Consensus Report: July 12, 2007

Petroleum Falls back to Support after Failing to Reach $74 Benchmark on Retreating Gasoline as Supply Increased Despite Restricted Refinery Output, while Natural Gas falls from Resistance on Milder Weather ahead.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead we saw the technical picture was still weak with the MACD and other oscillators along with stochastics still quite negative, and that a continuation lower to test $6.40 and then possibly a washout down to $6.25 and perhaps even $6.10 was still in progress, but based on the time cycle must happen soon or the existing lows may hold. Because the market is now extremely oversold to the point that it is very vulnerable to a short covering rally as we see the rate of new bearish forces entering the market drying up soon and yielding to a sharp reversal. That is almost exactly what transpired as the market recently failed to hold intraday highs above the $6.80 resistance level and today hit new lows for the year basis spot August at $6.30 before rebounding sharply to settle at $6.49 for a modest loss of .10 cents. The technical picture looks mixed as although stochastics, the linear oscillator, the MACD, and other indicators show signs of bottoming from an oversold condition, however, momentum and relative strength as well as other accumulation oscillators are indicating further weakness is likely. Under this scenario we see the potential for two-sided trade ahead with enhanced volatility and suggest traders use caution when anticipating entering the market and to look for certain price pivots to be tested first before committing to a position. The market certainly has exhibited enough weakness recently to test today's lows and possibly press lower to test our two week target at $6.25 per million BTU, and if broken on close would likely precede a further washout down to $6.10 at which point the market would be grossly oversold in our opinion. While this is the extreme bearish scenario, we feel it is more likely prices will rebound from somewhere at or above the $6.25 level, and then proceed on the resulting short covering rally to follow to advance up to test the first line of resistance at $6.50 with a close above this suggesting a follow-through to complete a full bullish reversal by testing $6.80, the critical resistance level that now contains the market.

Fundamental Supply Update

This week's EIA report reported an injection into storage of 106 that was well in excess of both surveys by DowJones and Bloomberg of 95 and 96 bcfs respectively. Storage now stands at 2627 which is still 64 bcfs less than last year at this time and yet 374 or 16.6% above the five-year average of 2253bcfs. Today's market reaction ended with prices slumping further and eventually hitting intraday lows at $6.30 basis August spot, before settling at $6.49 for another loss of $.10 on the day. After the sharp rejection technically from just above $6.80 over this past week the market has been restricted to a bearish range contained by resistance above at $6.80 with rejection from this level pressing new lows going forward to the point of today hitting a new low for the year and testing prices that have not been seen in almost 2 1/2 years. The knee-jerk reaction negatively to new lows following today's EIA update was also likely to be a reaction of the forecast for cooler weather to begin permeating parts of the Northeast and the eastern seaboard of the United States with relief that earlier this week were suffering stifling above normal heat and humidity. Some forecasters are now indicating a possible return of the above normal heat and humidity into many of the consuming regions of the central US next week which could easily inject more bullish volatility into the recent price range. 

  Concerning crude oil, the market settled at again, near the highest levels since last September, after breaking above the key psychological $73 barrier to an intraday high of $73.80 before strong short-sellers stepped in as the $74 benchmark failed to materialize, and as the selling momentum builds up into the afternoon prices quickly went into negative territory in sympathy with gasoline which had already moved into aggressive negative price action, resulting in spot crude breaking below the $72 benchmark intraday hitting a low of $71.92 before short covering recovered values back near unchanged for a slight loss of only six cents to settle right on the key intermediate support level at $72.50 a barrel. With no new major headlines from overseas concerning critical supplies from either Nigeria or the Middle East, crude oil seemed to run out of bullish steam at the upper levels as traders quickly found little to substantiate their buying commitments other than a gasoline market that was quickly retreating on news of the second consecutive weekly increase to supplies reported by the EIA, this week by 1.2 million barrels reaching 205.6 yet still comfortably below the five-year average and 3.8% below last year's level in total with reformulated gasoline down 25% from last year. Crude oil itself found it hard to hold the positive premium of the earlier morning session as the increased product output quickly circumvented the minor bullish news of a larger than expected drawdown in crude stocks of 1.4 million barrels leaving the total at 352.6 and still well above historic averages and a nine-year high. Internationally, the only news of a bullish nature was that of a pipeline leak that feeds Saudi Aramco's major refinery Ras Tanura, but having failed to interrupt oil low seemed to have little consequence. Counteracting this was likely the more bearish product related news that BP's Texas City refinery was attempting to go back online with its processing unit which had been shut down since Tuesday along with the news of a planned restart Thursday of its largest crude unit at Whiting, it's Indiana refinery. These restarts will likely contribute to next week's EIA update which now show's promise of a further increase to refinery capacity above the current level of 90.2% capacity having inched up from 90% even the previous week and yet still a far cry from the almost 94% operational capacity that is more typical this time of year. Looking ahead fundamentally and as we stated in a recent Bloomberg radio interview this past Monday, we see a potential vacuum building underneath the price of crude oil as it is being carried artificially upward on the legitimate shortness in the supply of gasoline along with fear premium from international tension over the chronic supply threats posed in Nigeria and Iran with the latter news obviously yet to materialize into anything substantial outside of the current 27% approximate output from Nigeria that has been curtailed for the most part over the past year and a half and has already been factored into current prices. We feel, especially after the past two days of retreat from gasoline prices of over $.12 per gallon from the intraday high based on today's close, that crude oil, which contrary to gasoline holds a multiyear high level of supply, is vulnerable to a sharp and value based decline back to test the $70 benchmark and failing here could easily fall back to test the first critical support level at $68.10 per barrel. However this will likely be preceded and encouraged by another failure somewhere above the $73 benchmark which the market has so far failed to sustain on a closing basis.

W. S. I Weather 6-10Day Outlook

6 – 10 Day Headlines

• With the exception of the West and Gulf Coasts, warmer than normal temperatures are expected to encompass most of the country. The warmest readings are forecast over the north-central U.S., where anomalies between 6-11 degrees above normal are anticipated.
  
• Today's forecast is not quite as warm in the Northeast as yesterday's forecast.
  
• The lowest confidence in the forecast exists in the Northeast. Notable model difference develop in the Northeast late next week.
  
• Temperatures may continue to trend coole in the Northeast than currently forecast if European models come to fruition. European models, particularly the 00z operational, depict the deepest trough and are the coldest of all the medium range models in the Northeast late next week.

Posted: 07/12/07

11 – 15 Day Headlines

• With the exception of the West and Gulf Coasts, warmer than normal temperatures are expected to encompass most of the country. The warmest readings are forecast over the Intermountain West, northern central U.S., and Great Lake States.
  
• No major changes can be expected from previous forecasts.
  
• Confidence in the forecast is about average based on the good large-scale model agreement.
  
• Temperatures may trend cooler along the West Coast and even warmer over the north-central and eastern U.S. than currently forecast if American models come to fruition. American models still depict the deepest West Coast trough and strongest sub-tropical ridge in the East.

Posted: 07/12/07

Conclusion

Natural gas has continued its bearish trading range after this week's failure to sustain a close above key resistance at $6.80 per million BTU and once again falling in line with last week's forecast. While this week's price action has confirmed our Outlook with today's break below our initial target at $6.40 and still has us in the process of possibly testing our next target at $6.25 per million BTU, we feel time is quickly running out in the cycle especially since high storm prevalence approaches for the Gulf of Mexico in August, for prices to run much lower than this on a closing basis. However there still exists, especially because of the extreme volatile nature of the natural gas market, a washout scenario whereby intraday the recent combination of technical weakness along with milder weather could press a test for $6.10 creating an extremely oversold condition. As stated earlier we anticipate the first test of near $6.25 will likely be followed by the emergence of stronger buying forces with a value bias that is likely to converge at these lower levels and cause a rather violent bullish reversal that with short covering could surprise many in the resulting price advance. Following this forecast bottoming action we feel the market could easily rebound back above minor resistance at $6.50 leading to a likely assault at the more critical rejection level that now contains the market at $6.80.

Concerning the petroleum complex, this week's EIA numbers were, overall bearish in our opinion from the strong retreat in gasoline prices, being that this is a product led rally and now exposes crude oil as being precariously supported on very thin ice. It was obviously construed as a price negative that with refinery capacity only inching fractionally above the 90% level yet managing to post another weekly consecutive supply increase that refineries are managing to increase efficiency on the output per barrel processed. Combine this with anticipation that with the announced refinery restarts capacity will likely increase next week and reveal another sizable increase to product stocks. The major wild cards that remain in the weeks ahead are the same being further potential interruption to supplies from the instability and violence in Nigeria, the ongoing interruption to supplies from the war in Iraq, and of course the more major yet up to now elusive supply threats implied from the expected increased sanctions against Iran over the nuclear issue. Looking ahead as we have stated before, if nothing major occurs from one of these three sectors overseas in the near-term, these headlines can become stale and thus their bullish impact and ability to sustain the fear premium, leaving crude oil little support except for its piggyback on riding the bullish sentiment of the gasoline shortage herein in the United States. Should the gasoline market, which underwent a noticeable correction from the highs this week, continue its decline through the current support at $2.24 a gallon to further test the next support level at $2.20 per gallon, we could easily see crude values breakdown into a sharper decline back to test the $70 benchmark with a failure at this critical level quickly followed by a further washout down to $68.10 in only a matter of a couple days! Technically the market is already showing signs of bullish fatigue at the higher levels especially when suspended above the $73 benchmark as traders reservations to commit becomes obvious. Only a decisive close above $73.50 near-term would suggest a continuation of the short-term up trend and the expectancy of a follow-through challenge to the key psychological $75 benchmark. However in this scenario we feel the market will need more than just technical momentum to reach this level, and without a sharper rebound to gasoline prices or a Gulf storm headline, this resistance level will be hard to attain near-term much less sustain. Prices for both crude oil and gasoline already hit and exceeded intraday both targets from our report last week exceeding the $73 benchmark along with $2.34 per gallon for unleaded.

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

July 12, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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