heavy supplies bring new lows across the board on energy complex

Consensus Report: February 16, 2006

Natual Gas and Oil Report

Heavy Supplies Bring New Lows Across the Aboard on Energy Complex

Technical Outlook: last week, we said the technical picture was still extremely weak and based on the pattern, we expected a further decline to possibly tests new lows at $7.10 with a potential breakdown to $6.80. This week confirmed our outlook with our initial downside target taken out at $7.10 and also the psychological benchmark of seven dollars was also penetrated intra-day with a current low of $6.975, posted yesterday with a subsequent settlement at $7.066 and a new multi-month low. Looking ahead, despite today’s slight bounce to settle at $7.134 for a gain of six cents, we still feel the market is technically wea , and likely to continue on its journey lower to $6.80, with a potential washout down to $6.50 over the near-term. However, the market is in dramatically oversold territory, whereby the reward to the short trader is diminishing rapidly, leaving the market vulnerable to a sharp bull reversal. While the fundamental weather impact remains potentially strong, we feel a lot of the mild weather headlines have been factored in to current prices. On technical merits alone, a rebound in price back above the $7.40 pivot point, due to grossly oversold technical indicators such as stochastics, relative strength, the MACD and momentum which still maintain a negative divergence and thus attracting value buyers, could further ignite short covering to challenge $7.80 very rapidly, and perhaps within the next consecutive session following the pivot breach.

Fundamental Supply Update.

Today EIA announced another slightly bearish withdrawal of 102bcfs which was below both estimates by Bloomberg and Dow Jones averaging 110bcfs and was also below our company call for a reduction of 112-117bcfs. Despite being above last year’s withdrawal for the same week, it still came in shy of the five-year average decline for that week , and thus prices came within half a cent of new lows posted since February 2005 with today’s intra-day low $6.98 before short covering arrested the decline to settle up on the day by six plus cents. Storage now stands at a burdensome total of 2266bcfs, which is a record for this point in the winter and is now 444bcfs above last year and a hefty 691bcfs above the five-year average of 1575 and a surplus of 43.9%. With this more than adequate current supply , and with only seven weeks remaining to the traditionally moderating back end of winter, it is almost a certainty that supplies will end at a new high record, to begin injection season with. However , some colder than normal conditions are forecast to enter the Upper Midwest and northeastern sectors of the country over the next two weeks and may provide a catalyst for some short covering to begin from funds that have participated in quite a profitable free-fall that began from all-time historic new highs of $15.78 posted back in December. This sheer drop of almost $9.0 in less than three months has certainly compressed values, and the noticeable narrowing of the trading range over the past week and a half has obviously curtailed the profit yield to the short position. Remember, it only takes one sizable short position to begin buying to offset, to begin the Domino effect of a massive short covering rally whereby a quick vertical acceleration of 60-80 cents , could instantly transpire! So a word of caution to the shorts as the phrase “ seller beware” may have been whispered quietly on the close in the pit today.

Natural gas may have also received a very small vote of support from a rebound in crude oil prices as the market broke a four session losing streak recovering from yesterday’s multi-month low close at $57.70 and the first close below $58 since last year. Crude oil may have found some late support on the prospect of an OPEC production cut to be possibly announced in the upcoming summit in Vienna in March. Estimates range between a possible output cut of between 500,000 and one million barrels amongst noted analysts. This would be a likely response to various economic conditions , as well as some political backlash from recent rhetoric by President Bush during his state of the Union address , and the specific phrase that Americans were “addicted to oil”, and thus , overly dependent upon foreign oil and a direct negative connotation to our relationship with OPEC as a sort of necessary evil. Quite a hypocritical , and almost comical statement, if it hadn’t become so costly to Americans and the world for that matter, to be coming from the one individual who ignited the oil market into a one-way rocket ride straight up since that precariously devious decision to engage Iraq in a war in March of 2003. In fact that pivotal decision will now likely go down in history as one of the most costly and damaging of blunders, both in terms of monetary loss and more importantly in waste of life; whereby the only gain was experienced by the oil companies that supported his election, the corporations that are profiteering off the rape and pillage of Iraq itself, and finally , and quite directly the massive infusion of wealth experienced by all those sponsors of terrorism , whose main revenue is derived from oil. The likely decision by OPEC to cut production in March , would also be in direct response to the recent free-fall in prices of almost $12 per barrel from the intra-day peak to the recent intra-day low since February 1, and the fact that they lowered their demand growth expectations to 84.6 million barrels per day for 2006 , which represents a climb of only 1.9% and moderately lower than the previous assessment given in January. This week’s inventory numbers certainly gave reasons for the Bulls to exit as crude oil rose an unexpected 4.9 million barrels to now total 325.7 million barrels , which is well above the upper end of the average range , while motor gasoline inventories also rose by 2.2 million barrels along with distillate fuel inventories , which also climbed , but by a more modest 0.9 million barrels, and yet , making it an across the board sweep of gains , leaving all three fuels well above the average range for this time of year. Let’s now take a closer look at weather over the next 6-10 days.

W. S. I. Energycast 6-10 day Outlook February 20-26

The widespread cold-weather , that is expected to encompass most of the continental US early next week will undergo at least a temporary moderation during the 6-10 day period. As a result, highs in the thirties and forties will become more commonplace in the Midwest and Northeast . Late next week. Highs in the fifties and sixties will return to Texas and the southeastern US. On the back side of the storm system, colder than normal temperatures will redevelop in the East next weekend. Just how cold and how widespread the cold-weather becomes is where the medium-range models display the most notable differences. For the balance of the 6-10 day period, colder than normal temperatures are forecast along the West Coast and over most locations along the US , Canadian border. Warmer than normal anomalies are expected over Texas , and the south-central US. Either way, anomalies are expected to average closer to normal , and only forecast average between 1-5 degrees colder or warmer , respectively than normal. Also worth mentioning in the longer-term 11-14 day Outlook due to the presence of a strong Greenland , blocking ridge, there exists good potential for a moderate to strong development of the North Atlantic Oscillation(NAO) to enter a negative phase allowing below too much below normal temperatures that have been confined to the northern tier states, to penetrate much deeper all the way down to the Gulf Coast.

Conclusion.

Natural gas is still reeling from an extremely weak technical pattern , along with the knockout punch delivered by the warmest January on record, causing almost a $9.0 free-fall in the price since all-time record highs posted in December. This has resulted in a grossly oversold , technical condition, and despite heavy existing supplies, could converge with a bullish fundamental shift to the weather. Only because of the recent compression in price and trading range, do we feel the market is extremely vulnerable to a short term, sharp bull reversal. Keep a close watch on a rebound back above the pivot price at $7.40 , which we feel could ignite an immediate acceleration to $7.80 thereby temporarily neutralizing bear forces and possibly encouraging bullish momentum trade and further short covering. We feel , a cautious warning to those inclined to get aggressively short below $7.0, and if you must, should only do so using tight stops with a ready and impatient exit strategy , preferably to execute between $6.80 and below, down to $6.50 if attained.

Concerning crude oil, the market over the past two weeks has confirmed our forecast , taking out both predicted targets within the week’s timetable at $62.50 , and then $58.10 posted yesterday. Looking ahead , the technical picture indicates further weakness is in order, yet the market is entering a grossly oversold posture, but negative divergence in both the MACD and the momentum indicators suggest a challenge to key support at $56.25 is within reach. Of course , the fundamental caveat to that objective would be any strong countermeasures imposed by OPEC with regards to cutting output , as well as a likely return of Iran nuclear jitters, or another flare-up in any of the geopolitical hot-spots amongst key producers such as Nigeria , Russia, Iraq or Venezuela. This reversal fuel would likely manifest itself in prices returning to challenge key overhead resistance at $61.80, with a close above the pivotal $62.50 breakout level needed to temporally neutralize bearish momentum. However , we feel if the current decline continues from the strong momentum created from such a sharp decline in only 15 days, bringing a washout down to $56.25 and possibly lower, intra-day to challenge $55.10, it would only serve to induce a larger short interest that when unwound will lead to a larger and more dramatic bullish return to the long-term uptrend when numerous international supply threats return.

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

February 16, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744