Petroleum Threatens to Break Through Upper Resistance

Consensus Report: February 8th, 2007

Petroleum Threatens to Break Through Upper Resistance on Sustained Colder Northeast, while Natural Gas Closes at new highs in Reaction to Weather.

Natural Gas and Oil

Technical Outlook: Last week we said, looking ahead, the technical pattern is in a short term up- trend and we saw some clear indications of bullish fatigue setting in on market forces, whereby we believe if the market fails to break above key resistance at $7.80 and sustain a close above this barrier into new higher ground over the next 2-3 sessions, we felt prices were vulnerable to a sharp and more formidable decline than the last pullback. However, prices did hold support on the pullbacks managing to stay above $7.40 support since our last report. We also said last week there exists a second scenario whereby the current advance extends further resulting in a break out above the current highs at $7.96 bringing challenge to continuation resistance above this at between $8.10 and $8.25 that may prove to be an exhaust or” blow off top". While that is still in progress in our opinion and remains to be seen, the current pattern suggests an undertone of strength building that could precede a more sustained price elevation and a potential challenge to key resistance at $8.60. While we expected stronger selling to emerge from the higher levels from last week’s report, this week the selling has been compensated by a rather orderly arrival of systematic buying resulting in firm consolidation in our opinion. Looking ahead the technical indicators are overall bullish and now complement what appears to be a stronger fundamental backdrop of colder weather forecast for the country which we will discuss further in the next section.

Fundamental Supply Update

Last week's EIA report showed a drawdown of 224 bcfs and so far the largest drawdown of the year, and was comfortably higher than both previous estimates by DowJones and Bloomberg that were for 217 and 218bcfs respectively, as well as being larger by about 30bcfs than the 5 year average. Storage now stands after the last EIA update at 2347 bcfs which is 26higher than last year and 378 or 19.2% above the five-year average of 1969 bcfs. While prices initially traded in a positive range following the update, gradually the market strengthened to reflect the stronger technical picture along with the bullish weather outlook. The spot March contract closed at $7.87 per million BTU after a gain of 16.2 cents. While the largest withdrawal from storage also being slightly above pre-release estimates was bullish, today's strong finish was also due to a combination of bullish sympathy trade with crude oil and its own dynamic finish along with the colder than normal forecasts that continue to suggest an extension of frigid demand in the East beyond the halfway mark in February. This will now put a stronger emphasis on possible colder than normal conditions throughout the balance of February and even possibly extending into March which could be more than enough to keep the Bears shy to the point of allowing the Bulls to continue to dominate trade deeper into the month. The fact that the country is recently experienced some of the coldest weather in the upper Midwest and northeastern sections in recent years has served to create a discernible amount of doubt in the short interest that only weeks ago had dominated the trading and was preparing to call an early end to winter.

Concerning crude oil, prices have recently rebounded considerably from the break out above key resistance at $56 which we clearly stated last week would signal to some of the major hedge funds that possibly some of the fear premium was returning to the market. After breaching our bull pivot level at $58.10 which was confirmed recently the market has now challenged on several occasions the upper end of a clear and definitive trading range between $56 in the $60 benchmark. And while we said in last week's report that in our opinion the $60 benchmark would require something more substantial from the fundamental side of the picture in order to sustain this level, the recent buildup of technical support along with the sudden resurgence of colder weather that is now indicated to surge deeper into February suggests the market may very well breakthrough this benchmark and make a run for $62.50 before more aggressive selling ensues. This past week's EIA update provided a mixed sentiment as crude supplies declined by a smaller than expected 400,000 barrels while motor gasoline inventories increased by 2.6 million barrels for the eighth consecutive week leaving distillate fuel inventories as the only bullish statistic declining by a more than expected 3.7 million barrels

W. S. I Weather 6-10 Day Outlook

Though readings are not expected to be as cold next week as they are this week, colder than normal temperatures are forecast to continue over most of the eastern two-thirds of the country the next 7-10 days. In response, below and much below normal temperatures are forecast over most of the central and eastern U.S. for the balance of the next week and 6-10 day forecast periods. The most persistent cold is anticipated in the Northeast, where little moderation from the cold is expected the next 7-10 days. In response, daytime highs in teens and 20s and overnight lows in the single numbers and teens are expected to the rule for the Northeast most of next week. Conditions are forecast to be more changeable in nature over the southern tier of the country. A series of storm systems are expected to bring seasonable to seasonably warm readings at times early in the week. However, as the eastern trough deepens and the storm track becomes even more suppressed to the south, much cold readings are forecast to overspread the southern tier of the county late next week. In response, highs are in the 40s and 50s over Texas and the southeastern are forecast to fall back into the 30s and 40s during the latter half of next week. With exception of Gulf Coast, anomalies between 7-13 degrees below normal are forecast over most of the eastern two-thirds of the country for the balance of the 6- 10 day period. Meanwhile, a split-flow pattern is expected to bring seasonable readings to the western third of the nation for the balance of the next week and 6-10 day periods. In response, any prolonged periods of unseasonable warm or cold weather are not expected over the western U.S. Highs in the 40s and 50s are generally forecast in the Pacific Northwest most of next week. Temperatures in the 30s and 40s are expected to be the rule of the Intermountain West. California and the southwestern U.S. are only forecast to see highs in the 50s and 60s most of next week in response to weak a trough forecast to settle into the region.

Conclusion

Natural gas continued its rally and assault on the upside resistance with today's close at the highest level in several weeks of $7.87 basis spot. As we stated in last week's conclusion this now sets up a near-term challenge of resistance that why is just above the current highs above the $8 benchmark at $8.10 that we predicted in last week's report. Looking ahead as we enter the forecast period that takes us deeper beyond mid February, we anticipate volatility to increase as the stakes go up as the temperatures will need to drop further to sustain the same price levels in our opinion. As winter diminishes the existing late winter or cold possibly extending into March now could become a critical factor. All things considered in combination with the existing colder forecast converging with an improved technical bullish pattern suggests quite possibly a potential breakthrough overhead resistance at between $8.10 and $8.25 scaled up to a more critical level at $8.60 whereby rejection selling forces could be intense. This makes the next forecast that takes into consideration the balance of February a critical factor to the near-term price outlook for natural gas and the possible price peak reached for the winter season. Look for pullbacks to be well supported first at $7.65 and then more critically at $7.40 with a breach of this level bringing a rapid return to previous lows at $7.25 scaled down to $7.10, with both of these lower levels now considered to be oversold territory under the current colder forecast fundamentals.

Concerning the petroleum complex, and despite this week's EIA numbers again, being overall bearish, the market is still feeling the recent convergence of somewhat moderately bullish factors that we mentioned last week that have temporarily established support at the $56 benchmark. Just as we mentioned in strong detail in last week's conclusion that various conditions such as OPEC's attempts to further cut production, some strengthening in certain sectors of the economy and of course the constant threat posed from instability amongst major international oil producers in the Middle East, chiefly from Iraq and Iran, could continue to support the short term up trend in Crude oil prices, however, now the specter of much colder conditions sustaining themselves late into the winter for the Northeast along with a greatly improved technical chart pattern have taken center-stage. It now seems inevitable that the market will now surpass the $60 benchmark, and by our estimation judging from momentum combined with the sustained colder weather especially in the Northeast, could even reach the $62.50 level near term. Look for support from technical buyers first at $58.10 scaled down to $57.30, with a more critical level lying below this at $56 which at this point would receive heavy buying interest on the first attempt if reached in our opinion. In the time being and from the short term standpoint the current cold weather fundamentals and the technical improvement have served to temporarily take traders minds off of the longer-term economic weakness that threatens oil prices in the future from an ailing housing market here in the United States and yet aggressive buyers should keep in mind that after winter passes, because of the existing more than adequate product supply, these longer-term bearish fundamentals could quickly come back to haunt the market and reduce values accordingly.

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

February 8th, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744