Petroleum Closes Near $76 and New Yearly Highs on Total SA Force Majeure in Angola

Petroleum Closes Near $76 and New Yearly Highs on Total SA Force Majeure in Angola and Strong Gasoline Rebound after EIA Announced Supply drop, while Natural Gas Rallied in Sympathy and Improving Weather Demand Forecast.

Technical Outlook: Since our last report we said the technical picture looked 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 saw the potential for two-sided trade ahead with enhanced volatility and suggested traders use caution when anticipating entering the market and to look for certain price pivots to be tested first before committing to a position. We also said the market had certainly exhibited enough weakness recently to test current 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 we explained this to be the extreme bearish scenario, we said clearly it was more likely prices would 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. This turned out to be the accurate forecast as prices went down following our report to fresh new lows at $6.22 intraday before rebounding yesterday to break our target resistance on close and settled above the $6.50 level. Today, to complete our rebound prediction prices continued the advance to close above this comfortably at $6.70 as the market now has our key resistance level at $6.80 within reach. Looking ahead, we now see the technical outlook has greatly improved with Stochastics, momentum, the MACD, the Linear oscillator, as well as the Relative strength index all showing a more confirmed bottoming signal that further upside from the rebound from oversold levels is likely. We now anticipate a near term challenge to test $6.80 is likely with a break above this leading to a rapid challenge to $6.92 before the market even begins to approach being overbought. Look for support on pull backs at $6.65 and then $6.50 to be well bought near term.

This week's EIA report reported an injection into storage of 65 that was just below or closely in line with surveys by DowJones and Bloomberg of 65 and 68 bcfs respectively. Storage now stands at 2692 which is still 63 bcfs less than last year at this time and yet 365 or 15.7% above the five-year average of 2327bcfs. Today's market reaction ended with prices climbing to near session highs in settling in at a two week high of $6.70 per million BTU. The market is now turning its attention to improved weather demand scenario as brought out in our forecast by WS I weather in the next section that indicates the arrival of some highly elevated temperatures in the consuming eastern United States that should place above normal demand on natural gas from consumers possibly over the next two weeks. This in conjunction with the petroleum complex currently on fire with crude oil assaulting new yearly highs almost daily and with gasoline supplies uncomfortably low as America drives through peak summer season, and natural gas prices could be poised here to break out, especially if there's even a hint of the arrival of a storm in the tropics. Near term we expect at least a challenge to the recent resistance level at $6.80 with room for further gains up to test $6.92 and possibly the $7.0 benchmark if the hotter forecast sustains itself for any length of time beyond two weeks.

Concerning crude oil, the market settled at again, near the highest levels since last August, after breaking above the key psychological $75 barrier to an intraday high of $76 following news of an electrical problem that cut daily output in half at the Dalia oil platform in Angola operated by French company Total SA causing them to declare a force majeure as their daily output was reduced from the typical 240,000 barrels down to 127,000 barrels of oil per day making their ability to meet contractual obligations impossible over the short term. This of course came on the heels of a bullish EIA update whereby petroleum experienced a full spectrum decline with crude stocks inching lower by 0.5 million barrels while the headliner gasoline inventories fell by a surprising 2.3 million barrels last week and remain well below the lower end of the average range. Even distillates declined by a fractional 0.2 million barrels yet remain in the middle of the average range for this time of the year. Also adding to the bullish mix was international news that China's second-quarter GDP grew at an annual rate of 11.9% furthering the cause of robust world energy demand. Based on these fundamentals combined with a strong technical backdrop certainly has crude oil after closing above our target from last week's report of $75 per barrel propelled by the necessary close above $73.50, poised to challenge the next resistance level of $77.50 and near all-time highs! What is particularly telling about this year's rally is that the petroleum advance has been supported for the past several months without the occurrence of a single dominating headline such as the one that accelerated prices last year to all-time highs of $78.40 per barrel back in August 2006 when the Hezbollah took on Israel and was firing rockets into Lebanon. Before that in 2005 crude oil rocketed to similar levels after the surprising nightmare arrival of the evil sisters Katrina and Rita, the two devastating hurricanes that caused extensive damage to critical oil infrastructure in the Gulf of Mexico. This sustained rally has been more the result of a consortium of contributing factors led by: first, and mainly a true supply shortage in gasoline spawn from an unpredictable series of mishaps and refinery breakdowns straining gasoline production in the world's top consumer; then second, quickly followed by the increased tension in Nigeria further elevating their restricted output to a level of 27% of the country's total exports; and finally third, to round out the basis of support for this sustained uptrend is heightened tension in the Middle East which has been centrally focused between the two hotspots of Iraq and the nuclear issue with Iran and the ongoing sanctions levied by the UN. With these main three conditions all exhibiting signs of chronic debilitating factors that could all deteriorate further into the future, and it leaves little comfort for those optimistic bears that are praying for some kind of price relief or subsiding of the market in expectations of either increased supply or easing demand as if a miraculous peace accord is expected to suddenly break out in the Middle East or Nigeria for that matter. Instead when you consider we are about to embark on the high prevalence storm period for the Atlantic Coast, and one can certainly see why this situation is serious. This situation leaves the world quite defenseless against the actual likelihood that given the surprise arrival of a tropical storm heading for the Gulf of Mexico or a sudden escalation in violence in the Middle East threatening any one of many oil producers, or both, and unfortunately we could be facing a sudden price spike in crude oil or the products or both from the highest sustained price levels already in history!!

Above- to much-above normal temperatures are still expected to dominate the northern tier of the country for the balance of next week, in addition to the

Intermountain West and Southwest. Readings in this general area should range from 3-12F degrees above normal. There remain important technical uncertainties regarding how quickly the heat builds into the eastern third of the country as well as with the actual degree of heat, but model guidance today continues to favor a robust warming trend. High temperatures are forecast to start the week in the upper 70s and 80s east of Chicago,

and perhaps even cooler for New England, before reaching well into the 80s and 90s for the middle and end of the week. There are only some questions regarding wind direction for coastal New England and therefore how hot temperatures will become there. In any event, the hot weather is already forecast to be present at the start of the week for the midwestern U.S. locales from Chicago westward as daytime temperatures also soar well into the 80s and 90s on a consistent basis. Certainly highs in the lower 100s could occur in a few areas, but more the northern Plains than the Upper Midwest.

Meanwhile, relatively cool temperatures are anticipated for the south-central U.S. where highs will primarily just reach the mid 80s to lower 90s. The forecast is a little more difficult for the rest of the Deep South and

Southeast but today's guidance has trended a little warmer for late next week and weekend. The bottom line is that the coolest readings compared to normal will be toward the lower Mississippi Valley and Texas where the best chance for shower and thunderstorm activity will be. Temperatures should average 3-5F degrees below normal. For the western U.S., the relatively meager monsoonal season will continue although the Southwest should get some relief next week from the sustained hot and dry conditions they've experienced. The best risk is over the more southeastern portions of the Southwest and

Great Basin while no major changes are anticipated in most locales. High temperatures should still reach 100- 110F degrees most days in the western deserts with 90s to the east. High temperatures in the 90s meanwhile should also continue in the majority of the Great Basin. Finally, the West Coast is forecast to experience near- to slightly above-normal temperatures but little in the way of unusual or sustained heat. Highs should reach the 90s in the north-central California valleys while mid 70s to lower 80s will be the rule in the Pacific Northwest.

Natural gas has made a significant rebound from new lows this week as prices rebound from $6.22 intraday lows and in two days closing at $6.70 with prices now poised to challenge the key resistance level 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 last week's prediction of finally breaking down to hit our two week target at $6.25 per million BTU, followed by a quick rebound up to test the $6.80 which we feel is currently in progress, they're now exists a distinct potential for a further break out that could find prices quickly challenging the $7.0 benchmark on either sustained above normal temperatures in the central and eastern US along with a further escalation in petroleum values or the potential for both. Near-term we look for support to be well bought at the lower levels first at $6.60-$6.65 scaled-back to $6.50, with a close back below $6.40 needed to negate the short-term upward momentum to then turn the market negative to retest recent lows.

Concerning the petroleum complex, this week's EIA numbers were, overall bullish in our opinion from the strong rebound in gasoline prices, being that inventory levels in general experienced a full spectrum reduction. Add to this the fact that gasoline production actually declined in conjunction with refinery capacity inching upward to 91% just explains further the precarious refinery challenges we face here in the US as we head into peak hurricane season over the next three months. Some of the key refinery restarts that transpired over the weekend will most likely impact inventory in next week's report which could bring some temporary late relief to gasoline prices and crude oil, which at this point has certainly earned an over extended and over bought price correction. This especially considering that crude oil still enjoys almost nine-year highs in domestic US supply whereas gasoline still remains historically strained with inventory levels currently well below relative averages. When you consider the combination of recent technical strength, the continuing refinery challenges here in the United States, the ongoing tension from uncertainty and instability in Nigeria and in the Middle East, and finally the approach of peak hurricane season here for the Atlantic Coast, and you have the catalyst for a strong continued up trend in petroleum values. On near-term momentum alone we anticipate crude values could easily challenge the $77 benchmark per barrel with gasoline spot prices easily advancing back up to $2.30 per gallon on any sign of further weakness in refinery output. However, on the flip side of this scenario traders should be concerned about a potential vacuum building underneath crude oil prices as they have already over extended their advance in our opinion on the back of the gasoline shortage which despite being legitimate has failed to return gasoline prices to its contract highs this year while crude oil in contrast has repeatedly set new contract highs almost daily, despite enjoying almost nine-year high inventories and even during the recent $.20 plus decline in gasoline prices! This artificial support for crude oil could easily cave-in, triggered either by another pullback in gasoline, sudden easing in Middle Eastern tension, or even an unexpected revelation of further economic weakness here in the United States from the ongoing housing crisis in the sub-prime mortgage debacle considering how far petroleum prices have been recently stretched to. If this takes place, crude oil prices could easily subside 2-3 dollars per barrel rapidly with a bigger washout possible taking values quickly back to test $72.50 and lower almost overnight!

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United Strategic Investors Group