Energies hold Support on China's Demand and Supply data

Consensus Report: June 15, 2006

Natual Gas and Oil Report

Energies hold Support on China's Demand, and Supply data, while first Gulf Storm helps Ignite Natural Gas along with Elevated Heat Forecast.

Technical Outlook: last week we said technical indicators were mixed yet overall bearish while approaching oversold status. We also said that a close above $6.40 resistance would indicate the Bulls have more ammunition and thus bring another challenge to the $6.80 highs. This scenario not only transpired, but with fire as yesterday's convincing bullish close above resistance settling at just below $6.60, set the stage for today's impressive $.61 bull break out to close at $7.20! This two-day rally of about a dollar per million BTU has broken the short-term downtrend and reversed many of the short-term indicators to positive. Looking ahead, most key indicators such as stochastics, the linear oscillator, and the MACD all display a positive divergence that suggest the sudden uptrend has more ground to cover. Relative strength, the rate of change, various oscillators as well as the intermediate parabolic are also in a constructive pattern that is more favorable to the upside at this point. We anticipate under this posture for the market to find support near-term on pullbacks, first at $7.02 and then scaled-down buying from $6.80 back to $6.60. This would serve as an area for recoiling and gathering strength for another bullish assault on overhead resistance at $7.25, quickly followed by a challenge to $7.40 and then the bull pivot price at $7.65, that if breached, could swing prices sharply higher for an upward thrust to $8.10. Only a full retreat resulting in a close back under $6.46 would break the bullish momentum in our opinion, and return the market to bearish range trade likely between $6.20 and $6.60 on a closing basis.

Fundamental Supply Update

Today the EIA reported a net injection of 77 bcfs again same as last week, that was well below previous estimates by both Bloomberg and Dow Jones that were closer to 89 bcfs and only served to further ignite the buying that began on yesterday's breakout session from nervous short covering on technical concerns and storm jitters. The immediate weather Outlook over the next two weeks is also supportive as it suggests elevated cooling demand from abnormally high heat which we will discuss in more detail in the weather Outlook next. Storage now stands at 2397, which is 451 bcfs higher than last year and 659 bcfs or 37.9% above the five-year average of 1738 bcfs. While these numbers obviously still imply record supplies with little threat to availability, traders feel the recent decline over the past several weeks has sufficiently priced this in at least for now, and they are now more preoccupied with potential increased demand from the approaching summer heat as well as the possible supply disruption imposed by a storm. Baker Hughes reports 1376 rigs pumping gas, down 13 from the previous week as of June 9th.

Concerning crude oil, the market moved higher again today following yesterday's rally for a gain of $.36 to settle at $69.50 a barrel basis spot July delivery as traders digested the impressive economic data from China as industrial production expanded by 17.9% and the largest increase in two years. Figures suggest that oil consumption from the second-largest world consumer is expected to grow by 8.6% during the second quarter. This robust demand outlook provides little room for error or the possibility of a sudden supply disruption in one or more of the key producers as global excess capacity is limited to about 2 million barrels per day while the OPEC cartel continues to produce at the maximum capacity of 28 million barrels per day with real above quota output estimated at closer to 29. Existing tensions in overseas producers such as civil unrest in Nigeria, continued war restrained output in Iraq, and expanding restrictions on foreign petroleum participation in Venezuela, have all continued to bolster support for oil at the $68 benchmark. And of course, and most importantly, the potential challenges to future petroleum availability in the Middle East provoked by the continued standoff between the UN Security Council in the world's fourth largest producer, Iran, as the world waits for their response to the recent incentive package and or the threat of sanctions imposed by the West if the current uranium enrichment program by Tehran is not ended soon, looms large as a potential break out to oil prices above the current range. All of these conditions combined, continue to underpin the uptrend in Oil that has maintained a valuation above our key support at $68.10 that we have forecasted for weeks now. As we stated last week, it would either take a sudden and unexpected resolution, even if temporary, to the UN/ Iran nuclear standoff, or a significant economic slowdown amongst the key consuming powers of the US, Europe and Asia, to send oil prices into a more sustained decline, neither of which shows signs of materializing. In fact the recent industrial economic growth numbers from China suggest otherwise. Now let's take a closer look at the weather with W. S. I as it will continue to play a more vital role of impact on energy prices as speak hurricane season approaches.

W. S. I Energycast Weather 6-10 day Outlook

Above and much above normal temperatures will be dominating much of the nation next week as a subtropical ridge maintains a strong influence across the nation. The warmest anomalies in the East are expected along the northern tier while much above normal reading should also be anticipated in the western third of the country, except the Northwest. Temperatures across these areas may run 3-10f above normal. The Northeast corridor or should start the week hot with highs well into the 80s and lower 90s but a slight cooling trend is expected for the middle and end of the week due to mid-level troughing. Nevertheless, reading should remain above normal in most locales. The Deep South and Southeast should witness above normal readings on the whole, but no significant warmth due to an easterly flow dominating most of the time. Highs will be mostly in the mid 80s to lower 90s, warmest toward the lower Mississippi Valley and interior Texas where warmer maxes will occur on the hottest days. Very warm weather will also continue all week in the Midwest with high temperatures in the mid 80s to lower 90s on a widespread basis. A slight cooling trend late in the week and the following weekend will occur as there will be a subtle change toward the focus of mean ridging shifting westward allowing weak cold fronts to penetrate. Otherwise, temperatures will remain above normal since not much polar air will be tapped. Meanwhile, little to no relief is expected in the southwestern US as intense heat redevelops this weekend and continues straight through next week. Highs will generally reach 100-105 in the deserts but isolated 110 degree maxes are expected as well. Some of this heat will expand through interior California with highs reaching the 90s throughout the Valley's although the lack of an offshore component will keep the immediate coast a little cooler. The Pacific Northwest is expected to undergo a gradual warming trend with highs climbing into the 70s and perhaps low 80s on the warmest days.

Conclusion

Natural gas has recently experienced a technical breakout from an oversold condition that has been the result of short covering prompted more by technical concerns and weather and storm fears that have yet to materialize, rather than from more solid real supply demand considerations. The fact remains that existing supply continues to run at record unprecedented levels with a current supply cushion that is still at least the equivalent of a month and a half of additional supply by historic standards. To put this in more clear and defined terms, it would only take an average weekly injection rate of 55.1 bcfs over the remaining 20 weeks of the injection season to end in November with a record-breaking 3.5 TCF's, and obviously the heaviest supply the industry has ever experienced. This is hardly a bullish scenario considering it is way below the five-year average injection of 68.1 bcfs over the remaining 20 weeks that is required to reach the typical 3100 bcf benchmark deemed necessary to facilitate winter needs. However, as this market has so graphically displayed many times in the past, its ability to ignore, albeit temporarily, what may seem to be inevitable by using what I call "selective focus" is able to trade off of the demand side of the equation only and obviously a sudden elevation thereof. This will make for a very volatile trading range over the coming weeks as the market will be extremely sensitive to any sudden fluctuations in demand and especially vulnerable to sharp and precipitous declines on any signs of diminishing cooling demand from temperature drop as well as storm disappointment as traders will immediately be forced to return their attention to record heavy and more than adequate supplies. Looking ahead on technical merits alone, the current bullish break out certainly suggests a near-term challenge to the bull pivot price of $7.65 that we warned could be reached almost overnight, as it has, on a sudden storm challenge, the very same scenario that we outlined in our conclusion from last week's report! This sudden arrival of what turned out to be the first named Gulf storm, Alberto, certainly provided the impetus for the past two day vertical price acceleration. Arguably today's lower injection of supply could only serve to complement yesterday's short covering performance. Alberto, despite ultimately bypassing the critical production areas of the Gulf and thus disrupting zero supply, still provided a bullish platform from which prices obviously launched as it reminded traders of last year's devastating storms and how quickly supply can be threatened in a very meaningful and critical way as Alberto literally originated just below Cuba in no time and immediately threatened the Gulf following a weekend!

Concerning the rest of the petroleum complex, the sudden arrival of the first named Gulf storm, while also implicating this same underlying threat to supply, failed to have the same dramatic impact on these markets as the liquid energies must also balance many other international factors that are unique and yet by jurisdiction have little influence over natural gas. The passing of the storm over the Florida Panhandle and out to the Atlantic, away from the critical output regions of the Texas and Louisiana coast, certainly gave the petroleum complex a sigh of relief, however it still had a mildly bullish impact when combined with the ongoing international tension overseas stated earlier, and the continued tightness that still exists in the gasoline market when considering peak driving season is now upon us. This week's EIA data, while received with mixed opinions, still failed to break down the uptrend and sustain prices below our current key support benchmark at $68.10 per barrel. While there seemed to be a balancing act from bull bear dispositions as the surprising decrease of 0.9 million barrels in the supply of crude oil leaving 345.7 million barrels total, was sufficiently counteracted by the more surprising increase and seventh consecutive gain in unleaded gasoline, of 2.8 million barrels and about twice what was expected, leaving the critical supply in the middle of the average range; what seem to water down the bearish gasoline data was that refineries operated at a new high 92.7% of their operable capacity since last year storms and increasing gasoline production to 9.2 million barrels per day, yet over the last four weeks gasoline demand has still averaged 9.4 million barrels per day or 0.6% over the same period last year. This rather tight scenario whereby last year's storm damage still hinders gasoline output as demand continues at a robust progressive pace, it underscores a continued vulnerability to any sudden disruption to production from this year's storm season that would immediately exacerbate an already tenuous and critical ongoing precarious supply demand balance. As far as the overall petroleum complex, I believe an X-factor or wild card that has not been mentioned much in the press lately as it seems to be an obviously unpleasant subject, is a potential serious threat to supply and unfortunately is lurking in the background and could impact global economies at any time. What I'm referring to is a terror strike that could loom large against the West in retaliation for the alleged Haditha massacre that US Marines are currently being investigated for. While many in the media seem to be wrestling with attempts by some to either downplay the event, make excuses for the potential reality of such a tragedy, or by even some at the other end of the spectrum who deny the event or are attempting to justify in some way it transpired as a result of "snapping under the pressure of war". No matter what conclusion we as Americans may arrive at to pacify our own feelings of guilt or in just accepting the ugliness and tragedy of this supposed war on terror that by majority most Americans now truly regret ever started, unfortunately the extremists in the Islamic fundamentalists movement no doubt have formed their own opinion and thus conclusion as to what happened in Haditha! It is their viewpoint, and their conclusion that we should be concerned about. I believe it would be rather foolish to think the opposing forces of which, in the Muslim world there are now many, that have erupted in direct defiance and complete hatred for the position the Bush administration has placed American interests in Iraq, are not planning to retaliate. If as the President has recently acknowledged, " we made a terrible mistake in Abu ghraib" and if by mistake he acknowledges that the insurgency that is perpetrating most of the fatalities in Iraq is acting in retaliation for that prison debacle amongst many other reasons, then he'd better brace himself for a likely increase in the violence in retaliation for what could be considered a much more serious mistake. This alleged open act of unrestrained violence by US Marines displaying disrespect for innocent life resulting in a murderous rage, that if confirmed, would obviously galvanize the anti-American sentiment that already exists and needs little kindling to reach the heat of boiling, should be considered as a serious driving force for the enemy to retaliate against American interests globally near-term. When considering potential targets, our intelligence sources had better consider oil infrastructure as a highly prized objective for al Qaeda and other Muslim extremist groups as by hitting such economically sensitive resources, the enemy accomplishes two fundamental advantages. They advance the flag of terrorism and thus cripple, almost overnight, economic growth while at the same time accelerating the rise in the price of oil which then complements their agenda by increasing their underlying revenue. The whole situation we now find ourselves in Iraq kinda makes you wanna look at the administration and say, to coin a famous phrase from an old comedy duo from the thirties:" well here's another fine mess you've gotten me into Ollie". You know it would be comical if it wasn't so tragic and if the results of this war hadn't killed so many people.

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

June 15, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744