Petroleum Prices Retreat to Supply Increases

Consensus Report: June 08, 2006

Natual Gas and Oil Report

Petroleum Prices Retreat to Supply Increases, Iran Proposal and the Death of Al-Zarqawi, while Natural Gas Continues Bearish Range Expansion.

Technical Outlook: Last week we said the tech signals were mixed and that we expected with longer term signals bearish yet some short-term indicators still positive, that new highs at 6.75 were likely along with a break back to 6.10, both of which transpired. Earlier this week, values failed at the peak at $6.82 attracting strong short interest as the falling momentum accelerated with yesterday 41-cent washout bringing the July futures to another rare close below $6.00 to settle at $5.975. Looking ahead, after this enhanced volatility week that produced the two-sided range expansion that we forecast, we anticipate from the now mixed technical indicators that are still overall bearish, with some approaching oversold status, for continued intra-range trade contained by resistance above the market at $6.40, with rejection from this level likely to bring another challenge to support at $5.96, and then existing continuation lows at $5.75. Only a close above resistance at $6.40 would suggest the bulls have more ammunition and thus bring another challenge to the $6.80 highs.

Fundamental Supply Update

Today EIA report revealed a net injection of 77 BCFs were added to storage, which was again moderately below both Bloomberg and Dow Jones survey estimates of about 85 BCFs, yet it was right in line with the ICAP estimate of 78. Storage now stands at 2320 BCFs which is 452 higher than last year and 678 BCFs or 41.3% above the 5-year average of 1642 BCFs. This still represents the highest supply the market has ever seen and with at least a month and a half to two months supply cushion, keeps the storage level on track to end in November at a new record high that many analysts predict could exceed 3500 BCFs! Under the current, and clearly dismal industrial demand picture, and let not forget about 12% of production remains offline from last year hurricanes, we see the market still vulnerable to a further decline to new lows between $5.75 down to $5.50 before gas becomes more competitive with other fuels such as coal. Initially, on approaching these levels, the short interest may find the support harder to penetrate as values become more vulnerable to buying surges in response to hurricane threat and the elevated cooling demand from peak summer heat. With Baker Hughes reporting 1389 rigs pumping gas, up 8 over the previous week, production should remain steady going forward. Currently as of June 1, the MMS reported its final update on the production that remains off-line from last year storms Katrina and Rita, which still has 1.099 bcfs or 10.99% of daily gas production shut-in.

Concerning crude oil, today petroleum complex was dominated by the sudden and unexpected news of the successful U.S. air strike by two F-16 fighters utilizing 500 ton bombs to kill Al Musab Al Zarqawi, the number one most wanted Al Qaeda operative in Iraq. Intelligence reports acquired over weeks of diligent effort and following several close calls and near misses finally paid off with devastating accuracy as the news of a secret meeting at a safe house just outside of Bagdad between Zarqawi and supposedly 7 of his aids was validated with a kill confirmed. However, after prices declined all the way down over $1.70 per barrel to a low of $69.10, prices short-covered to settle back above $70 to $70.35 for a modest loss of only $0.47 after traders reacted to an expectancy of renewed insurgent violence in retaliation for the los of the now artyred Al Qaeda leader. So the initial continuation slide in crude prices seem to dry up under $70 as the hope of reduced sabotage to Iraqi oil infrastructure and regional stability seemed to dissipate. Petroleum values had started their decline in reaction to earlier optimism derived from easing tension in the Iranians nuclear stand off as the nations head nuclear negotiator, Larijani, expressed interest in the recent offer of an incentive plan from the West to Iran that included induction into the WTO, approval to purchase Boeing and Airbus aircraft materials, and the addition of a light-water reactor for civilian nuclear technology in exchange for Iran voluntary compliance by halting their own, current aggressive uranium enrichment development plan. Energy prices had also declined noticeably yesterday on the release by the EIA report declaring another increase to crude stocks of 1.1 mbs to remain comfortably above last year supply by 4.2%, while gasoline also increased for the 6 th consecutive week, by 1 million barrels also to 210.3 mb. yet still below last year level. However, with gasoline demand still up 0.7% over the same 4 weeks last year, the supply versus demand ratio remains tight, and thus Americans have seen little relief at the pump with prices averaging $2.89 last week.

WSI Energycast Weather 6-10 Days Outlook

Above and much above normal temperatures are now forecast over mainly the central U.S. and Midwest for the balance of the 6-10 day as the focus of the warm weather is expected to shift east of the Front Range next week. Therefore, the most persistent warmth is now anticipated over Texas and the south-central U.S. while the Midwest and north-central U.S. will likely see the most changeable conditions next week. High 90s and low 100s are expected to be the rule for Texas and the South-Central U.S. most of next week. Meanwhile, highs in the 60s and 70s over the north-central U.S. to start the week will climb into the 70s and 80s by the end of the week. Though the central U.S. is looking much warmer than previously forecast, the strongest signals for warm weather still exist south and west of Chicago. For the balance of the 6-10 day period, anomalies between 2-8 degrees above normal are expected to encompass most of the central U.S. A much cooler regime is now forecast to become established over the Eastern third of nation. In response, daytime highs are now not expected to climb out of the 60s and 70s in the Northwest next week. Meanwhile, the intermountain West may continue to see highs in the 80s and 90s while Southwest temperatures climb into the 90s and low 100s. However, at least relative to normal, these temperatures suggest anomalies will not be as warm as recent weeks. Finally, little relief from the cool and damp conditions is anticipated in the Northeast next week. In response, highs are only expected to climb in the 60s and 70s in the Northeast most of next week. While not cold for this time of year, highs in the 60s and 70s generally support anomalies between 1-3 degrees below normal in the Northeast for the balance of the 6-10 day period.

Conclusion

Natural gas remains caught in a long-term bearish technical trend fueled by increased record supply initiated by a passing warm winter, dismal industrial demand, and recent weak shoulder month weather. However, under the $6.00 benchmark we see the potential downside to prices limited to a reduced window of short gains of only about another 50 cents as pricing below $5.50 attracts buying interest from competitive fuel users such as coal and residual fuel burners. Of course, the potential arrival of the first named storm to threaten the Gulf of Mexico and all bearish plans would be immediately sidelined with an upward blast to prices of at least a dollar or more that in our opinion would bring a challenge to the $7.40 to $7.65 pivot level almost overnight in the event that scenario transpires. Of course that will be the wild card; but as the sudden death of Zarqawi illustrated, the unexpected can happen at any time. Currently, a tropical disturbance in the southern Caribbean is being monitored, and if it develops further and matures from its disorganized state, could become this years first named storm in the Southeastern US and is on track to possibly threaten the Gulf as early as next week. At this point it seems very disorganized, but until disclaimed must be taken seriously, because if it becomes the first Gulf storm this early in the season, it will ignite a likely olatile buying frenzy in all the energy markets that would surprise many in our opinion.

With regards to the petroleum complex, we feel the recent negative impact from the Iraqi al Qaeda leaders death will be short-lived as any hopes for stability in Iraq and reduced violence in the region are precarious at best as he was only one man, and violence has recently escalated to double the rate of May last year as over 1400 lives were claimed last month due to how poorly this supposed war on terror has been conducted. We continue to suffer deplorable losses and growing anti-American sentiment throughout Iraq from incompetence from the likes of Rumsfeld who continues to receive growing criticism from experienced generals who served under his command on the ground in Iraq, that demand his resignation from clear examples of flawed oversight and ignoring sound strategy. The recent shocking revelation of the alleged massacre at Haditha that implies U.S. Marines brutally assassinated 24 civilian Iraqis, including women and children has the potential to totally counteract any temporary benefit or reduction in violence from the death of Zarqawi. Outside of a full resolution to the Iran nuclear standoff, through diplomatic measures, which would likely be temporary at best if attained, is the only scenario whereby we see the potential for a more sustained sell-off to crude prices resulting in a more dramatic correction down through key support of $68.10 that in our opinion would bring a rapid test to the $65.00 benchmark. The other outside scenario that might contribute to this decline could be from the economic slow down Ben Bernanke warned about, that he may actually contribute to by raising rates again later this month which would continue to threaten the consumer where he is most vulnerable his home value. If the Fed goes too far and cripples the housing and real estate market, they will create a devastating economic recessionary avalanche that we feel the Fed under estimates and the detrimental fallout could far out weigh any potential increase to the current inflation rate that we see as commodity influenced, hardly sustainable, and far from the comparison to the negative implications of a crash in the real estate market which would impact every sector of the economy. Outside of this nightmare, we see forward values to the petroleum, complex remaining firm with little spare production capacity, from OPEC as a backup to potential disruption (less than 2 million per day while global consumption runs at about 85 mpd) as losses in output from Nigeria, Iraq, and the storm sensitive refining U.S. continue to underpin world production. This all amidst a backdrop of robust demand from Asia, Europe and the U.S. and of course let us not underestimate the wild card, as this year hurricane season is now underway and is forecast to be prolific, which could ignite an already proven bullish speculative buying force that dominates the energy arena.

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

June 08, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744