Spot crude hits $72 on gasoline surge

Natual Gas and Oil Report

Spot Crude Hits $72+ on Gasoline Surge and the Natural Rides the Energy Wave to Over $8 and a Multi-month High

Technical Outlook: Last week we said the market was on track to test new lows below $6.50 with a potential to washout to $6.25. Prices failed by a narrow margin to reach our initial target as the lows last Friday only managed to reach the low $6.60s before short covering sharply on close. What transpired this week was a massive short covering in reaction to a unique combination of sympathy with Crude, weather fears and technical concerns. Looking ahead, the technicals are mixed, however despite several indicators declaring a bullish divergence remains, most are grossly overbought from the steepness of the recent advance. We expect resistance to be stiff at $8.20, however if breached, prices could quickly advance to $8.60 on momentum. There is a large vacuum in price between $7.80 and $7.20 that will be filled quickly if support at $7.80 is taken out on close in our opinion.

Fundamental Supply Update

Today the EIA reported a net injection of 47 bcfs that was near previous estimates from Bloomberg and DowJones of 51, yet well above the ICAP auction estimate of 42. The number was right in line with our company call of 47-52 . Prices quickly retreated on the disappointment and followed the weakness in Crude into the close. Storage now stands at a record 1761 bcfs for this time of the year and still 62.6% above the 5 year average of 1083. Since this rally had virtually nothing to do with supply demand fundamentals, and instead was a result of massive profit taking from the accumulation of weeks of short domination over the direction of prices who decided to offset their positions in light of recent Oil strength and above normal heat in Texas, prices are now quite vulnerable to a collapse as the reality of little or no demand sets in. As for the overage in supply, this will become more ominous as below normal demand materializes. Baker Hughes currently reports1349 rigs pumping gas, up 36 from the previous week as of the week ending April 14. And with the latest MMS update from the Gulf still declaring 1.334 bcfs of gas or 13.34 % remains off-line, production could become a more critical supply issue later as demand increases for summer’s cooling needs. Concerning Crude Oil, prices quickly broke over $72 pb Wednesday as the EIA announced across the board declines that included a drop of 800,000 in crude stocks and twice the expected reduction in gasoline inventories of 5.4mb leaving 202.5 mb and about 5% below last year. Distillates also fell by 2.8 million to further support the bull trend, despite being well above average supply due to this past warm winter. With refineries scrambling to flush their inventories of MTBE plagued gasoline in order to meet the government’s deadline to replace summer RFG or reformulated gasoline with more environmentally friendly ethanol blended fuel by May 8th, many feel suppliers will fall short of the necessary output to meet the driving seasons elevated demand. With the DOEs’ reports showing 7 weeks of consistent declines totaling 23.4mb and demand for gasoline holding steady above last years rate, it seems buying fears maybe justified. However some predictions that because of the recent surge of over 26% in the wholesale price of gasoline, it could quell some of the demand this driving season, might be wishful thinking and at best seems too early to predict. Concerning U.S. Crude output the MMS announced 334,019 bopd remains shut in or 22.27% of daily oil output in the Gulf of Mexico. This condition could become more influential as the driving season develops and with the onset of hurricane season, further implicating production vulnerability again.

WSI Energycast Weather 6-10 day Outlook

The warmest temperatures, at least relative to normal, and the most persistent warmth are anticipated over the north-central and northwestern U.S. for the balance of the next week and 6-10 day periods. Widespread highs are expected to climb into the 50s and 60s in the Northwest and northern Rockies most of next week. The north-central U.S. may see a brief period of cooler weather arrive near mid-week; however the warm weather is expected to return during the latter half of the 6-10 day period. The coolest temperatures are forecast in the Northeast during the 6-10 day period, as 2-4 day period of below and much below normal temperatures are expected to arrive during the latter half of next week. Daytime highs are not expected to climb out of the 50s and 60s in the Northeast on the coolest days. For the 6-10 day period, anomalies are expected to average between 1-3 degrees below normal. Texas and the Southeastern U.S. will experience the most changeable conditions next week as the warm weather early in the week will be replace by cooler and drier conditions during the latter half of the week. In response, temperatures are expected to average close to seasonable levels over both locations for the 6-10 day period. Finally, warmer than normal temperatures are also forecast over the southwestern U.S. for the balance of the 6-10 day period, anomalies are forecast to average between 2-4 degrees above normal.

Conclusion

Natural gas certainly seemed to defy gravity as well as it’s fundamentals as last week’s slightly lower than expected increase to supply hardly \ sparked a buying panic as the fact that prices did’nt begin their climb until Friday, verified. But the market did ignore heavy supply and current weak demand, and in accordance with our warning in last week’s conclusion of a wild card or weather condition suddenly blind-siding the market and sending prices back above $7.10 neutralizing the shorts, prices also moved above our defining price of $7.19 on close, prompting a move to the sidelines for more analysis before re-entry. The fact that prices made this strong vertical advance before hitting our downside objective of $6.50, albeit by a small margin as Fridays’ lows were in the $6.60s, surprised us. It now seems apparent that the market was more sensitive to sympathy with Crude than many of us thought, and obviously the exaggerated reaction to the small heat wave in Texas that caused “rolling blackouts” served to be the exact weather anomaly I warned about. Looking ahead we now feel prices are more grossly overvalued than before as the fundamental picture has not changed, and in fact due to this week’s weather forecast, the supply as compared to historic averages is likely to grow making the market more prone to a collapse. We anticipate that if the technical Bulls cannot attain a close back above $8.20 over the next 3 sessions, look for prices to fall back below $7.80 for a further decline back to test $7.19 over the next week. Should the Bulls prove their technical strength by achieving a close back above $8.20 then a quick thrust up to $8.60 is likely to follow. Concerning Crude prices, the market confirmed our forecast in last week’s report exactly by hitting our target of $72pb on the head, and for the precise reasons we stated of primarily unleaded gas supply fears and the geopolitical tension in Iran and Nigeria. In fact Gasoline also hit our weekly objective right on time and to the penny with prices settling back above $2.20(our target from last week$2.20) at $2.21 basis spot May after peaking at $2.25. Looking ahead conditions show little sign of abating as Nigerian militants set off a car bomb near the capital obviously renewing their pledge of violence in defiance of economic instability in the region, and thus about 641000 barrels remain shut in. Also the Iran standoff will soon come to a head as the IAEA is scheduled to report the countrys’ compliance or lack there of, to the UN Security Council at the end of this month on the 28th. We expect Crude to find initial support at $71.80 and then$70.50 with a more critical support at $68.10 basis the new spot June futures. The next upside objective is the key $75.0 benchmark, and again we see Gasoline as the continuing driver to carry Crude there on it’s quest to challenge $2.40 pg near term. Look for unleaded support at $2.12, then $2.04 with a more critical test at $1.96, and extreme volatility.

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

May 5, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744