Natual Gas and Oil Report

Crude and Gasoline Prices Retreat from Record Highs on Profit-taking after Moderating EIA data and Political Rhetoric while Natural Gas Free falls to its Fundamentals.

Technical Outlook: Last week we said the market was grossly overbought despite mixed indicators, and that if prices closed below $7.80 there was a vacuum below this level that could bring a test of $7.19 within the next week if resistance above at $8.20 was not taken out on close over the next three sessions. This is exactly what transpired as prices collapsed after breaking below our pivot support of $7.80 on close, Tuesday, moving lower by over a net, $1.0 to settle at $6.80 today since our last report when prices were over $8.0 last Thursday. Looking ahead the technical picture looks dismal as major technical indicators such as stochastics, the MACD, and momentum, all declare a clear negative divergence still exists while other directive mainstays such as relative strength, the parabolic, the rate of change, and the linear oscillator, all suggest further weakness ahead. Considering the severity of the price collapse, in such a short period of time within five sessions and taking out the support that staged the previous strong rally to challenge $8.50 just last week, suggests just on the merits of sheer momentum that lower prices will be challenged soon possibly taking out our previous target from two weeks ago at $6.50- $6.45 and then a new low for the year. Only a sudden rebound achieving a close back above $7.19 could temporarily neutralize bearish forces for a possible round of range trade between likely, support at $6.98, and key resistance above at $7.40.

Fundamental Supply Update

Today the EIA reported a net injection of 80 bcfs that was well above previous estimates from Bloomberg and DowJones of about 69, and they revised the additions for Natural gas injection from the week of April 14 to include an increase of 10 bcfs from 1761 to 1771. The added gas revision to the previous week only added fuel to the bearish fire as selling regenerated throughout the session reaching a climax just prior to the close in excess of $.46 to settle at a multiweek low at $6.80 basis June futures. As we stated last week, the rally in natural gas futures culminating in last Wednesday's challenge to $8.50 basis spot, had no fundamental justification as the supply picture remained the same with a record heavy 62% supply cushion above the five-year average which absolutely could not sustain prices at that level as we enter what is traditionally one of the slowest demand periods of the year. So obviously this week's collapse brought the market more in line with its true fundamentals and returned the markets focus to finding a value that is more analogous to supply. This also returned market direction and pricing on a projected path to converge with the targets we forecasted weeks ago. Price action has also confirmed that our explanation last week was valid in that natural gas prices simply piggybacked on the momentum of petroleum as it rocketed to legendary new highs at the $75 benchmark, igniting massive short covering that was also being fueled by hysterics and the overreaction to a brief heat wave whereby temperatures were certainly elevated for this time of year in Texas and in the Southwest. However, as the inventory   numbers were revealed, this temporary heat wave failed to impede any significant supply additions and thus served to further expose how artificial last week's price elevation really was. Concerning production, Baker Hughes currently reports 1331 rigs pumping gas, down 18 from the previous week, as of the week ending April 21, 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 soon as demand increases for summer's cooling needs.

Crude Oil and Gasoline, certainly stole the headlines because of the immediate economic damage to the consumer, despite natural gas claiming the volatility award. The unprecedented move up to $75 per barrel and its catalyst gasoline, which set its own record of about $.25 within a week and taking the average pump price for unleaded regular to near $3.0 per gallon last Friday, not only confirmed the target that we forecasted in last week's report of $2.20 basis Nymex, but also provided the impetus for a massive eruption of complaints throughout the country that quickly permeated and dominated the debate in Congress, becoming the major subject matter for political grand standing by both parties. It also served to humor many of us in the energy field who realize as the political debate heats up and both parties waste a lot of time playing the "blame game," that little will be accomplished with regards to affecting actual price movement because most members of Congress fail to grasp the reality of the fact that is a global market that cannot be manipulated nor changed, with regards to price by any single nation. Another fact worthy of consideration is also that the recent ascension in prices of all members of the petroleum complex is the result of the buying and thus the composite demand of all the nations of the oil consuming world. While it is true that the United States being the largest consumer of oil and thus individually a major contributor to the recent surge in prices, it seems to lend itself to the arrogance of many politicians who feel it is actually up to us to just step in, take sudden consumer pleasing action and effectively lower prices here in America and thus also for the rest of the world. The fact that Exxon Mobil just generated over 88.9 billion in quarterly revenue, which equates to about $1 billion per day, certainly gave the political machine something to rant and rave about as recently Mr. Lee Raymond and the almost $400 million retirement package from Exxon has provided fuel for the blazing recent complaint fire, and literally become the poster child of blame and insults of the energy world and the primary target of angst and frustration from Capitol Hill. But now back to reality. Neither an imposed windfall tax, royalty tax levied on oil leased property from the government, or the highly touted and politically convenient, president approved, supposed investigation of the alleged, and no doubt, executed price gouging, that is still probably running rampant between service stations and suppliers countrywide, none of which will have any substantial price impact, and virtually provide little if any possible relief over pricing for this driving season which is about to begin. In fact this week's price retreat probably had more to do with technical selling as many traders felt current geopolitical tensions and recent inventory data had been sufficiently priced in, with only minor influence felt from the President's feeble announcement of, "too little too late" countermeasures of suspending further purchases of oil for the Strategic Petroleum Reserve and the temporary relaxing of the EPA mandate to switch to ethanol based summer blend gasoline from MTBE additive fuel by May 8, a transition that was almost complete anyways. Selling had already begun prior to these announcements early in the week and only served to accelerate yesterday after the EIA announced inventory numbers that pretty much fell in line with expectations, which logically prompted profit-taking following "by the rumor" and then "sell the fact." This also encouraged technical shorts to get more aggressive taking advantage of the chance to sell oil from an enviable all-time high! Wednesday the DOE reported crude stocks had inched lower by 0.2 million barrels over the previous week leaving 345.0 million barrels, and remained well above average for this time of year. Gasoline inventories dropped by 1.9 million barrels last week and are conversely now below the lower end of the average range. In contrast distillate fuel inventories increased by 1.0 million last week and remain above the upper end of the average range for this time of year. This report showed at the least, a brief moderation from the recent torrid pace of across-the-board inventory declines. As for supply concerning Crude Oil the MMS announced   334,019bopd remains shut in or 22.27% of daily oil output in the Gulf of Mexico, as of Wednesday, April 19. Looking ahead, the long-term fundamentals for oil and gasoline remain nervously bullish with the IAEA report due to be released tomorrow to the UN Security Council with regards Iran's nuclear compliance, and the approach of peak driving season quickly followed by what is expected to be another active hurricane season for the southeastern US. Back to the issue of the blame game, if anyone wants to take the time to go back and consider the facts concerning basic supply demand fundamentals, and in my opinion it is quite clear the single most responsible and unfortunately, economically devastating, pivotal event that ignited the recent upward acceleration to world oil prices Is the Iraq War. It seems to be the popular trend in the media and one that is obviously embraced by this administration to push the theory that the sole reason for the runaway train in oil prices is because of increased demand from Asia and mainly China. However, and I went into extreme detail over the evidence for my premise on a live radio interview with Bloomberg News this past Friday the 21st of April, whereby when you consider China's oil consumption which increased to a level of about 6.5 million barrels per day and overtaking that of Japan in 2003 which consumes about 5.4 million, making China the second-largest consumer of oil to the US which leads consumption with over 20.5 million barrels, the " China factor" is certainly exerting a continuous upward force on prices, but when broken down in perspective it in no way explains even half of the price escalation since 2003. China's oil consumption has been increasing at approximately 7% per year, over half of which they currently produce themselves. However when you take the pre-Iraq war level of export of about 2.5 million barrels per day based on a past potential production level of 3.5 million barrels per day and a rate that US war proponents like Wolfowitz claimed would return after US occupation, have now been greatly reduced to about 1.6 million barrels per day of production from sabotage, infrastructure complications due to war, pipeline bombings etc., with even less being exported from stealing, internal losses and selling on the black market making actual export delivery rates hard to track. In response to the increasing demand for oil worldwide and mainly due to the fear factor and resulting in the war premium that was becoming more and more ominous from the escalation in oil prices, OPEC effectively raised its production quotas from prewar levels at 23-24 million barrels per day to by June of 2005 they had raised it to 28 million barrels per day. Now if you calculate the adjusted incremental production increases just from OPEC alone without considering non-OPEC increases over this same time frame and weigh it against China and Asia's net import consumption increases you will find that while still rising, oil prices would be hard-pressed to have reached $40 a barrel. Timing is the key to everything, and when you consider the impact of removing between 1-2 million barrels per day of real oil production from the second-largest reservoir in OPEC consistently week in and week out for three years you're forced to recognize a pivotal and vital supply loss that triggered a world imbalance! Now with the lost production from Iraq what could have been a manageable increase in demand from Asia, soon became a critical and fear inducing challenge. If you want to deny this, you may, but then you must then deny the recent $10 run-up in the price of oil this past six weeks that was directly attributable to just a potential threat of oil interruption from the third largest OPEC supply in Iran which up to now has interrupted zero barrels of oil! Then you must also try to ignore the approximate $5.0 increase of the last $15 that has been blamed on Nigeria's production that in reality has been curtailed by 26% over the past three months. Now, once you have accepted the reality of these two combined reasons being responsible for the recent escalation in oil prices from $60 per barrel up to last Friday's all-time record of $75 per barrel, then you begin to realize the mechanics of what moves the price. With that understanding, now apply that graphic reality to both the resulting war premium estimated between $10 -- $15 and another $15 -- $20 in price reaction that you can attribute to the approximate 40% real decline in Iraq's oil output. The combination of the war and its uncertainty along with severely curtailing the output of a major oil producer, and the price impact is nothing short of dramatic! Did we not learn anything from history? Prior to the Iraq war, the only single event that managed to escalate oil to its then highest historic level of $40 was the first Gulf War 13 years prior. And how long did prices sustain the $40 level? Only briefly, because that war actually ended when the administration said it did. When you look at the indefinite sense of time involved in the war in Iraq that had permeated the situation by late 2005 and the continued restricted output and then add in the convergence of the Katrina and Rita factor and their damage to critical US production, then you begin to understand how the impact of ongoing demands on supply suddenly have twice to three times the normal stress impact and thus ignite the speculative buying fever that exaggerates the bull market. That also addresses the seeming paradox of crude oil reaching the $75 benchmark simultaneously while the US currently holds 8 year highs in crude stocks. Please do not misunderstand, I'm not saying Iraq is the only reason that oil prices are at the stifling level the world is experiencing today. However, I am strongly stating that there is compelling evidence to suggest that it is the pivotal catalyst that ignited prices into a new and accelerated upward pattern. This can easily be traced back to that monumental decision by the Bush administration to engage in a war on March 19, 2003 that jeopardized the second-largest oil reservoir in OPEC and quickly became the quagmire and the glue that bound later events such as Katrina, China and India's demand, Nigeria's militant rebellion, and the sudden shortage in US gasoline supplies, into one critical threat after another, inflating the fear perception to the outer limits triggering a buying panic that has elevated prices to the pain threshold you see today. I believe as these events unfold the world will begin to realize that the decision to go to war in Iraq by this administration, whose initial reasons which have changed sequentially from the threat of Saddam's W. M.D.'s, to bringing freedom to the Iraqi people, to finally, fighting them over there so we don't have to face them here, all will begin to pale in comparison to the profiteering of corporate interests in Iraq and the establishment of a strategic military platform. It will be revealed in the end as the most detrimental and destabilizing event in the Middle East. I predict it will go down in the history books as the biggest economic blunder of any president in history! Go back and look at the price level of oil in March of 2003 and you'll see that prices were closer to $25 a barrel which now confirms after this past Friday's close at $75 per barrel, that the world has been forced to swallow a tripling price of the most influential commodity in an energy dependant world, in a very short three-year period, within which the full impact from such a shock wave has yet to be felt on a global scale. I fear that the real economic fallout from the highest and longest sustained elevation to oil prices in history is yet to come.

WSI Energycast Weather 6-10 day Outlook

Significant warmth will dominate much of the western third of the country during the next week and 6-10 day period. Readings of 4-7F above normal are anticipated with the highest temperatures in the deserts of the Southwest. Highs should reach well into the 80s and 90s,

although will be hottest early in the week. Highs can also be expected to reach well into the 70s and 80s across the interior valleys of California while 60s and 70s should be common in the Pacific Northwest. The coolest weather should be centered along the Eastern Seaboard, particularly early in the week. This will occur in happenstance with a western Atlantic storm and associated mid-upper level trough, which may bring showery conditions to at least the Northeast and northern mid-Atlantic. The low will drift away but another trough will deepen over the eastern third of the country toward the end of the week and over the weekend, ushering in Canadian air to most of the region, even as far south as the Gulf Coast. Highs mostly in the 50s and 60s are expected along the Northeast corridor, with 70s to lower 80s in the Southeast, although each of these regions may see cooler temperatures at times. The central U.S. should generally witness seasonable temperatures, with the Upper Midwest the most likely region to experience any warmer-than-normal readings. Highs mostly in the 60s and low 70s are expected, although should warm from these values by the end of the week or the following weekend. This will depend on how quickly any warm air in the West ejects eastward. Highs mostly in the upper 70s and 80s are anticipated across Texas, the coolest readings arriving with the deepening Eastern trough at the end of the period.

Conclusion

Natural gas should continue it's path of least resistance lower as the market suffers a convergence of a much more bearish technical pattern and ongoing record heavy supplies with a bleak expectancy of soft demand in the short-term. Longer-term elevated demand will return to impact prices, however, there looks to be little to stand in the way of the downward momentum that began with the recent passing of one of the warmest winters on record allowing an unprecedented buildup to storage gas. To reiterate the fundamentals that we have made clear in previous reports spanning back over a month ago, the heavy supply cushion that has now approached a level that is equivalent to almost two months of summer demand by our estimates, puts the onus on a record hot summer to deliver, along with a supply threatening hurricane again entering the Gulf, a real countermeasure to what will otherwise be a new record high in storage to commence winter in November. Looking ahead in the short-term we still anticipate prices to challenge the yearly low at $6.45 -- $6.50, with a potential for deeper washout down to $6.25 before substantial short covering emerges.

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

April 27, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744

www.strategicinvestors.us

1- 800-974-8744
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