Natural Gas tests Technical Overhead Resistance

Consensus Report: March 23, 2006

Natual Gas and Oil Report

Bull Trend in Energies Continues on Weekly Supply Update and Overseas Concerns, while Natural Gas tests Technical Overhead Resistance.

Natural Gas and Oil

Technical Outlook: Last week we said the technical picture had become more constructive and to expect a failure at resistance at either $7.40 or at the more critical level just above this at $7.65 to be quickly followed by a rather sharp decline back to support at $6.80 with a possible break below this leading to a rapid decline for an assault at the existing pivotal support level of $6.45 -- $6.50. Since then what has transpired has been a short-term failure at $7.31 which quickly propelled prices back down confirming our initial target at $6.80 with Tuesday's intraday low of $6.70, however prices then rebound from the oversold condition resulting in another assault at our initial overhead resistance at $7.40 with today’s intraday peak at $7.35. Looking ahead technical signals continue to look stronger due to the recent advance with the market clearly targeting our overhead resistance band at $7.40 -- $7.65. We continue to feel our upside target resistance will be tested, yet due to the recent strength and posture of the chart pattern we see a potential expansion on the upside for a thrust to test $7.80, which will likely result in a short-term exhaustive top leading to a more abrupt and sharp decline for an eventual test of existing support at $6.50-$6.45, with new lows below this soon to be revealed. Technical indicators continue to display a bullish divergence, however many oscillators are nearing a peak that often precedes a sharp and momentous reversal. Buyers beware of this recent advance as we feel long positions will soon be abandoned, making late entries risky and perhaps devastating.

Fundamental Supply Update

Today the EIA announced a supply withdrawal of only 23 bcfs that was comfortably below most estimates by Bloomberg and the Dow Jones that were in the lower thirties. It was also below our company call for a withdrawal of 32 to 37 bcfs. However prices soon ignored the short-term bearish implications and continued the recent advance after the rebound on technical merits as the market held support at $6.80 on close on Tuesday. We still feel, however, based on the bearishness of overwhelming supply fundamentals with storage now 66.7% above the five-year average that current values will soon be deemed inflated and like water reacting to gravity, the market will soon fall prey to the weight of heavy supplies. Storage now stands at 1809 bcfs, which is 506 higher than last year at this time and 724 or 66.7% above the 5-year average of 1085 bcfs.

Looking ahead, and despite “Old Man Winter's” recent final cold grip on the Upper Midwest, the peak cycle of winter is about over, and the market will soon be facing the soft demand of the shoulder month of April along with the newly found burden of record heavy supplies. We still feel this will more than overcome any proposed false sense of urgency to buy ahead of the approaching enhanced cooling demand arriving this summer. Let us not forget with current supplies over 66% above historical averages, that is equivalent to an extra two months of supply, requiring a sustained record summer heat factor just to bring supplies back down to within five-year averages and still even under these circumstances it will be a challenge to keep the November pre-winter storage below 3400bcfs, in our view. Of course the implications of an elevated hurricane season is the wildcard, yet this is hardly an immediate threat providing a sudden impetus to buy now.

Crude oil futures closed up over two dollars per barrel today or 3 1/2 percent to settle at $63.91 a barrel after briefly touching $64 and the highest price since Friday basis spot as the market digested the implications of an across-the-board supply decline announced by the EIA on Wednesday. This was also a reaction no doubt to the recent enhanced volatility and to take advantage of the short-term decline posted Wednesday following the report in reaction to existing heavy total stocks of 338.6 million barrels for the week ending March 17 which is 9% above last year's level. Today's advance was also characteristic of the market’s recent pattern of quickly assessing current actual supplies, factoring that in, and then resuming its focus on geopolitical threats to oil overseas as well as perceived product related supply tightness expected soon, especially concerning unleaded gasoline and the combined bullish implications of the transition to ethanol based additives and the phasing out of MTBE, along with the physical strain on refining capacity due to extended maintenance downtime. Refineries operated 86.7% of their capacity last week, however gasoline production decreased averaging 8.1 million barrels per day yet distillate fuel production increased over the previous week averaging over 3.8 million barrels per day. The main reason behind the surprising and first drop in crude stocks in six weeks along with a decline in gasoline that was over twice the amount expected of 2.3 million barrels leaving 221.6 million barrels, was a noticeable decline in the rate of fuel imports of only 9.3 million barrels per day last week which is 609,000 barrels lower than the previous week. As we stated last week, crude oil will continue to be led by the products, and chiefly gasoline as the average price per gallon was last reported at $2.511, up more than $.27 per gallon from a month ago and 19% higher than this time last year, according to AAA’s Daily Fuel Gauge Report. Despite the market finding stiff resistance above at $1.88 per gallon basis spot, we still feel the unleaded market will soon easily break this level and quickly challenge the $2.0 benchmark and thus will likely carry crude oil up above the recent range between $59 -- $64 to test $67 per barrel. Let's now take a closer look at the weather as it does hold some minor implications on the winter fuels.

W. S. I. EnergyCast Weather Outlook

With the exception of Florida, colder than normal temperatures are forecast over most locations east of Chicago for the balance of the 6-10 day period. While temperatures are not expected to be as cold as this week, the strongest signals for the most persistent cold exist in the Northeast. Daytime highs are not expected to climb out of the forties and fifties in the Northeast most of next week. The Midwest and Southeast will see some moderation from the cold at times as mild air surges ahead of a series of advancing storm systems. The cold as temperatures in the Midwest and southeastern US will arrive next weekend when all models depict troughing and widespread cold weather over spreading the Mississippi Valley and eastern US. However, for the balance of the 6-10 day period, all of the Midwest and southeastern US are expected average close to seasonable levels. Meanwhile, warmer than normal temperatures are forecast encompass most of the western and south-central US for the balance of the 6-10 day period. The strongest signals for warm weather will exist late next week, when all models depict a building western US ridge. At that time, widespread highs in the sixties and seventies will encompass California while highs in the seventies and eighties become commonplace over the southwestern US for the balance of the six gas 10 day period, anomalies are respected average between 2-5 degrees below normal over most of the western and south-central US.

Conclusion

Natural gas is still in the grips of a tug-of-war between short-term bullish technical indicators and overwhelmingly bearish fundamentals. We still feel that soon after the technically induced short covering runs its course prices will soon collapse due to the burdensome weight of heavy supplies that are now at a record 66% above the five-year average. The convergence of this record inventory and the soft demand cycle post winter, should soon prove to be a formidable and undeniable barrier to even the most optimistic of bulls. Look for resistance from $7.40 scaled up to $7.65 to attract strong short interest that we expect will return values back to eventually test support at $6.50. While there exists under the current technical composition a potential thrust through this barrier to test $7.80, we still feel this will only make the ensuing reversal and thus freefall back to support more dramatic and severe. Only a sudden and fundamentally induced break out resulting in a close to above $7.80, would neutralize and temporarily delay the build up of bearish short interest.

Concerning crude oil, the fundamental picture is playing out from the bulls camp as geopolitical concerns continue to outweigh the recent build up of crude supplies here in the US. Economic strength and increased demand from consistent growth in both India and China and now Japan who is in the middle of the strongest economic expansion since World War II recently enjoying an annualized 5.4% increase in the fourth-quarter outpacing both the US and Europe, are combining to provide a strong backdrop of demand serving to counter the existing heavy US inventory. Nigeria is also continuing to serve as a catalyst for higher prices as Italy's biggest oil company Eni Spa recently delayed shipments to clients after a pipeline was bombed the night of March 17, causing the company to declare force majeure as it will lose about 13,000 barrels per day of output. This source typically produces 75,000 barrels a day. Repairs to the facility may take up to the end of the month. Kidnappings and attacks earlier in the year on oil infrastructure has forced Royal Dutch Shell to halt production of some 455,000 barrels per day which remains presently off-line. Preliminary estimates show that production this month fell by 100,000 barrels a day to average 2.05 million barrels a day due to the attacks as Africa's biggest producer normally pumps 2.45 million barrels of oil a day. These ongoing uncertainties continue to overcome attempts to talk prices down such as were recently made by Al Naimi, the Saudi oil minister who stated the kingdom’s Haradh project, the biggest single boost to OPEC output this year has raised Saudi output capacity to 11.3 million barrels per day. Total production capacity is now on the high-end of the daily range of 10.8 million to 11.3 million barrels according to some analysts. This brings OPEC excess production capacity to between 1.3 and 1.8 million barrels per day and the highest level since May of 2004. With prices poised to now break above key resistance at the $64 benchmark, we still feel the market is on track to hit our $65 per barrel target from two weeks ago. Support will continue to hold strong at the $60 benchmark with prices recently only able to breach this briefly and usually only intraday. We continue to expect a product led rally premiering gasoline as the front runner, as this product targets the $2.0 per gallon benchmark which could easily propel crude prices above the existing resistance to challenge the $67-$67.50, a valuation not seen since early February.

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

March 23 , 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744