Consensus Report: January 17, 2008

Petroleum Continues Recent correction on initial reaction to Supply increases in EIA update and more Housing induced Recession Fears, while Natural Gas Continues Range trade on Colder Forecast amidst Supply Cushion.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead, from the recent price escalation that had broken decisively through our upside resistance band at $8.0-$8.10 that we saw prices poised to test traditional key resistance at $8.60 despite being grossly overbought already. We anticipated values to be defended on pull backs at minor support between $8.10 and $7.98, and then more critically at the bearish pivot price at $7.80 that if broken on close should return the market to test $7.50 again. Over the past week the market has been held range bound with the upside limited to $8.48, a marginal distance below our upside resistance and key historic bull pivot price at $8.60, and then below at minor support holding above $7.92 and exactly the same margin of $.12 cents above key support at $7.80. Looking ahead we have mixed signals with short term indicators such as stochastics, momentum, and relative strength in overbought territory, while some of the longer term signaling further upside potential. Under this scenario we look for a potential challenge and break through the upside at $8.48 to test $8.60 near term and likely within the next 3-5 sessions, yet if this attempt fails, we feel from the duration of the recent advance that fatigue will set in quickly causing a subsequent failure to bring a sharp and dramatic collapse with values easily returning to test key support back below at $7.92 and lower rapidly. 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 lower supply withdrawal of 59 bcfs that was smaller than both previous estimates by Bloomberg and DowJones that were closer to 62 respectively. Storage now stands at 2691 bcfs which is 258 bcfs below last year’s record and yet 168 or 6.7% above the five year average of 2523 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 not far below the $8.0 benchmark at $7.92 before rebounding sharply higher in settling closer to upper range on the session at 8.08 per million British thermal units for loss of 5.2 cents or .06%. Looking ahead after this week’s surprising market strength that carried values up through our previous resistance level at $8.10 which the market managed to penetrate again 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. However as mentioned earlier and in previous reports the weather is now the single most dominant influence over price direction and with the next 6-10 day forecasting 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 some independent strength as natural gas exhibited less weakness the larger meltdown in petroleum values and the rest of the energy complex as crude oil fell back to challenge $90 in the spot month.

  Concerning crude oil, the market today continued its retreat after the recent history making breach of the key psychological $100 benchmark after prices hit $100.09 in electronic trading before profit-taking extended into a more negative sell off and then this week’s first reported increase in crude stocks in 9 weeks along with further evidence of recession spreading into the economy contributed to the break of the key $90 benchmark before prices rebound slightly on close to settle at $90.13 basis spot February for a loss of .71 cents. Today’s comments by federal reserve chairman Ben Bernanke who indicated more fed interest-rate cuts were on the way after admitting that the outlook for growth in 2008 “had worsened” and “the downside risks to growth have become more pronounced” gave little support to petroleum as the market made new lows following his speech before the House Budget Committee. While the fed chairman stopped short of admitting the economy was facing a recession he did favor a Democratic proposal to quickly pass a temporary stimulus plan targeted at providing short-term financial support to low and middle income families. He also advised that fiscal action could be helpful in principle, as a combination of fiscal and monetary stimulus together could provide broader support for the economy than monetary policy actions alone. He also reiterated that the fed was ready to take ”substantive additional action” if necessary to insure against the risks of a recession. However these words seem to provide little comfort and failed to circumvent a further slide in both stocks and petroleum as the Dow Jones plunged more than 300 points to finish at 12,159 and settled for the worst one-day loss so far of the year. Petroleum values no doubt felt the pressure of the more than expected rise of 4.3 million barrels to total 287.1 million barrels for the week ending January 11 where as a much smaller rise of 700,000 barrels had been predicted in a Dow Jones newswires survey. Gasoline stocks also rose by a more than expected 2.2 million barrels yet are near the upper limit of the average range, while distillate fuel stocks increased by 1.1 million barrels and yet remain in the lower half of the average range for this time of year. Probably the only short term supportive data in the report was the fact that refinery capacity dropped substantially from above 91% the previous week to 87.1% last week. Gasoline production dropped compared to the previous week averaging about 9.0 million barrels per day while distillate fuel production also fell averaging 4.3 million barrels per day. Petroleum values also continued their slide in the wake of an onslaught of negative economic news that came down like an avalanche on the markets from several different directions. For instance manufacturing in the Philadelphia region dropped to a six-year low and Merrill Lynch posted a loss that was double what analyst at expected after the mortgage banker declared right down losses of $16.7 billion in failed investments due to exposure to the sub-prime mortgage meltdown that far exceeded even the most negative of earlier predictions. The Philadelphia Federal Reserve Bank’s general economic index declined to minus-20.9, the lowest reading since October 2001 from minus-1.6 in December the Bank declared today. Negative readings signal contraction. The index average was 5.1 in 2007. More negativity came from the ongoing real estate crisis as housing starts decreased 14% to an annual rate of 1.00 6 million, the lowest since 1991 according to the Commerce Department. For all of 2007, starts were down 25% in the biggest decline since 1980, to 1.35 4 million. The Philadelphia fed report also showed new orders in shipments had dropped, indicating the slumping housing was spreading throughout the economy. The index of new orders fell to minus-15.2 from 12. Shipments dropped to minus-2.3 from 15. And of course the expected rise in foreclosures which continues to accelerate will throw even more houses onto the market, increasing inventories beyond already uncomfortable levels and thus continuing to hurt property values threatening to push the economy deeper into a recession that many economists feel has already begun! Building permits fell 8.1% to an annual rate of 1.06 8 million, bringing 2000 sevens declined to 25%, the biggest since 1974. Permits were forecast to drop to a 1.13 5 million annual pace according to the survey median, after 1.16 2 million. Projections had ranged from 1.0 5 million to 1.1 7 million construction of single-family homes decreased 2.9% to a 794,000 rate according to today’s report. Work on multifamily homes, such as town houses and apartment buildings, plunged 40% to an annual rate of 212,000 over the previous month. In describing the regional impact the decrease in housing starts was led by a 31% slump in the Midwest and a 26% decline in the Northeast. All of these economic woes have increased the odds that the fed policy makers will take more aggressive action in response to the increasing risk of recession and are likely to cut rates by at least half a percentage point when they meet later this month with current futures trading even indicating currently a 40% chance of a 0.75 percentage point reduction in the benchmark rate to as low as 3.5% by the feds next meeting at the end of January. With all the economic headlines revealing more and more evidence of recession closing its grips rapidly upon the US economy it has temporarily pushed traditional stalwarts of the long-term uptrend in petroleum such as overseas tension and robust energy demand in Asia into the back seat. The big question now is has the short-term negative news of growing recessionary threats being sufficiently priced in after the recent $10 decline in the price of crude oil. And after such a healthy and dramatic price correction will the short-term threat of abnormally colder conditions in the North as they impact tight supplies of heating oil be enough to turn the market around and resume its bullish up trend?

WSI Weather 6-10Day Outlook

Mid-winter cold to grip most of the country next week

Summary

While below and much below normal temperatures are still forecast over most of the country for the balance of the next week and 6-10 day forecast periods, today's 6-10 day forecast is not as cold over the north-central and northeastern U.S. as it was yesterday. Medium range models continue to depict an increasingly more progressive and zonal (west to east) Polar jet stream along the U.S./Canadian border, and suggest and influx of mild Pacific into north-central and northeastern U.S. will bring warmer temperatures to the northern tier of the country next weekend. Before the warmer arrives next weekend though, a prolonged period (5-7 days) of unseasonably cold will grip the north-central U.S. next week. Daytime highs in the single numbers and teens are anticipated over the north-central U.S. during the Sunday through the next Friday time period. Overnight lows are forecast to range from the negative teens to the single numbers. As the warmer weather arrives next weekend, highs are expected to climb back into the 20s and 30s over the north-central U.S. The warmest temperatures in the Northeast are actually forecast early in the 6-10 day period. Any warming associated with the increasing more zonal Polar jet is not expected to arrive in the Northeast until the 11-15 day period. Daytime highs in the 20s and 30s are forecast in the northeastern U.S. most of next week. Overnight lows are forecast into the teens and 20s. The most persistent cold weather next week is now

anticipated over western U.S. Once the western trough redevelops early in the week next week, it is not expected to weaken until the end of the month at the earliest. In response, highs in the 50s and 60s are generally forecast over California and the southwestern U.S. next week. Highs in the 20s and 30s are expected to be rule for the interior western and northwestern U.S. For the balance of the 6-10 day forecast period, anomalies between 3-10 degrees below normal are forecast over most of the country. The exception occurs over the southeastern U.S., where seasonable to seasonably mild readings are expected to prevail.

Conclusion

 Natural gas has continued its strong short-term uptrend from its recent and brief foray down to below the key psychological $8.0 benchmark and established short term lows at $7.92 per million BTU. While the market has been held basically range bound over this past week between today’s intraday low at $7.92 and the upside at $8.48, prices are likely to break out of this range and possibly test the upside resistance point and surpassed this to new highs to challenge the next important price resistance level at $8.60 if the forecast weather materializes as severe as expected. According to the current weather Outlook from WSI below normal cold will permeate most of the upper three fourths of the country for the better part of the remainder of January with only an indication of the jet stream possibly shifting colder air back into the West, but not until possibly the end of the 11-15 day forecast taking us into early February and of course weather conditions can change by then. Today supply numbers were moderately bearish as the supply cushion above the five-year average increased began back above 6% temporarily, however over the next two weeks this is likely to decrease noticeably as below normal cold spikes demand thus taking a larger bite out of storage. The weather will continue to be the most important influence as we now progress into the more traditional heart of winter and what is considered peak demand in the two coldest months of the year. Also worth mentioning is the fact that prices have recently escalated rapidly and sustained themselves for the better part of the last two weeks with a gain in excess of $1.50 from low to high as the spot February futures had recently been as low as $6.95 on their debut at the expiration of the January predecessor. This could yield a rather dramatic bearish reversal and subsequent price collapse should the weather Outlook disappoint in anyway as to softening demand or fall short of its colder duration as technically the market is already exhibiting overbought warnings and signs of bullish fatigue. Should this scenario play out we could see market values quickly return to test previous key support levels first in a minor way at $8.10 and then $7.92 with a more critical bearish pivot at $7.80.

    Concerning the petroleum complex, this week’s price activity, has now extended crude oil just beyond a full 10% correction from its recent brief flirt and confirmation above the key historic $100 benchmark. Feeling the impact of the convergence of the first supply increase in crude oil stocks in over nine weeks and a plethora of economic data bolstering fears of a full-blown recession descending upon the US consumer and it seems petroleum values had nowhere to go but lower. However, if you follow the recent price patterns, crude oil has rarely ventured much deeper than a $10 drop from recent highs before the Bulls find some excuse to reverse values and continue the Juggernaut’s upward march. Whether it be renewed violence in Nigeria, further supply interruptions out of the war in Iraq, continued tension between the US and Iran, continued robust energy consumption in Asia, refinery limitations in the US or all of the above combined, it doesn’t take much to trigger a reversal whereby these short-term threats to supply takes center stage pushing future recessionary fears into the background once again. Typically values in the petroleum complex seemed to methodically work their way back higher after prices have given back over $10 a barrel and this has happened more often than not. In fact it wasn’t until the recent correction which was deeper than the prior three, temporarily taking values all the way down to $86 and almost a $14 drop from the previous high of $99.21 posted in November before values climbed all the way back up breaking the previous high and finally surpassing the key psychological $100 benchmark! It is our opinion that if crude prices hold the recent support between $88-$89 over the next 3-5 sessions we expect to see the benchmark challenging and $95 level near-term with the market poised once again to challenge recent highs. This is also likely to coincide with the Federal Reserve actions that are desperately in need to ignite a stock market rebound by making a noticeable reduction in interest rates along with a stimulus package that is likely to be above $50 billion to try and circumvent recession. Price action this week already confirmed and exceeded all of our targets from last week’s report as we clearly forecast the negative momentum would likely cause a follow-through selloff down to the critical level of support at the $92 benchmark which transpired. Now with the market grossly oversold we feel it will take little supportive news to trigger a reversal igniting short covering and attracting bullish commodity funds to return to escalating values once again. And with a recent study released in the Wall Street Journal by Cambridge Energy Consultants which indicates that existing Oil Fields are declining at a pace of 4.5% per year or the equivalent of Iran’s output per year, which is alarming in that it requires the world to increase production to compensate for losing output equal to Iran yearly, just to maintain status quo! This is just another example of how tight supplies are in relation to growing global demand leaving little room for any kind of supply disruption such as from another Katrina or any large-scale military conflict between producers that may threaten oil flow.

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

January 17, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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