Late winter forescast moderates, reducing natural gas to new lows.

Consensus Report: February 09, 2006

Natual Gas and Oil Report

Late Winter Forecast Moderates, Reducing Natural Gas to New lows , while Petroleum tests Support on Supply Additions and Headline Fatigue.

Technical Outlook: last week we said the technical picture was still negative, yet the market was being dominated by weather fundamentals. We also said to look for key pivot prices to be violated at either $8.10 or $9.28 to signify a more directive commitment to a trend. The market is still under weather fundamental dominance in our opinion , and this week confirmed our Outlook after violating the downside pivot price at $8.10. This quickly transpired , following a key failure at resistance at $8.60 , and then declined all the way down to new lows at $7.30 , before settling at $7.47, taking out our target support band at $7.50 – $7.60, due to the same reason we said would induce such a decline, that being a weather disappointment. Looking ahead, technicals are extremely weak, with momentum and the MACD indicating a wide negative divergence. Based on this pattern, the market is, while grossly oversold, vulnerable to a further decline to test new lows at $7.10, with a break here possibly leading to $6.80. However, this is highly dependent on weather in the critical 2-3 weeks ahead, and a sharp Bull reversal could easily emerge from these depressed levels if weather conditions make an abrupt change. This would bring on a short-term trend change signified by a momentum swing close back up over $8.40.

Fundamental Supply Update

Today , the EIA announced another bearish surprise as inventories dropped only a paltry 38bcfs, which was well below both estimates by Bloomberg and Dow Jones of about 58bcfs. More importantly , it was still below the closely watched ICAP estimate of 50 and over 100 below the five-year average withdrawal for this time of year. Prices soon declined to session lows of $7.30 and a level not seen since last February of 05 before short covering emerged to stem the decline. Storage now stands at an ample 2368bcfs, which is 437 higher than last year and a whopping 649bcfs above the five-year average of 1719bcfs. This makes any kind of supply tightness to possibly emerge within the small time window remaining in this winter, remote at best. In order to leave storage at a record 1500 plus bcf count in April, requires a strong demand weekly, above average draw of over 108, over the remaining eight weeks of the season. This rather obvious conclusion is clearly becoming evident in price as the market has been virtually cut in half from the recent all-time peak of $15 .78 posted in December 2005. However , should the market fail to establish a new low close below $7.25 over the next three sessions, we see prices vulnerable to a rather sharp short covering rally as some below normal cold threatens to permeate both the Midwest and Northeast within the two critical weeks ahead. We do not advise getting aggressively too short at these levels below $7.50 as the market has a propensity for exaggerated Bull reversals, exhibiting sharp and enhanced vertical accelerations on seemingly very little news. This could lead to a sudden rebound back to test key resistance at $8.40-$8.60, and likely within only to sessions!

Concerning crude oil, little news emerged to affect pricing other than the ongoing saga of Iran’s nuclear program , resuming, while the world ponders the response expected from the IAEA in March, and the UN Security Council likely to resort to economic sanctions. However, this response has already been presumed to be quite lengthy in its execution , and possibly with little positive results. Outside of some empty claims by Saudi Oil minister Ali Ibrahim Al-Naimi, at the Energy meeting, CERA Week 2006 in Houston, that indicated , an ability to compensate with increased production , any possible production shortfalls that may emerge, and obviously indirectly addressing the Iranian crisis, not much else surfaced to sustain recent fear-based gains. What seemed to be more surprising from the Saudi Minister was the announced intention to double their refining capacity worldwide over the coming years. Both announcements , however, seemed to ring hollow as to their immediate impact on the supply demand balance of crude oil today. Instead , crude oil prices reacted this week as the Iranian headlines seem to get stale as fatigue set in on the positions of the Bulls and prices declined right down to our breakout support level of $62.50, that we forecasted from two weeks ago , and reiterated in last week’s report. So as prices failed to continue the upward climb on Iran’s nuclear plans, the sobering status of existing supplies here in the United States became the intolerable heavy anchor that dragged the market down back to its breakout support level at $62.50. The surprise announcement of crude stocks inching lower by 0.3 million barrels from the previous week to now total 320.7 million barrels, failed to suppress the convergence of selling forces as they reacted to the simultaneous announcement of motor gasoline inventories increasing by a more than expected 4.3 million barrels , putting them above the upper end of the average range. The fact that distillate fuel inventories also inch lower by 0.3 million barrels last week , had little effect as they also remain well above the upper end of the average range for this time of year. This rather subdued and moderately bearish supply update also occurred as refinery capacity contracted to 85.8% from the previous week as gasoline production declined averaging only 8.6 million barrels per day , while distillate fuel production increased slightly to an average of 3.9 million barrels per day. This was likely due to refineries taking some much needed maintenance while imports are up as well as supply. Obviously this was more than enough to compensate for the seemingly anemic demand, that left weekly inventories at a more than adequate level. Let’s now take a closer look at weather, although it should have a diminishing effect on Energy prices going forward as the winter winds down.

W. S. I. Energycast 6-10 Day Forecast , February 13-19

Warmer than normal temperatures are anticipated during the next week , and 6-10 day periods from the northeastern US through the Ohio Valley and southwestern US , while below normal readings are expected on average across the Southeast and Northwest. Florida should be particularly cool to start but will undergo a slow warming trend during next week and weekend. Elsewhere, the northeastern US should start cold before trending much milder by the middle to latter part of the week. Highs in the thirties to low forties along the Boston – Washington corridor should rise to the forties and low fifties late in the week before trending back down to the thirties by the weekend. The Midwest will also witness some of the same significant changes with highs at the beginning of the week in the twenties and thirties, rising to the thirties and forties for midweek, then falling back by the end of the week in the weekend to the twenties and thirties. However, it would not be at all surprising to see even colder readings. The southeastern US should see highs in the forties and fifties most of this time, as implied coolest early in the period and then again late. The western US looks warm on the whole early next week before turning cooler in the northwestern US and California.

Conclusion

Natural gas will continue to feel the influence of bearish technical indicators along with bearish fundamental weather conditions. This has caused the largest price decline in absolute terms in the shortest period of time, almost $8.50, since the $15.78 all-time high posted in early December, and the steepest in the market’s history! However , one should be warned against getting caught too aggressively short after a drop of such magnitude, just prior to some of the coldest temperatures set to impact the Midwest and Northeast over the next two weeks. We feel with the market now grossly oversold , technically, and with the unknown of how long the late February cold may sustain itself, possibly extending into early March, that if prices fail to close below $7.25, over the next 2-3 sessions, a sharp and powerful Bull reversal back above $8.40 is very probable. This would also serve to neutralize bear forces, short-term. However , the obvious caveat to this is if the February cold forecast also moderates some what, further subduing
any proposed late winter threat to existing supplies , and would thus bring a close below $7.25 , suggesting a challenge to the key level at $6.80.

Concerning crude oil, now that the market has descended to breakout support at $62.50 , confirming our prediction based on a plateau of the Iran , nuclear threat, we see pricing approaching an important pivotal juncture. Should geopolitical tension fail to intensify in the major hotspots of the Middle East and mainly Iran, Iraq and then Saudi Arabia, quickly followed by Nigeria, Russia , and then Venezuela and Mexico, descending in importance in that order, which is quite possible , at least over the short term of let’s say a week’s time, we see prices as quite vulnerable to a sudden and sharp drop back to the $60 benchmark and possibly lower in a quick downward thrust to key support at $58.10 due to heavy existing US supply, high import rates and one of the mildest winters in America’s history. This is also because of a bearish technical pattern , whereby crude oil has begun to decline from an extended overbought condition. However , and obviously , the ongoing wildcard of a sudden fundamental impact could change the current downward path of least resistance. This of course , could come from anyone of several unexpected directions such as a sudden terror strike on anyone of the key producers in the Middle East, or in Russia , or even a sudden interruption to supply coming out of Venezuela or Mexico. Currently , the global economy is emitting mixed signals with continued robust growth coming from India and China, while recent weakness in the US housing and automobile sectors suggest questionable economic prosperity in the world’s top consumer for the coming year. Because of the current extreme sensitivity to fear of threat to the world’s future oil flow any sudden uprising that directly implicates reduced crude output will elevate prices back above $65 per barrel and resume the long-term up trend to eventually challenge the $70-$71 existing highs. However , we do feel, it will take something more than the recent belligerent exchanges that have been bantered back and forth between Iran and members of the UN Security Council over the past two weeks to escalate and sustain recent higher levels as the recent standoff has been fully factored into prices.

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

February 09, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744