Consensus Report: May 29, 2008

Petroleum Falls back under $127 confirming short term Momentum peak as US dollar rebounds and Gasoline demand subsides as Recession fears mount, while Natural Gas collapses in sympathy with Crude as weather demand remains mild and supply update is adequate.

Natural Gas and Oil

Technical Outlook: Since our last report we said in looking ahead now natural gas had become short-term overbought, however, some of the intermediate technical indicators were still firmly bullish and suggested that a penetration of overhead resistance to establish new highs was extremely probable. From this analysis we anticipated a potential breakthrough and following close above the $12 benchmark for the first time this year within this week. We also said to look for support to hold on pullbacks at $11.50 scaled of all the way back to $11.25 with the unlikely break of this intermediate support leading to a retest of the recent lows. This turned out to be an accurate forecast as the market did penetrate the $12 benchmark over the short term, however failed to achieve the necessary close above this critical resistance level in order to make the next advance. Looking ahead now after today’s sharp rejection from a double top at $12.08 basis the new spot July futures, we anticipate a near term follow through to test lower support at $11.25 and then possibly $11.10. However, if the intermediate supports at $11.40 -$11.50 hold, then the previous short term uptrend remains intact whereby the market is still on track to test the upside limits. Should the market adhere to reaching our upside objective of attaining a close above the $12 benchmark, we anticipate strong buying support still to then propel values much higher with an overhead target initially of $12.60 over the near-term.

Fundamental Supply Update

This week's EIA report revealed another consecutive injection, however by an expected 87 bcfs, which was right in line with both estimates that were also near 83 to 85 bcfs forecast in the surveys by DowJones and Bloomberg respectively. Storage now stands at 1701 bcfs which is 321 bcfs below last year’s record and now 8bcfs or -.5% below the five year average of 1709bcfs. This report seemed to add to the downward momentum that was created earlier in the session’s reversal as prices continued to slide after the news and following the rejection from the now prominent double top at $12.08 basis spot July. While we do not expect much in the way of unusual weather to impact the market over the remainder of this month, we continue to anticipate strong volatility to play on the market as it seems to have its hands full between sympathy trading with crude oil, technical concerns, and an obvious injection of fear based premium that has begun to reflect the anticipation of higher than normal cooling demand this summer quickly followed by an active hurricane season, which got an early jolt from Tropical system Alma that now weakens below Nicaragua. Although the storm is not expected to develop into any legitimate threat to oil and gas infrastructure in the Gulf it still represents a graphic reminder of an early and long hurricane season that has already begun, albeit prematurely. As we have mentioned in earlier reports, the fundamentals that underpin natural gas continue to look bullish especially since the level of storage has managed to fall just below the five-year average, and despite by a narrow margin, it will continue to support prices as long as supply culpability remains precarious. Looking ahead we continue to feel the longer-term path of least resistance for values is higher with a legitimate challenge to what is normally considered winter time price peaks at $14-$15 and the market’s current all-time high remain as summer targets.

Concerning crude oil, today provided another example of enhanced volatility as the market quickly covered an expanded range of seven dollars per barrel after traders quickly moved to lock in short-term gains after the market catapulted to just above $133 per barrel on the knee-jerk reaction to the EIA data announcing an almost 9 million barrel decline in weekly crude stocks. However, once traders began to look within the numbers and realized the 8.8 million barrel decline was, as revealed in the actual EIA news release, due to tanker delays in offloading deliveries and it became obviously apparent that the deficiency in supply was only temporary the selling naturally increased as they began to focus on other elements of the report which were not necessarily bullish. While inventories of motor gasoline stocks had declined by 3.2 million barrels, this was quickly offset by the MasterCard consumption survey which revealed a noticeable decline in consumer demand of 5.5% over the same corresponding week last year and on average over this past month by 6.3% compared to the same period last year. Also contributing to the bearish sentiment was the fact that distillate fuel inventories actually increased by 1.6 million barrels and yet remain in the lower half of the average range of supply for this time of year and thus continues to underpin petroleum’s current uptrend. Refinery capacity remained unchanged at 87.9% which contributed little as to a preview of next week’s output and thus had little impact on values in our opinion. The market also managed to ignore other relevant bullish factors such as Nigeria’s continued chronic supply disruptions from militant activity as the major rebel group MEND or The Movement for the Emancipation of the Niger Delta threatened new attacks on oil installations to commemorate the one-year anniversary of President Umaru Yar’ Adua’s inauguration. A weekend attack by the group on an oil facility cut about 130,000 barrels of the nation’s oil production. This element continues to support the ongoing shortage of distillates in the US as we depend on the highly favored Bonnie light sweet crude imported from Nigeria to refine heating oil and diesel. Obviously traders were able to ignore these ongoing elements of the petroleum uptrend as earlier in the week prices had placed a short-term blow off top that clearly seemed to exceed the logic of existing fundamentals when $135 per barrel attracted unprecedented selling. This only served to confirm our forecast last week that the cart was clearly getting ahead of the horse as far as petroleum values and that the market was vulnerable to a sharp correction. As far as the value of the dollar and its impact on oil trading, our opinion continues to be that the US dollar has recently begun to be a market follower versus a leader as it’s rallies seem to be preceded by oils price movements and not the opposite.

WSI Weather 6-10Day Outlook

Early summer warmth to build into the Midwest and Northeast next week

Summary

The warmest temperatures and the most persistent warmth next week are anticipated over the southern Plains and the lower Mississippi Valley. Once the got and humid weather become re-established late this week, little relief from the expected over the next 7-10 days. If anything, the summer-like heat and humidity will only intensify as widespread highs climb well into the 90s to near 100 degrees. Though readings may not be as anomalously warm as those over the south-central U.S., warmer than normal temperatures are also expected to encompass the southwestern and southeastern U.S. next week. Widespread highs in the 80s and low 90s are generally forecast over the southeastern U.S. most of next week. Highs in the 90s and low 100s are expected to be rule the southwestern U.S. Meanwhile, the biggest changes next week are anticipated in the Northwest, where the warm and dry conditions that have overspread the Pacific Northwest in late May are expected to yield to cool and damp conditions during the 6-10 day period. Daytime highs may struggle to reach 60 degrees in Seattle on the coldest days late next week. The biggest questions in the 6-10 day period continue to surround the potential Midwest and Northeast heat even late next week. All models do hint at early summer warmth overspreading the lower Midwest and northeastern U.S. in day 6-11 time period, but display notable technical differences surrounding the intensity and duration of theevent. The European operational model is initially the warmest of all the models as it suggest most of the eastern half of the country will see highs in the 90s at some point during the day 6-8 time frame. The American operational model is not as warm but hints as longer duration event. If the 00z American operational model is correct, the East would see more 80s than 90s with widespread moderate to high humidity. The American operational model appears to the way to go this morning as the ensemble models, even the European ensemble, seem to better support the American models. The American operational model would even more appealing if it didn't have its obligatory tropical system in the eastern Gulf in the late 6-10 day period.

Conclusion

Natural gas, this week continued its volatile momentum after rebounding from the intraday low at $10.85 last week and after recently retouching the existing highs virtually at the inception of the new spot July contract at $12.08 per million BTU and yet resistance remains above this at $12.20. Looking ahead to intermediate to longer-term picture regarding natural gas remains bullish both technically and fundamentally. The current weather unknowns are obviously bullish as a considerable amount of fear premium remains in the market as prices reflect the highest pre-summer values approaching $12 per barrel in the markets history! We continue to feel the market will be underpinned and vulnerable to sympathy trading with petroleum, technical factors and then weather demand. In the weeks ahead weather forecasts will gradually take precedent over influencing market value and then you will see a gradual decoupling from its closure association with petroleum values as the focal point of cooling demand and storm fears begins to dominate trade. Until then look for support to hold the market at $11.50 scaled back to $11.25 with a close below the slower support needed to revisit the lows in our opinion. On the upside we continue to anticipate the necessity of a short-term close above the critical $12 benchmark resistance level in order to set the stage for a challenge to $12.60 and a new all-time summer record high. The existence in the forecast for the first elevated Heat of the year bringing an early warning to the threat of elevated cooling demand much in the same way as tropical system Alma ignited storm fears early on, could easily converge with a hair trigger market that is acutely susceptible to bullish exaggerations, and thus my upside target at $12.60 could be exceeded quickly.

Concerning the petroleum complex, this week’s price action, clearly confirmed our forecast last week as we’ve pinpointed with accuracy our call for a correction to test the previous break out support level at $125 per barrel that was tested at today’s session lows. Looking ahead the relevant factors will continue to be the weekly supply numbers, the international supply situation and mainly in Nigeria where the only legitimate physical supply threat remains, and of course the unfolding of the US recession which has managed to crawl back into the limelight this week. Also contributing to today’s dramatic drop of over four dollars per barrel has been the rumors circulating amongst traders that a large correction is in the offing that could quickly return the market to previous price levels at $120 per barrel with even some calling for a more dramatic washout back to $110 and even lower. With the CFTC actually making public its intentions to further police and conduct its investigation into crude oil trading which is designed to answer the cries from the public and subsequently there approval pandering politician’s claims that the recent surge of speculator funds into the marketplace is responsible for the stifling escalation in prices, market nervousness is obviously at an all-time high. However it is my contention at least as a preliminary observation that unless they uncover some unexpected illegal apparatus of excessive buying that somehow eluded existing position limits through a series of disguised buying avenues using false identities, I believe little will be revealed. The larger concern that seems to be circulating amongst trade insiders would be a fear that the results of the investigation would lead to much stricter policies soon to be enforced concerning position limits and more importantly margin requirement increases that could obviously reign in the amount of speculators participating as well as force many of the existing participants out of the market due to financial constraints. However the fact that margin increases will equally burden both the existing short as well as long positions financially by requiring an immediate injection of additional funds in order to hold the current position in the marketplace has contributed to a more sanguine conclusion by some who feel the almost negligible results will prevent the necessity of the change. There is obviously an argument that logic presents in that the larger position of length will at least in the short term feel more of the burden of increasing the required funds to continue the risk whereas the more likely path of least resistance would be to liquidate and thus lock in recently attained profits from the market’s Rally versus putting up the additional funds which only continues the exposure of risk only while enduring a higher cost to maintain the same. Until the reality of margin adjustments transpire I expect little else of major consequence will be revealed by the investigation other than increased transparency of existing positions and who holds them which in amongst itself will probably reveal some interesting new twists however as to causing any discernible impact overprice direction I remain highly skeptical. In looking into next week, petroleum values will continue to be mainly influenced by US weekly supply data, any signs of the recent rhetoric by OPEC to meet the challenges of global consumption, which is currently running at elevated levels, signified by output increases which has already been implied by the U. A. E. along with the swing vote from Saudi Arabia, and finally the threat to domestic gasoline demand imposed by the ongoing US recession. All of these elements are in play at heightened levels just as we described in last week’s report and have contributed to this week’s noticeable and timely price decline in to no less degree from the “Wall Street affect” which we described last week as the powerful funding capability of the institutional managers, which began to flex some of its muscle with attempts to make the flight to petroleum as a safe haven against inflation and the retreat of the US dollar look less attractive or at the very least excessive at current values, and thus begin to bolster the argument that stocks at least for the short-term appear as a more attractive alternative. With crude oil beginning to look technically overbought above the $130 benchmark, we anticipate a continuance of the recent downward momentum to at least challenge pivotal breakout support at $125 per barrel with achieving a close below this possibly triggering a deeper washout down to$122 in the near term, however in our view traders will find any excuse in initially supporting the $124-125 price level resulting in a rebound that is likely to return a short-term challenge back up to the $128-$129 resistance band, and at least over the short term will provide a trading range that will probably contain values over the next three to five sessions. It seems unlikely under today’s environment whereby the peak oil theory continues to dominate trading that traders will be willing to increase their risk exposure to the downside by increasing selling commitments aggressively when approaching a support level, and so over the immediate short-term I do not expect prices to collapse below $122 per barrel over the near term unless something unexpected is revealed in the wake of the US recession. And in my opinion this would have to be something new such as evidence that the coming break down in commercial real estate is gaining traction which based on needing more evidence from increased unemployment, this future event will take more time to unravel in my opinion and thus will not have the immediate impact on prices that I anticipate will eventually collide with an overbought petroleum market.

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

May 29, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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