Energies Resumes on Geopolitical and Technical Concerns.

Consensus Report: March 16, 2006

Natual Gas and Oil Report

Uptrend in Energies Resumes on Geopolitical and Technical Concerns.

Natural Gas and Oil

Technical Outlook: last week we said that natural gas showed mixed signals with most indicators still bearish yet grossly oversold and to expect a continuance of the subdued and rather narrow trading range. We also said that a widening of the existing trading range was likely to be extended at the lower end with a possible push below support to test $6.25 with a possible extension down to $6.10 unless a surprising short-covering reversal, produced a close back up over $6.80, which would be needed to temporarily neutralize bear forces and bring a test to $7.0- $7.10. Surprisingly the latter occurred and although admittedly not in the expected scenario, prices did takeout our upside resistance point with a vengeance as prices settled today at $7.26. Obviously, on purely technical merits alone this shows all of the earmarks of a classic bull break out as traditional signals such as momentum, stochastics, relative strength and the MACD, all are displaying much more constructive configurations over previous weeks with a more bullish divergence clearly evident within many of these indicators. However, as we have warned many times in the past, it is our opinion that the natural gas market is still mainly dominated and ultimately directed by the underlying physical fundamentals and the perception of such. Therefore, since it is our view that the current short term bullish technical posture is in conflict with the existing bearish supply fundamentals, we expect the existing and recent sudden upturn in price will soon reverse. Looking ahead, we expect the market will confront strong resistance above at $7.40 scaled up with increased selling pressure more critically at $7.65. A failure at either of these two price points should quickly propel values back to initial support at $6.80 with a break below this to be quickly followed by an assault at the pivotal support level at $6.45- $6.50. With some indicators already approaching overbought status, it would take a further advance resulting in a close above $7.60 to negate our Outlook for the decline, as the technical strength and spread buying would then present a viable argument to challenge $8.0.

Fundamental Supply Update

Today natural gas closed at the highest level in three weeks ignoring the latest EIA data that showed that supplies fell by 55bcfs, and a number that was well below most estimates. The withdrawal from supply was both below normal for this time of year as well as below most estimates by Bloomberg and Dow Jones that averaged closer to 60 bcfs and it was also closer to our company call for a drop of 47-52 bcfs. Storage now stands at 1832 bcfs, which is still 439 higher than last year at this time and a hefty 688 bcfs above the five-year average of 1144 bcfs or 60.1%. Obviously with current supplies at a record 60 plus percent above the historic average, the sudden technically induced short covering rally has little to do with the existing bearish supply demand imbalance, and even to the most optimistic of bulls, with the post winter softening demand of April rapidly approaching, makes the case for sustaining the recent price elevation due to the urgency of the eventual summer cooling demand a fleeting fantasy at best. With an existing supply cushion equivalent to that of a healthy two solid months of summer demand that would require record elevated heat, the caliber of which would have to rival the hottest of months in past summers just to bring supplies back down within the five-year average and that is still considering the 14% of production that remains off-line in the Gulf, certainly displays an extremely bearish condition. Another words it is doubtful that even an abnormally hot summer could prevent beginning the 2006 winter season in November with a new high record storage level of 3400 to 3500 bcfs.

Concerning crude oil, prices obviously were able to discount or factor in another hefty increase to stocks of 4.8 million barrels for the week ending March 10 leaving 339.9 million barrels and the highest level in almost seven years as market players quickly turned their attention to the main geopolitical concern overseas, namely, the Iran nuclear confrontation that seems to be unavoidable. This, along with the recent escalation to violence in Iraq that although while posing no immediate threat to physical oil supplies, is still a reminder of ongoing conflict in the heart of another major oil-producing nation and underscores a general pervading threat that seems to be a common denominator of ongoing tension and continuous potential interruption to the supply of oil such as in other key producers like Nigeria and Venezuela. Let us not forget the recent threat by Al Qaeda upon oil infrastructure that was made graphically legitimate with a suicide bombing attempt at the Abqaiq Saudi refinery. Let's now take a brief look at the weather with WS I as it seems old man winter may not be leaving quietly, especially in the Midwest.

W S I EnergyCast March 20-26

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 highest confidence is placed in the Midwest and Northeast cold as all medium range models advertise the cold weather currently centered over the region will continue the next 7-10 days. Therefore, highs are only expected to climb into the 30s and 40s in the Midwest and Northeast next week. In response, anomalies are expected to average between 2-9 degrees below normal over most of the central and eastern U.S. for the balance of the 6-10 day period. The coldest anomalies are forecast over the central Plains, Ohio and Tennessee Valleys, and the Mid-Atlantic states. Not so surprisingly, the strongest correlations for cold weather associated with a March negative AO pattern also exist in these regions.

Conclusion

Currently natural gas is experiencing a countertrend, short term rally that is temporarily defying the existing bearish fundamentals. This short covering induced rally will be short-lived in our opinion as the market will soon succumb to the overwhelming reality imposed by record supplies that are over 60% above historic averages and the pending softer demand cycle of the approaching shoulder month of April. When this reality transpires, whereby market participants realize that the approaching weight of supply becomes more ominous as demand retreats, and then this reality converges with a temporarily overbought technical condition, a virtual free fall collapse could soon materialize. We expect to see this short covering and technical buying to diminish and meet overhead resistance likely between $7.40 and $7.65, with a solid close above $7.60 needed to temporarily hold off selling pressure, but only as a brief delay to the impending liquidating yield to heavy supply fundamentals.

Concerning crude oil prices have recently been carried by geopolitical tension mentioned earlier along with the strength of the products, mainly gasoline which both saw moderate supply declines for the week ending March 10th. There seems to be legitimate concern over a less than smooth transition from the fuel additive MTBE to the more environmentally friendly ethanol that some predict will cause shortages this summer during peak driving season that could actually drive prices back up to test the three dollar benchmark per gallon. The statement of this challenge in more clear and defined terms by the major refiner Velero Energy was the main impetus behind Tuesday's rally of over $.11 per gallon in spot gasoline. The fact that recently April gasoline futures took out its multi-month high basis spot of $1.74 decisively with today's close at over $1.87 while crude oil only managed to equal its recent multi-month peak at $63.80 is further evidence of the product led rally. We expect near-term for crude to challenge our target from two weeks ago of $65 per barrel on a combination of renewed technical strength, tension overseas and uncertainty over gasoline supplies for the summer. Look for support to be strong first at $62.50, then at $62.10, with more pivotal and critical strength at the $60 benchmark.

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

March 16, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744