Petroleum Tests Upper End of Range following Surprise SPR Increase

Consensus Report: January 25th, 2007

Petroleum Tests Upper End of Range following Surprise SPR Increase, while Natural Gas Exhibits Volatile Gyration in Reaction to Weather, Technical Selling and Short-Covering .

Natural Gas and Oil

Technical Outlook: Last week we said, looking ahead while grossly oversold, the market was still giving mixed signals technically, and based on the slowing downward momentum, gives warning of a possible reversal soon. From our perspective, if the market failed to penetrate the $6.0 benchmark within the next 3 sessions we said there was a strong probability for a more substantial reverse rally back up to key resistance above at $6.80 with a more realistic chance at breaking through to test $7.0 this time in our opinion. We also said Weather fundamentals may finally be changing enough to complement this oversold market this time as well, which, in both instances, technically and fundamentally transpired. Since our last report not only did the market reverse rally back up through the existing resistance point at $6.80 which had contained the market for well over a month, but then as we predicted extended the advance further up through our target at $7.0 and then continued to an exhaustive peak just below key resistance at $7.80 only to experience a critical failure at $7.70 as heavy selling ensued. Looking ahead, the technical picture is now giving mixed signals, whereby longer-term indicators such as the parabolic, MACD, linear oscillator, and others are showing constructive resilience to the upside, however, stochastics, momentum, relative strength and other short-term indicators suggest follow through weakness vulnerability. Under these circumstances we look for certain price pivot points to indicate further substantial movement, and to confirm near-term direction in our opinion. The next important challenge to support lies just below the current market price at $6.80, whereby we feel the market will invite further selling participation should this level be penetrated on close. This scenario should invite enough selling pressure to return values to the $6.20 -- $6.25 level rather quickly. However, due to the current mixed signals the technical picture reveals, we also see the potential for a rebound from the critical $6.80 level, which if held above on a closing basis over the next two to three sessions, we see it preceding a challenge to the bull-pivot price at $7.25, which suggests a renewed swing challenge back up to resistance at $7.70 to $7.80 with a remote chance for an exhaustive thrust to new highs at the $8.0 benchmark. The current weather forecast suggest a backdrop of support for this latter scenario which will be discussed in more detail in the next section.

Fundamental Supply Update

Last week's EIA report showed a drawdown of 179 bcfs and the first triple digit drawdown of this year, and also comfortably above both previous estimates by DowJones and Bloomberg of 170 and 173bcfs respectively, as well as being larger than the 5 year average draw of about 160bcfs for the same week. Storage now stands after the last EIA update at 2757 bcfs which is 251higher than last year and 472 or a full 20.7% above the five-year average of 2285 bcfs. While some of Traders typical confidence in the coldest month of the year to bring elevated demand had returned with this past week’s rally of over $1.50 from the recent lows at $6.15, it obviously wasn't enough conviction to sustain the short-term rally as even the slightest indication in the longer-term forecast extending just beyond the first week of February hinting at a possible return of milder weather, ignited profit-taking as many quickly abandoned their long positions. However just as Weather sources told me last week, that after colder conditions impact the Eastern Seaboard over the next 6 to 10 days, a more substantial sustained cold could impact the Eastern two thirds of the country, and from this Outlook we said it could give the desperate Bulls just enough ammunition to get a foothold and provoke a reversal that could ignite a more substantial short covering rally, which is exactly what transpired as prices rocketed from $6.32, which is where they were on the date of our last report, up to Tuesday's peak at $7.70. However, and obviously just as quickly as prices launched as” Old Man Winter" made his late appearance, prices can retreat just as fast if not quicker upon the perception of his exit, especially if it is believed he will not return with the severity or exposure level that the country recently experienced, if he returns at all. While prices certainly fell with a seeming unforgiving purpose today, we still see the potential for another challenge to recent highs fundamentally if the current weather pattern continues, and if the extended forecast changes, which is still very possible. The Bulls may not be ready to totally throw in the towel yet, given that estimates are running for an anticipated draw on storage for this week that is well in excess of 200 bcfs, only to be followed by a potential drawdown the following week of the same magnitude, which could possibly be just enough doubt to the recently reenergized shorts that have just assumed control over price direction. That is why we feel the immediate extended forecast and how it adjusts, especially at the outer fringe of the 11 to 15 day outlook, as well as price behavior when approaching previously mentioned technical pivot points, will be critical.

This past week’s rally of over $1.50 from low to high, and all within basically three trading sessions, completely confirmed our statement concluding last week's fundamental section whereby we stated clearly concerning the market's ability to suddenly counter the bearish supply trend: “While some doubt this scenario, because of the market’s obvious heavy supply overhang, they do well to remember that once a supply number is factored in, and given that winter still has the better part of six weeks remaining, if the downward momentum slows as the selling dries up, this market has a propensity and unique habit of conveniently changing focus to the demand side while ignoring existing supply.”

Concerning crude oil, prices have recently rebounded from the sell-off down to our targeted price level at the $50benchmark confirming our range trade scenario outlined in last week's conclusion whereby we said if prices failed to penetrate on close the $50 benchmark that range trade was likely from between higher lows just above the $50 level and likely to be contained by key resistance above the $54 level. However, this Outlook was based on the spot trading price range established by the February futures contract, and now that the March futures has become spot and maintained about a $1.40 premium value from inception over its predecessor, which sets the same price range with March futures being contained by its resistance level which corresponds at $56, which has managed to contain the market since its debut as the lead contract this past Monday, only served to further confirm our Outlook. This also speaks volumes of the strength of the bearish conditions that currently underpin the crude oil market that we have mentioned in many reports in the past considering that this week's action included the surprise announcement by President Bush of intentions to enact doubling the size of the Strategic Petroleum Reserve to 1.5 billion barrels, which would require an approximate increase to US purchasing by 100,000 barrels a day, and obviously a fundamental change that no one expected a week ago to be announced. Prices recently managed to rebound up to the top end of the recent trading range despite another across-the-board increase to both crude and product supplies announced this week by the EIA. Crude stocks increased to 322.2 million barrels after an addition of 700,000, while motor gasoline inventories rose by a more than expected 4.0 million and distillate fuels increased also by 700,000, placing all three commodities above the upper end of the average range for this time of year. Refinery capacity fell back by a fractional amount to 87.4% as gasoline production remained flat from the previous week while distillate fuel production decreased, which was unexpected considering the recent cold infusion into the Midwest and Eastern United States.

W. S. I Weather 6-10 and 11-15 Day Outlook

6 – 10 Day Headlines

Below and much below normal temperatures are forecast over most of the eastern two-thirds of the country. Anomalies as cold as 7-12 degrees below normal are expected to encompass the
Mississippi Valley and most of the eastern U.S.
Today's forecast is not as cold in the southwestern U.S. as previously forecast.
Near to above normal confidence is placed in today's forecast. Models today are in the best agreement they have been all week.
Temperatures may trend colder over most of the eastern two-thirds of the country than currently forecast as all models advertise a series of Arctic air masses will overspread the central and eastern U.S. next week. The coldest air mass is expected to arrive in the day 7-11 time period.

11 – 15 Day Headlines

With the exception of the Gulf Coast, colder than normal temperatures are still expected to encompass most of the eastern two thirds of the country. The coldest anomalies are forecast over the northeastern U.S. Seasonably warm readings are anticipated over the southwestern U.S.
No major changes can be expected from previous forecasts.
Confidence in the forecast is about average based on the reasonably good large-scale model agreement.
Temperatures may not be as cold, and the much below normal temperatures as widespread, as currently forecast if American models come to fruition. American models, particularly the 00z operational, depict a more zonal (west to east) jet stream and bring a stronger influx of mild Pacific air into the Continental U.S. than European and Canadian model solutions.

Conclusion

Natural gas continued its corrective and volatile path this week after
confirming our call to challenge the key resistance level at $6.80 and then break above it for a likely new high in the trading range challenging the $7.0 benchmark. With the mixed technical picture and some fairly cold weather still ahead forecast to impact the key consuming eastern two thirds of the country, we are not ready to stick a fork in the market yet and burst the Bulls bubble until we see more price action, and specifically we caution traders to use our key price pivot points at $6.80 support level that if breached could bring a rapid return to low end support at $6.15 to $6.20, whereas on the upper end look for pivot resistance to be challenged and surpassed at $7.25 if traders feel the pre-February forecast still holds enough “Arctic Intrusion" to pose a substantial remaining threat to existing heavy supply. While this potential, and proverbial “last gasp of winter breath” could impulse another run at the recent highs, we caution that this will likely be brief, abrupt and volatile as is par for the course for Natural Gas, and certainly not one for the fainthearted, as the decline that will likely follow should be severe and quite unforgiving. This is based on a growing perception that even if February turns out to be colder than normal, we will be hard-pressed to see storage fall below 2000 by the first week of March leaving little chance for withdrawal season to end in April without leaving storage with a new record surplus, and a total of somewhere between 1600 and 1800bcfs, unless March experiences in unusual cold anomaly.

Concerning the petroleum complex, and despite this week's EIA numbers again, being very bearish, the market underwent a convergence of somewhat moderately bullish factors that may temporarily establish the $50 benchmark as a more firm and intermediate support level. Probably the most notable and unexpected of these being the surprise announcement by the president in his State of the Union address to double over the next 20 years, the amount of oil to be stored in the Strategic Petroleum Reserve. This nuance must be tabulated into the petroleum equation to properly assess future valuations in our opinion. Quickly following that News has been the recent escalation to tension between the United States and Iran revealing itself through heightened rhetoric as well as increased Naval activity in the Persian Gulf, along with a supposed threat of North Korean assistance to Iran conducting its own underground nuclear detonation. Obviously the increased violence and recent elevated casualties suffered this past weekend in Iraq whereby 27 US soldiers were killed added to the overall uncertainty that exists in the region and thus provides support for the threat premium in petroleum. While as of recent most of the Middle Eastern threat proposed by Iran's saber rattling had fallen on deaf ears, it seems after oil has declined an unprecedented almost $30 from the August peak at $78, traders are beginning to reevaluate their perception of threat premium and the implications of instability that our position in Iraq projects into the future as well as its effect on other key producers within the region. On that topic, the recent Hezbollah backed general strike in Lebanon has also raised concerns and renewed fears about the future stability of the Lebanese government, which if it were to succumb to the rogue anti-Western faction and sworn enemy of the State of Israel, it could reignite a renewed violence in that part of the world. This unfortunate event, if it transpires, would only serve to galvanize a hatred for the West, as a whole, that has been simmering just below the surface throughout the Middle East, and unfortunately was originally inspired by that infamous blunder of the Bush administration to invade Iraq. While the recent tension and increased animosity between the US and Iran has yet to materialize into the interruption to any real crude supplies, traders have certainly become aware that most of this threat premium has recently been removed by the market's recent price collapse. Counteracting this artificial support, has been the recent recognition of OPEC’s lack of control over pricing and of course the definitive reality of the slowing US economy revealing itself through subsequent lower demand on the products. These conditions can very rapidly move back to Center stage upon the first sign of easing Middle Eastern tension, an obvious tall order, however, the same bearish result can materialize if enough time passes and the Middle Eastern threat fails to interrupt oil flow. Considering these conditions, we find crude oil has now established a fairly definitive trading range, that while now has undergone a more constructive technical support formation, will still be dependent upon a significant change in the fundamental tug-of-war in order to move substantially in either direction out of this range. We anticipate now
over the intermediate term for crude oil to trade between minor support at $52.50 and then if broken below this at $51.10 as a bearish pivot penetration level preceding an immediate re-challenge to the $50 benchmark, and then at the other end of the spectrum, resistance lies first above at $55.90 -- $56 with a potential close above this key level igniting short covering and bullish hedge funds that would regard this event as a signal of a return of a more significant amount of Fear Premium back into the market. This of course could bring an immediate challenge to swing resistance at $58.10 that if breached on close could ignite more technical buying and bring a challenge to the $60 benchmark. This level however, while certainly attainable in the short term as a possible reaction to an escalation of violence and fear in the region, would take something much more substantial in the way of a realized threat to supply in order to sustain this price level. It's our opinion to successfully anticipate the next substantial price move within this established trading range, and the obvious precursor to moving out of this price range will be predicated upon how some of these critical situations progress or pan out. The first card in the “deck of dilemma” to be turned face up on the table will likely be the weather and its potential implications of demand on distillate fuel and mainly heating oil. The next likely card in our opinion to be overturned and thus shed more light on future direction is the ongoing economic data, and more specifically concerning the housing market and its rippling effect on the consumer which represents the lion's share of the GDP. Concerning the Middle East, Iran and the ongoing quagmire that seems to only get worse day after day in Iraq, will likely take longer to reveal its threat or lack thereof to actual supplies. This of course is assuming that conditions continue on as they have with little change in the overall effect of supply currently being more than adequate to the recent declining world demand evidencing itself to OPEC's ability to recently cut production in an attempt to circumvent receding demand chiefly here in the US. And while the recent updated economic growth recorded for China, at a faster than expected 10.7% for 2006, holds bullish promise, which is modestly above the 10.4% GDP growth initially estimated by government officials, it still pales in its implications of consumption on the world stage if the US which consumes over four times the amount of petroleum, continues to slow in reaction to a housing induced recession. In conclusion, and since we are coining the deck of cards analogy, the bullish wildcard obviously still remains as the sudden unexpected threat posed to a major producer by a terrorist act, and most likely in the Middle East such as to Saudi Arabia which would be the worst-case scenario and yet cannot be discarded as a likely target considering the unprecedented level of instability in the region, and the fact that the suspected state sponsors of terrorism have recently experienced a noticeable pay cut after oil's rapid price collapse.

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

January 25th, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744