Geopolitical tension counter heavy supplies of petroleum and natural gas

Consensus Report: February 23, 2006

Natual Gas and Oil Report

Geopolitical Tensions Counter Heavy Supplies, Temporarily Suspending Petroleum Prices while Natural Gas Tests Technical Lows.

Technical Outlook: Last week we said prices for Natural Gas were still under bearish technical forces, and subject to testing new lows at $6.80 with a possible wash-out down to $6.50, near term. However, we also said clearly the market was grossly oversold with the short reward diminishing rapidly, and we specifically forecast that the market was vulnerable to a sharp short-covering vertical advance that if able to rebound prices back above the pivot price of $7.40, that a further acceleration to test $7.80 would immediately follow, perhaps by the next session. This was confirmed almost to the penny and just as predicted, except even sooner than we said with the price hitting $7.75 within the same session $7.40 was breached as the market then settled up over $.54 at $7.73, with $7.85 hit yesterday before the market gave up almost all of it’s gains of the previous day. Looking ahead after today’s short-covering bounce, following the retest of the lows at $6.99, we see a likely failure near term to surpass the intermediate resistance at $7.40 which should result in a decline to test new lows below $6.975 to $6.80 and possibly trigger a wash-out to $6.50 confirming our longer term target from last week which we still feel is in progress. Technical signals are still over all weak. Only a sharp rebound producing a close back up over $7.65 would be needed to temporarily neutralize bear forces in our opinion.

Fundamental Supply Update.

Today , the EIA announced a withdrawal from storage of 123bcfs, that was slightly above the estimates by Bloomberg and Dow Jones of 114bcfs and 117bcfs , respectively, it was also well above our company call for 102-107bcfs. The market quickly digested the moderately bullish news , and then returned focus on the heavy existing supply , which now stands at 2143bcfs , which is almost 48% above the five-year average of 1449bcfs and values quickly plunged to the session lows at $6.99pmbtu before short covering on the close. Looking ahead , the cold-weather is supposed to reappear in both the Upper Midwest and Northeast within the next 6-10 day period, however , is likely to be considered too little too late to make an impressionable demand in the minds of traders. With some predicting supply to end in the first week of April close to 1700bcfs, and a new record high for storage, there seems to be little to provide much fear to force the bears to relinquish their stronghold on the market. Certainly there now exists , a strong bias to short , any sudden rallies, which is a sharp contrast from the mentality of buying into weakness that strongly influenced trade only two months ago.

Concerning crude oil, the ongoing civil unrest in Nigeria has recently taken center-stage in the petroleum complex. Nigeria’s largest woe producer in Africa and the 11th largest in the world . Producing about 2.4 million barrels per day over recent months. The economy in Nigeria is extremely dependent on oil production, driving about 80% of government revenue from the oil sector , with net oil exports running between 2.1 and 2.2 million barrels per day . The export of crude oil delivered about 27 billion into Nigerian coffers during 2004. However , the people of Nigeria have benefited little from this flow of oil . With more than 70% of the nation living below the poverty line. This fact has provided the substrate for corruption and violence from militant rebel groups, namely MEND, the Movement for the Emancipation of the Niger Delta , who have demanded the release of the jailed Ijaw leader Mujahid Dokubo-Asari. Recently, over the past week , nine foreign oral workers have been kidnapped and there now hostages in the swamps of the Niger Delta, and Nigeria’s overall oil exports of following by about 450,000bpd or roughly 20%. Current situation is bad and only looks to get worse as militants continue to threaten further violence and interruption to existing oil infrastructure. Most of the recent violence and loss of production has been directed at Shell. The company’s largest woe producer in Nigeria, normally accounting for about 1.1 million barrels per day , which is about 46% of the nation’s total production. Shells 106,000bpd Trans-Ramos pipeline remains shut after attacks in January. The company’s 380,000 bpd Forcados oil export terminal is also shut following last weekend’s attacks. Shell also shut down production on its 115,000bpd E.A. field, from which for workers were kidnapped in January. This ongoing situation , when combined with the upcoming challenges facing the IAEA in March concerning Iran’s nuclear program, the continued violence , threatening production in Iraq and the tenuous situation in Venezuela, all converge to make a hotbed of brewing threats to the already precarious future supply of oil. On the US oil front, supplies continue to build at a steady pace, that was generally within expectations. Crude oil inventories rose by 1.1 million barrels from the previous week , and now stand at 326.7 and remain well above the upper end of the average range for this time of year. Total motor gasoline inventories inched higher by 0.1 million barrels last week , putting them above the upper end of the average range, and yet the increase was below the amount expected and provided an upward bias to prices. Distillate fuel stocks declined by 1.3 million barrels . But remain well above the upper end of the average range for this time of year. Refineries operated at 86.6% of their operable capacity last week. Gasoline production declined compared to the previous week averaging nearly 8.5 million barrels per day, while distillate fuel production increased slightly, averaging nearly 3.8 million barrels per day.

W. S. I. Energy Cast Weather Outlook February 27 – March 5 .

Though moderation from the intense cold is expected to develop in the Northeast late next week, below and much below normal temperatures are still forecast in the Midwest and Northeast for the balance of the next week and 6-10 day forecast periods. In fact, most locations of the Northeast will see the coldest week of the season to date next week. Daytime highs will only climb into the teens and twenties to start the week, but as the cold-weather begins to moderate late next week, highs will climb back into the more seasonable cold thirties and forties. Highs in the thirties and forties are still considered much below normal in the Northeast . For this time of year. The Midwest and southeastern US will be on the western and southern fringes of the cold-weather respectively,and both regions will see at least brief periods of warmer weather at times. Despite the warmer weather at times, anomalies are expected to average between 2-5 degrees below normal over the Midwest and southeastern US for the balance of the 6-10 day period. The Northeast will see anomalies average between 4-8 degrees below normal. Meanwhile , below and much below normal temperatures are also expected to arrive on the West Coast during the 6-10 day period. While cooler than normal temperatures are forecast in the Northwest, the coolest weather is anticipated over California . Next weekend, when daytime highs in the fifties and sixties are expected to become widespread over the state . These temperatures are certainly not considered unseasonably cold for this time of year, but cold enough to suggest anomalies will average between 3-5 degrees below normal over California for the 6-10 day period.

Conclusion .

Concerning Natural Gas, at the market continues to feel the immense pressure from burgeoning supplies that are the result of one of the mildest winters in US history. The technical picture continues to complement these fundamentals with a pattern of weakness, suggesting a further subdued trading in the near future. We expect values to be contained by resistance, first at $7.40, with further short covering likely to stall at $7.65 on a closing basis. This failed rally is likely to be quickly followed by a renewed assault on existing lows bringing a challenge to first $6.80 with a possible further washout down to $6.50 before a substantial short covering and value buyers emerge to stem the declined.

With regards to crude oil, while the recent sharp decline from the $69 intra-day highs posted on the first of February have put the market in a short-term bearish technical trend, we feel the fundamental picture entailing numerous geopolitical hotspots could soon reverse the technical downturn. Support is now scaled down from $59 and then $58.10 with key pivotal support just below this, at $57.50. Considering the current world climate of escalating Mideast violence, especially in Iraq, whereby the latest development of attacks upon Sunni mosques in retaliation for the destruction of the sacred Shi’ite mosque this past week has now elevated Iraq’s violence to a new level and now on the brink of Civil War, certainly complicates the future balance implications of the supply of oil in that region. When you add to this, the continued civil unrest in Nigeria, and the impending challenge imposed by Iran’s nuclear ambitions, and you have to admit the future implications for oil fundamentally are extremely bullish! Look for a rapid challenge to resistance, first at $61.80, and then $62.50, which is the breakout level, and a close above this could bring an immediate challenge to $65 per barrel.

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

February 23, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744