start to think that's a normal state of affairs and they start investing that way,'' says Eric Holmes, who helps manage $21 billion at Cincinnati-based Fifth Third Asset Management, including the shares of Allstate Corp. ``The Colorado State report reinforced the idea that this would be a normal level of risks.''

Yet little in the way of storms materialized.

Gas Futures Fall

As of this week, no hurricanes had made landfall in the U.S. Hurricane Ernesto briefly threatened the Florida coast in August before weakening to a tropical storm and causing $100 million in damage in Virginia. Only nine named storms formed in the Atlantic. The Colorado State researchers said in an Oct. 3 report that the greatest danger to the U.S. from hurricanes this year was over.

``So Much for the Hurricane Forecasters,'' A.G. Edwards & Sons Inc. analyst Paul Newsome wrote in a Sept. 12 research report, raising earnings estimates for Hamilton, Bermuda-based Ace Ltd., Allstate and other U.S. insurers.

Seven of the 10 members of the S&P Property and Casualty Insurance Index will earn more this year than last, according to the brokerage Fox-Pitt, Kelton Inc. in London. Since mid-August, the S&P Property & Casualty Insurance Index has gained 9.2 percent, beating the S&P 500's 4.5 percent increase.

Hindsight Investing

``In hindsight, we should have bought more insurance stocks,'' Holmes says. ``We were cautious on not having too much weight in property-exposed stocks.''

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

Klotzbach says he and Gray still aren't sure why their forecast was so wrong. Gray didn't respond to a phone message and an e-mail seeking comment.

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 -- typically June through November -- he says. The phenomenon led to dry air in the Atlantic and fewer thunderstorms, Klotzbach says.

Rival Analysis

AccuWeather's Bastardi, 51, a one-time wrestler at Pennsylvania State University, questions the published Colorado State analysis. In April, Bastardi wrote a report saying the Gulf Coast would skirt major damage this year because a patch of warm water -- in the center of the South Atlantic's tropical-storm breeding grounds last year -- had moved north. He says Klotzbach and Gray may not have noticed or factored in that development.

Bastardi notes that a statistical model in Colorado State's April report, based on raw data since 1950, predicted just 11 named storms and two major hurricanes. The ``adjusted'' forecast for April -- the bottom-line prediction adding the forecasters' sense of the situation -- raised the final predictions to 17 and five.

Klotzbach says the adjustment was the result of ``our own intuition as to what's going on.'' He and Gray thought incorrectly that 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.

A Degree at 18

A Plymouth, Massachusetts, native, Klotzbach graduated from nearby Bridgewater State College with a degree in geography at the age of 18. He had been home-schooled by his father, a software engineer, and his mother, an academic adviser. He has been working with Gray since 2000.

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 Ltd., a Hamilton, Bermuda-based hedge fund that bought some of the catastrophe bonds. ``This area has been and will be an attractive one,'' says Barney Schauble, a partner at the eight-year-old hedge fund, which manages more than $100 million. ``People were looking for coverage.'' He wouldn't be more specific about the firm's returns.

Perhaps the biggest loser was Amaranth, the Greenwich, Connecticut-based hedge fund manager that had $9.5 billion in assets as recently in August. After gambling that gas prices would rise, Amaranth lost $6.5 billion as they tumbled. The fund is closing.

``Traders are very fickle,'' says Gleichmann, the United Strategic Investors president. ``Guys are coming back to a more jaded outlook with these weather forecasts, which only means down the road we're going to be set up for another surprise.''

To contact the reporters on this story: Peter Robison in Seattle on robison@bloomberg.net; George Stein in New York at ghstein@bloomberg.net

Last Updated: October 6, 2006 00:07 EDT