Wall Street Journal : July 31, 2008

Petroleum Remains Range bound as Weakening US economy contains Rally attempts despite Geopolitical concerns, while Natural Gas continues to consolidate losses amidst mild heat outlook, quiet in the Tropics, yet Technically oversold.

Natural Gas

Technical Outlook: Since our last report we said in looking ahead, that several technical supports had been broken and that a close back below the $9.0 benchmark was needed to cause a deeper washout down to test $8.60 which has thus far been prevented by the market’s failure to close below $9.0 and yet intraday has managed to test $8.81 basis spot. So far prices have also been well contained below $9.54 on rally attempts and thus far have not ventured close to last week’s high of $9.94 posted the day of our last report and so the bearish forces have not been neutralized to confirm our call for the rebound to test swing resistance yet at $9.92. However it now seems more clear that our call for the more bearish contingency is still in progress, whereby a close below the $9.0 benchmark may soon materialize into the deeper washout I mentioned last week. Now almost all technical indicators are still in grossly oversold territory with stochastics, relative strength, momentum, the rate of change, the MACD, Bollinger bands, along with several oscillators exhibiting depleted value indications that typically precede a bullish reversal. I anticipate that if the price of the September spot futures fails to effect a close back above $9.32 per million BTU over the next 2-3 sessions, then a likely break down resulting in a close back below the $9.0 benchmark will culminate in the deeper washout I predicted earlier whereby a challenge of new lows at the critical support of $8.60 is very probable at this point.

Fundamental Supply Update

This week's EIA report revealed another consecutive injection, and close to what had been expected as 65 bcfs, which was right in line with Global Insight’s call for 63 and near both estimates that ran closer to 70 by DowJones and Bloomberg respectively. Storage now stands at 2461 bcfs which is 357 bcfs below last year’s record and now 12 bcfs or -.5% below the five year average of 2473 bcfs. This report being slightly lower than what had been anticipated by both previous estimates of the two key surveys failed to prevent the continued slide in natural gas prices as the market continued to feel combined pressure of the recent downtrend in petroleum prices along with technical weakness and a mild weather Outlook. Looking ahead with more seasonable weather forecast for the key Midwest and Northeast after a brief heat spell early next week is hardly generating much enthusiasm amongst the badly battered Bulls who have already given up almost 37% in the recent decline since the markets peak of $13.69 posted July 2. However we must warn now that the market has been totally deflated of almost all its fear premium and is now technically grossly oversold, the risk to increased short interest is building as sensitivity to quickly approaching peak storm threat that typifies August and September is growing more acute, attracting interest from longer-term value based buyers.

Concerning crude Oil, today the market gave back over half the gains posted in the previous session as the September delivery dropped $2.69 or 2.1% to close at $124.08 per barrel on the Nymex. For the month of July crude oil lost $15.92 or 11% for the month in the biggest drop in dollar terms in its history. Despite the recent US economic stimulus plan the Commerce Department reported Thursday that the US economy grew by 1.9% for the 2nd quarter and weaker than analysts expectations which further dampened the outlook for energy demand in the world’s top consumer. This week’s EIA numbers revealed a smaller drop of 100,000 barrels in crude stocks resulting in a total of 295.2 million barrels for the week ending July 25 where as gasoline inventories dropped a more than expected 3.5 million barrels which was the only bullish revelation as distillate supplies increased by 2.4 million, and yet both products are comfortably above the average range for this time of year. Refinery capacity inched up to 87.2% and yet continues to reflect anemic demand as gasoline consumption continues to run at an estimated 4% below last year despite the government’s indication that it was down by 2.4% over the past month compared to the same time last year. The market is beginning to ignore geopolitical concerns that would previously ignite stronger rallies as yesterday’s $4.0 found no follow-through today despite ongoing supply disruptions in Nigeria and the anxiety over Teheran’s potential decision to be announced this weekend as to whether they will comply with recent UN demands to suspend their ongoing nuclear enrichment program or face more serious sanctions that are pending. Logic would dictate considering the US position of being bogged down militarily in both Iraq and Afghanistan, that Iran sees no immediate threat that would suddenly force them to comply, and so I don’t anticipate Iran to concede and discontinue their nuclear campaign. While this remains as a latent bullish influence, unless it causes an immediate renewed military threat from Israel, it may have little consequence as to deter traders recent commitment to liquidate in lieu of obvious weakening demand for energy here in the US.

WSI Weather 6-10 Day Outlook

Cooler readings to return to the Midwest next week

Summary

Today's 6-10 day forecast is cooler over most locations south and east of Chicago than it was yesterday. The main reason for the change is the period shift of the 6-10 day, and the fact that a colder day is arriving in the East late in period. The heat in the East early next week is also not looking quite as intense as the models were hinting at yesterday. American models this morning are strongest with the southeastern U.S. ridge and are the warmest of all the models over most locations south and east of Chicago early next week. Canadian models favor the European models which are faster to deepen the eastern trough and bring and end to hot and humid weather in the East. As a result of the better model agreement, a preference is placed in the European models during the next week and 6-10 day forecast periods. While readings may not be quite as warm during the latter half of next week as they will be early in the period, the warmest temperatures and the most persistent warmth are still anticipated over Texas and the southeastern U.S. next week. Once the hot weather becomes re-established in the Southeast later this week it is forecast to continue most of next week. Highs in the 90s and low 100s are generally expected to be the rule for Texas and the southeastern U.S. most of next week. The best change for readings near degrees occurs early next week as a weakening cold front will bring an increasing chance for shower and thunderstorm activity during the 6-10 day period. The biggest change in temperatures next week is still anticipated in the Midwest and Great Lake States, as the warm and humid weather encompassing the region early next week is forecast to come to end during the 6- 10 day period. Widespread highs in the 70s and 80s are expected to become more common place over the Midwest and Great Lakes during the latter half of next week. While warmer than normal temperatures are also forecast in the Northeast the first of half of next week, the strongest signals for warm weather exist south of the region. In response, highs no warmer than the low 90s are expected to prevail in the Northeast on the warmest days next week (Tuesday and Wednesday). Meanwhile, the 6- 10 day forecast is warmer today over most of the western U.S. This is also mainly the result of the period shift and adding a warm day late in the 6-10 day period. The only region in the West not expected to see warmer weather during the 6-10 day period is the Southwest. The strong influx of monsoonal moisture into the southwestern U.S. will bring highs in the 90s and low 100s to the region most of next week. Otherwise, highs in the 80s and 90s will become more common place over the western U.S. during the 6-10 day period.

Conclusion

Natural gas, this week continued its consolidation in our opinion as prices remain hemmed in between predominantly $8.90 on the downside and $9.30 resistance band on the upside with the market unable to close below the $9.0 benchmark as of yet as conditions remain grossly oversold. The market will continue to be influenced by sympathy trade with crude oil which remains in a short-term downtrend, amidst a backdrop of disappointing milder weather as the heat index has thus far been changeable with a more seasonable outlook, and finally as the tropics remain quiet with no immediate storm threat pending, all combined to keep prices contained to lower consolidation for the short term. Looking ahead with prices grossly oversold technically amidst a backdrop of weak fundamentals leaves the market vulnerable to a potential technical bullish reversal upon the next selloff. Traders in my opinion are now hunting for a value to place large funds that have recently been sidelined as the energy markets in total have given up the largest correction of this year and in a short period of time the largest of many years! Should a sudden storm threat arrive on the horizon that is targeting the Gulf and the energy markets could quickly return to a bullish frenzy resulting in a vicious price escalation that could shock many. Considering peak hurricane season lies dead ahead in August to September, further downside movement in natural gas may be limited as getting short near monthly lows could be unwise considering the time of year.

Concerning crude oil, so far this week has confirmed hour call in last week’s conclusion whereby we stated clearly that the short term correction may be nearing its end as technically there would be good support at the previous critical level between $121 -$122 that preceded the initial run to existing all-time highs at $147 basis spot. This was confirmed with yesterdays brief venture below $121 that only ignited a massive wave of buying that brought on an almost seven dollar reversal as prices briefly tested $127.89 before retreating into the close! Fundamentally looking ahead the same hotspots geopolitically will continue to influence price movement and on the bullish side of the equation in supply disruptions in Nigeria; the heightened tensions between Iran and Israel backed by the US over the nuclear issue; China’s robust demand for petroleum as their GDP remains healthy above 10%; continued support for the peak oil theory as output continues to decline amongst major producers such as Russia, Venezuela, Mexico, and the North Sea. And yet on the bearish side of the equation, which has recently dominated center-stage and managed to put all these geopolitical concerns into the background, the growing fear of demand destruction for energy across-the-board led by the growing recession here in the US and the implications for it spreading overseas. This week’s jump in initial jobless claims to the highest level in over five years certainly puts a negative spin on tomorrow’s critical unemployment numbers as most estimates run near a loss of another 75,000 jobs and the seventh consecutive reduction in US employment. The recent revision for the negative GDP of a contraction in growth of a negative .2% posted in the last quarter of 2007 makes it more official that the US is now in a full-fledged recession with many analysts anticipating an increase to the overall unemployment figure to 5.6%. This key figure in unemployment deserves close monitoring as we have mentioned in many reports before, as it will precede a logical melt down in commercial real estate as declining payrolls force employers to shut down office space in commercial rentals forcing foreclosures and igniting another round of failed mortgage-backed securities and collateralized debt based derivatives that the banks have grown so accustomed to selling. The renewed losses could erupt in a whole new wave of bank write-downs as the bad loans, imploding debt instruments, and lowered credit ratings as these investments go awry with institutional owners finding no buyers just as the subprime residential based securities previewed their fate and unfortunately some household names may not survive! These conditions however will take time to unfold and so in the meantime I anticipate crude oil will continue to be range bound between $120 on the support side with resistance now defined above at $127.50 with a near-term breach of this level likely to return values back up to $131 before another round of selling ensues. However if tomorrow’s unemployment numbers are much weaker than expected with a loss of over 100,000 in payrolls and crude oil may actually penetrate the $120 benchmark which could then ignite a whole new wave of selling bringing a rapid test of $117 before the short-term selling dries up. Concerning the US dollar, I continue to see more signs that currency traders are taking their cue from commodity values and economic data rather than the opposite with Energy traders showing little concern for the value of the US dollar as recently price action has been dominated by liquidation or previous contract owners selling out their positions which would not be influenced in any way by the value of the US dollar over their decision to exit the market. Now if the US dollar were to suddenly weaken substantially more as crude prices decline, it would then logically provide a short-term positive influence over would be purchasers from overseas looking to enter the market. And as I have stated before, recent evidence has shown that the US dollar actually got weaker over this recent correction in the energy complex as it revisited recent highs of 160 against the euro during the same time.

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

june 07, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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