Consensus Report: January 10, 2008

Petroleum Retreats further from $100 Price Barrier on initial reaction to Product increases in EIA update and Recession Fears, while Natural Gas Continues price climb on Colder Forecast and larger Supply Reduction

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead, the market had left a price gap back below between $7.53 and $7.57, which being notorious for filling it’s gaps, makes for an irresistible target. We anticipated from the overbought status exhibited in the stochastics, momentum, and the MACD, that despite the parabolic and positive divergence remaining in the linear oscillator, the upside price influence should soon yield to price fatigue, and likely find rejection to come in from a potential breakdown from failing at a sub-peak somewhere under the recent intraday high at $7.97. We also said to look for from the steep angle of the recent price climb that when the upward momentum stalls, probably near the $7.80 to $7.86 price band, it will be followed by a violent drop that will not only fill in the price gap below, but also break much further taking out minor support below at $7.25 and even lower. While our target at filling the gap in the mid-fifty cents range was hit, the market failed to drop farther from this level as bull forces quickly returned to control prices. Looking ahead from the recent price escalation that has broken decisively through our upside resistance band at $8.0-$8.10 we see prices now poised to test traditional key resistance at $8.60 despite being grossly overbought already. We anticipate values to be defended on pull backs at minor support between $8.10 and $7.98, and then more critical at the bearish pivot price at $7.80 that if broken on close should return the market to test $7.50 again. Of course the weather and degree of cold is the paramount influence on price direction this time of year in our opinion and will be discussed further in the next section.

Fundamental Supply Update

This week's EIA report revealed a slightly larger supply withdrawal of 171 bcfs that was comfortably higher than both previous estimates by Bloomberg and DowJones that were closer to 162 respectively. Storage now stands at 2750 bcfs which is 282 bcfs below last year’s record and 122 or 4.6% above the five year average of 2628 bcfs. The market reacted with only a slight dip in prices following the release of the EIA’s supply report on profit-taking after the recent run-up and yet found support just below the $8.0 benchmark at $7.98 before rebounding sharply higher in settling near session peak value at 8.20 $75 per million British thermal units for gain of 17.6 cents or 2.2%. Looking ahead after this week’s surprising market strength that carried values up through our previous resistance level at the $8.0 benchmark and then $8.10 which the market managed to penetrate today, we anticipate continued follow through with the market now poised to challenge traditional key resistance at $8.60 which if breached on close could easily take prices up to challenge the $9.0 benchmark. As mentioned earlier and in previous reports the weather is now the single most dominant influence over price direction and with the recent shift in the computer models towards a much colder solution forecast for the upper Midwest and Northern section of the country we can see continued upward pressure on price values. Today’s market performance also showed independent strength as natural gas exhibited strong defiance in ignoring the meltdown in petroleum values and the rest of the energy complex as crude oil dropped about two dollars per barrel while natural gas posted a strong gain.

  Concerning crude oil, the market today continued its recent retreat after last week’s history making breach of the key psychological $100 benchmark after prices hit $100.09 in electronic trading before profit-taking settled prices in negative territory. February crude oil settled at $93.71 per barrel on the Nymex after a drop of $1.96 or 2.1%. The markets sharp decline followed a brief short covering earlier in the session following words from Federal reserve chairman Ben Bernanke who indicated more fed interest-rate cuts were on the way in what has become considered a desperate attempt to head off the serious threat of a looming recession here in the United States emerging from the subprime mortgage meltdown in the biggest housing crisis since the great Depression. More negative news came from Goldman Sachs restated yesterday that the US economy will fall into recession in the second quarter and then mentioned today there’s a 50% chance of recession in Japan, the world’s second-largest economy. Between the US and Japan, they account for one third of the world’s oil consumption and so logically the fear of economic slowdown and thus slumping demand from this large source of energy consumption in the world a large question in the theory that even if the US enters recession strong energy demand from Europe and Asia could make up the difference. However, and to reiterate what we have stated in many previous reports, that a real recession here in United States presented the largest threat to the uptrend in oil as the reality of this scenario just on perception alone could trigger an almost immediate removal of a large portion of fear premium that is currently elevating petroleum values and this factor alone could return the market back to test the $80 benchmark and even lower! Also we believe much to the chagrin of many of the Wall Street pundits and reality defying carnival acts like Kudlow  and Cavuto, that even in China and Asia the pain of a consumer driven recession here in the United States would also be felt in their economies experiencing some slowdown as the United States being the strongest product consumer in the world would no doubt take a serious toll on their export market as well. This week’s decision by the European Central Bank to hold rates unchanged at 4% for the 7th month consecutively also contributed to the weakening US dollar which is longer-term bullish for crude oil as it logically indicates the requirement of more US dollars being necessary to make up the value of a barrel of crude and yet simultaneously increasing the purchasing power of the other currency holders as their value rises in contrast. However in the immediate sense as a rate cut poses only a long-term and theoretical solution that can only contribute to the possible recovery of the economy and yet is far from a cure-all for the complex problems that currently threaten economic growth, and so petroleum values continued to retreat on the legitimate fear of the looming recession. And so the ongoing balance of forces that influence petroleum values will continue. On the upside prices will continue to find support on the supply demand tightness in his this week the EIA revealed another at larger than expected drawdown in crude stocks as they dropped by 6.8 million barrels and more than three times what had been anticipated leaving the total stocks at 282.8 million barrels in the lowest level in three years. However what seriously mitigated the bullish impact of this figure was a contrasting larger than expected increase to motor gasoline stocks of 5.3 million barrels which was also about three times more than anticipated while distillate fuel stocks also increased by a more than expected amount of 1.5 million barrels and yet remain in the lower half of the average range for this time of year. Refinery capacity also increased now up to 91.3% as gasoline production increased over the previous week as well as distillate fuel production which also rose from last week. Consumption rates especially for gasoline continue to indicate slowing demand as a report from MasterCard advisers indicates a drop of over 5% in the consumption of gasoline over the same period this time last year.

WSI Weather 6-10Day Outlook

Changeable conditions are expected to characterize the weather over the eastern half of the country next week.

Sandwiched in between periods of seasonable to seasonably cool readings early and late next week is expected to be a brief period of warmer than normal temperatures. However, the pattern looks too progressive to bring any prolonged periods of unseasonably warm or cold weather. In response, daytime highs generally in the 30s and 40s are expected to be the rule for the Great Lake States and northeastern U.S. most of next week. Highs in the 40s and 50s are forecast over Texas and the southeastern U.S. The main story in the 6-10 day period though will likely be the cold weather the majority of medium range models now advertise will overspread the western and north-central U.S. A series of cold Canadian air masses are forecast to bring below and much below normal temperatures to most of the western half of the country next week. The first of these air masses is forecast to arrive near mid-week, when highs in the teens and 20s are anticipated over the north-central U.S., and 20s and 30s and 40s and 50s are forecast over the interior western and southwestern U.S., respectively. The coldest of the air masses is expected to arrive near the end of the 6-10 day period (next Sunday), when the first Arctic air mass since early December is forecast to overspread the western and north-central U.S. In response, daytime highs may struggle to reach 0 degrees over portions of the north-central U.S. on the coldest days next week. Highs as a cold the teens and 20s over forecast the interior western U.S. Even Seattle and Portland may unseasonably cold weather next weekend, with highs falling back into the 30s by end of the day 6-10 day. In response to the cold weather during the latter half of next week, below and much below normal temperatures are now forecast over the most of the western half of the country for the balance of 6-10 day forecast. The much below normal anomalies forecast over the northwestern and north-central U.S. are mainly based on the cold weather expected to arrive in day 9-12 time period.

Conclusion

Natural gas has continued its strong short-term uptrend from its recent and brief foray down to below the key psychological $7.0 benchmark and established lows at the debut of the February spot futures. Looking ahead especially after the sharp advance that managed to take the market beyond last week’s price peak of $7.97 per million BTU has now positioned the market to challenge the next important price resistance level at $8.60. The weather will continue to be the most important influence and so far looks supportive to the uptrend as the computer models have this week made a noticeable shift to a much colder solution indicating a strong downward plunge of frigid Canadian Arctic air is likely to permeate the central and northern tier of the country over the 6-10 and extending into the 11-15 day forecast that is now likely to shift the balance of January to a colder than normal conclusion which is the opposite scenario to what was expected earlier. This sudden shift in the weather has also contributed to higher values as it has forced many traders to cover pre-existing short positions that were initiated on the expectancy that prices would drop. It should also be mentioned that the once heavy supply cushion that existed at the beginning of the month with over 8% surplus above the five-year average has now been cut almost in half with the current overage running only at 4.6% above the five-year average and yet this has been accomplished without any major winter performance which is further evidence of how precarious the actual production rate is for natural gas. As we have mentioned many times in the past, that the market continues to be plagued by a vulnerable production rate that seems to fall in jeopardy as to its reliability whenever demand exceeds the norm. It has once again become painfully obvious from the recent price surge that should an extended Winter blast that could sustain temperatures to below normal in both major consuming regions of the Midwest and Northeast over an extended period of at least two weeks or more, to see how the existing surplus could be immediately eradicated putting existing supplies once again in a danger zone and thus launching prices almost immediately too uncomfortable levels above the $10 benchmark!

Concerning the petroleum complex, this week’s price activity, surprised many of the over-exuberant bulls who had anticipated prices to surpass the key psychological $100 benchmark and possibly even establish a new trading range above this level. However the continuous retreat which has resulted in returning values back to the $94 benchmark and temporarily today reaching a session low of $93.25 has quickly reminded everyone of the sobering volatility that has become characteristic to the crude oil market! Looking ahead the market will continue to be influenced by the balancing act of the weekly EIA supply numbers, international threats to supply lines, ongoing instability in the Middle East along with unrest in Pakistan, and on the Bears side of the equation of course the looming threat of recession here in the United States. And so the short-term threats to supply and ongoing perception of continued robust energy consumption fueled by double-digit GDP growth in Asia will continue to underpin the uptrend and petroleum values while the more gradual and time-consuming revelation of the impending recession here in the United States will provide the countermeasure to that uptrend. OPEC’s continued abstinence to the global economic threat of the recent unhealthy escalation in Oil prices along with the world’s growing perception of their dubious limitations as to supply capabilities has also supported the recent fear premium that Crude prices have managed to maintain. Until then for the immediate forecast we will anticipate a possible negative momentum follow-through to retest $93.25 and then more critically at the $92 benchmark with rebound attempts in the market likely to first bring values back up to challenge the $95 benchmark and then a more bullish continuation to the pivot price of $97.50 per barrel. While this week’s price correction took out all of our downside price targets culminating in exceeding our furthest downside target of $95, it shows the market’s vulnerability to the perception of recession threat and the potential likelihood that it would lead to slowing demand for energy in the world’s top consumer, and then other nations as well that are tied to our demand for their exports.

FUTURES AND OPTIONS TRADING INVOLVE RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE.

January 10, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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