Consensus Report: August 16,2007

Petroleum Continues Enhanced Volatile Range as Traders Evaluate the Longer term threat of Economic Slowing against the short term Storm threat to Supplies, While Natural Gas Rebounds from early Stock meltdown on Supportive EIA Report as Dean Eye’s the Gulf.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead technical signals were now stronger and that longer-term indicators such as the linear oscillator, the MACD, and the parabolic, all suggested further upside ahead. Meanwhile, stochastics, momentum, and the relative strength index still displayed some weakness over the short-term, and that given this mechanical outlook of a continued mixed forecast, we said to look for certain pivot points at the support and resistance levels to govern near-term direction. We also said most likely the market would rally to challenge the key $6.80 level that has contained bullish attempts over the past several weeks. This outlook was confirmed as prices this week not only rose to challenge our targeted resistance point, but also broke through this level to reach as high as the $7.20 resistance level before falling back in the range and has managed to close above the key $6.80 level more than once before falling back. Looking ahead technically the market has gotten a little overbought in our estimation and the $7.20 level is beginning to look like a temporary top for the market. Most technical indicators at this point are exhibiting overbought warnings to the point that we expect if the market cannot manage to challenge or break above the $7.20 resistance point over the next 3-5 sessions, we anticipate a further decline back to test support at $6.60-$6.65, and then possibly $6.40 support levels before more substantial than buying steps in after some of the overbought conditions subside. Only a further advance back up to challenge and settle above the existing resistance at $7.20 would override it and set the stage for a continuation up to $7.60, a key resistance level.

Fundamental Supply Update

This week's EIA report revealed an injection into storage of only 21 bcfs that was close to survey estimates by DowJones and Bloomberg that were running between 20 and 27 overall. Storage now stands at 2903,and a record high which  is still 108bcfs above last year at this time and yet 371or 14.7% above the five-year average of 2532 bcfs. The market initially reacted with an onrush of buyers as prices challenged the highs of the day early on before collapsing to the low of the session at $6.54 per million BTU as the stock market saw values collapse below 300 points early in the session creating a contagion of selling that rallied almost all markets across the commodity Index is traders quickly liquidated any positions of favor in order to meet the margin requirements for equities or just to free up capital in the wake of the uncertainty over where the subprime melt down and resulting credit crunch could lead. It is our opinion that in lieu of the fact that natural gas production in the Gulf of Mexico is critical whereby emergency shipments from overseas or from our neighboring trade partners is extremely limited caused traders to begin buying throughout the day as they soon ignored the stock market selloff and began to weigh the impending threat to critical infrastructure posed from the approach of hurricane Dean. This legitimate concern caused natural gas to ultimately reach positive territory late in the session before settling back into the close for a small gain of one cent before settling at $6.875 per million BTU and yet an impressive rally of over $.30 from the intraday session low. As we have mentioned many times before, despite current technical conditionings exhibiting overbought status, fundamentals, and in this case one of the most powerful impacts of all, a storm threat, can and will override almost all other conditions because of the immediate threat to critical and precarious production levels for the industry. It is my belief that should hurricane Dean take a more northerly track next week after clearing or passing through the Yucatán Peninsula and unfortunately set its Path for the production coast of Texas and western Louisiana, most technical concerns and even the existence of record storage will take a back seat in the market will still accelerate in an almost vertical advance that will surprise many especially with the recent short interest that has entered the picture. However, as in all things there is a potential flip side to that coin, that should hurricane Dean take a more westerly course and make landfall below Brownsville Texas bypassing critical gas production infrastructure then we anticipate a noticeable storm disappointing decline to immediately follow and thus testing recent support levels.

 Concerning crude oil, the market today closed with further weakness to settle with another loss of $2.33 to settle at $71 per barrel and a continuation of the strong retreat from yesterday’s intraday peak of well above the $74 benchmark that was a result of another bullish EIA report declaring the second consecutive large draw-down for crude stocks in this case of 5.2 million barrels leaving 335.2 million barrels in ending stocks which remain above the upper end of the average range, while total motor gasoline inventories also fell by 1.1 million barrels last week remaining below the lower end of the average range and the second consecutive drawdown as well following last week’s decline of 1.7 million barrels. Only distillates inched up by a fractional 0.2 million barrels and remain in the middle of the average range for this time of year. Refineries continued to operate near last week’s levels however inched up to 91.8% of their operating capacity. However this bullish report obviously faded into the background as the market opened sharply lower in reaction to the continuation of the recent stockmarket sell-off that impulsed a wave of sympathy selling that routed all commodities except the bond market which attracted a flock of eager buyers in their earnest pace to a flight to quality. It seems apparent that despite all the recent hot air and rhetoric that has spewed forth from the likes of Fox News and other major media that have been insisting over the past six months or more that the housing slowdown is nothing more than a temporary and minor condition that would only effect a small section of the economy and thus have little effect on the consumer and the broader economic structure. Unfortunately, as reality sets in, these same proponents of the propaganda and their words of rose colored ignorance are beginning to ring hollow much in the same way as the lies of the wonderful progress were making in Iraq have been exposed and often after being spread by many of the same sources. Over the past week as the contagion of the subprime collapse that has thus far toppled over 70 major mortgage companies spread into hedge funds that were linked to subprime mortgage derivatives such as the recent announcement by the major French investment bank BNP Pariba halted funding for three affiliate funds that were tied to US subprime securities, that just exacerbated the permeation of fear throughout the equity markets globally which seemed to reach a crescendo on the warnings declared yesterday by Merrill Lynch that the number one US lender Countrywide could be facing bankruptcy. This morning the announcement that Countrywide had just maxed out its credit from a consortium of over 40 banks totaling $11.5 billion to maintain solvency in a seemingly disparate financial move to tread water sent securities plunging as traders scrambled in fear wondering where and when the economic fallout might end as obviously the credit crunch as major World Bank’s scrambled to provide liquidity by injecting billions into the system, raising concerns over future economic stability. The fact that recently in the last fed meeting, the relatively new fed Chairman Ben Bernanke failed to even provide any calming words of countermeasure that would suggest a change in fed policy might be eminent such as easing credit, but instead and much to the dismay of Wall Street pundits, reiterated the same denial of reality and a continuation of exaggerating the inflationary threat maintaining the same vigilant stance declaring that the “ghost threat “ was still the feds major concern and posed the number one threat to the country’s economic growth. Obviously the recent subprime mortgage collapse that has even threatened to shut down the country’s largest seller of mortgages, as banks quickly tighten credit, reject applications and further restrict the criterion to initiate a house purchase, which has only accelerated the collapse in demand which is exacerbating home devaluation as builders face the worst recession in over 16 years, no, how could this possibly affect the consumer? Are you kidding! How can it not as economists estimate the average GDP over the next quarter and for the rest of the year will lose one full percentage point of growth as the consumer who makes up 70% of that GDP is further debilitated! The fed better move quickly and at least set the stage by changing their tune at the upcoming next meeting by announcing a change of stance and voice clearly their intentions to accommodate credit policy to alleviate some of the pressure on the system and to allow some stimulus to reignite growth potential as the downward momentum for a full-scale recession is already in progress!

W. S. I Weather 6-10Day Outlook

6 – 10 Day Headlines

Changeable conditions are expected to characterize the weather over much of the country next week. The most persistent warmth is anticipated over the southeastern U.S., where little relief from the hot and dry weather that

has plagued the region in mid-August is expected. While next week may not be quite as hot as this past week, widespread highs in the 90s to near 100 degrees are generally forecast to be the rule for the southeastern U.S.

most of next week. Meanwhile, the hot and mainly dry weather is expected to continue in the Southwest as daytime highs between 100-110 degrees are generally forecast throughout the southwestern U.S. next week. Elsewhere across the country, conditions are expected to be more changeable in nature. The Northeast may start the week on a cool note, however, warm and humid is

expected to redevelop during the latter half the week. In response, highs in the 70s and 80s in the Northeast and Mid-Atlantic States to start next week are forecast to climb into the 80s and low 90s during the 6-10 day period. The Midwest may start the week on the warmer side of normal but is expected to see cooler weather arrive during the 6-10 day period. As a result, highs in the 80s and low 90s in the Midwest early in the week are forecast to fall back into the 70s and 80s during mid-to late 6-10 day period. The region that may see the biggest change next week is the Pacific Northwest. Highs only in

the 60s and 70s are expected to grip the region to start the week, however, all models feature a building West Coast ridge and European and American operational models suggest highs may climb well into the 80s and 90s in Seattle and Portland by the end of the 6-10 day period. Finally, Hurricane Dean is now forecast by all the medium range models to make landfall over Mexico and northern Central America near the middle of week. That may not be the end of the tropics though as European, Canadian, and American operational model all feature a wave near the Islands on day 6, and another, stronger,

wave north of the Leeward Islands around day 9. These waves may pose a threat to the southeastern U.S.,Florida, and perhaps even the eastern Gulf in the late 6-10 and 11-15 day periods.

Special WSI Storm Watch

Though most models are in excellent agreement regarding the southern track of Dean, it is important to remember that there are still several days for changes to develop. All it took was 3 or 4 model runs for Rita to change her track from Brownsville to the Port Arthur in this same range.

The 12z runs remained very consistent with the track of Dean as well, all depicting a WNW track through the Caribbean and across the Yucatan peninsula. It now appears that model consensus is honing in on a landfall point somewhere in central or northern Mexico, supported by the 12z Canadian and Navy runs as well. There are a couple of outliers, however. Several GFS ensemble members support a more northward track toward TX, and the 12z and 18z runs of the GFDL imply a central Gulf threat by midweek. It is important to remember that hurricane tracks can and do diverge significantly beyond day 4, even when there is good model agreement

Conclusion

Natural gas has recently held a key support level at the $6.80 level today after a sharp recovery from intraday lows at $6.54 rallying over $.30 to settle just positive at $6.875. However as restated earlier the technical conditions still exhibit overbought warnings after yesterday’s retreat from the $7.20 resistance level which attracted strong short interest. However we still reiterate that the fundamental impact or possibility that hurricane Dean could still potentially target critical gas production infrastructure in the Gulf of Mexico will dominate traders decisions over the near-term and more specifically between now and early next week when forecasters get a better handle on the storms ultimate path to landfall. Until then we feel the trading range established will be support below us beginning from $6.65 scaled all the way down to the more critical level at $6.20, with overhead resistance starting a bonus at the minor level of $6.92 and then the psychological $7.0 benchmark quickly followed by $7.20 above with a settlement above this key level leading to a rapid test of $7.60 per million BTU. Also as mentioned earlier we feel in combination of existing heavy record storage along with the technical overbought status that upon any indication of a change in course reported from forecasters causing storm disappointment in this market will immediately decline sharply as fear based buyers quickly abandon their positions.

Concerning the petroleum complex despite the EIA numbers over the past two weeks being overall bullish, with crude stocks falling almost 10 million barrels over the same period, it is obvious the market has found a new set of priorities whereby the status of US economy has taken centerstage with the  rippling effect of the subprime mortgage meltdown dominating the influence. However we do anticipate a potential bounce tomorrow morning as crude oil managed to rally almost a dollar from today’s intraday lows that formed an exact double bottom from the $70.10 level reached exactly four sessions ago Friday and obviously held as the market settled at the $71 benchmark for a loss of $2.33 on the day. Since the Dow Jones ended up recovering most of the 340 point deficit reached earlier in the session after an impressive rally in the last hour of trading which saw the market recover the better part of 300 points to close with only a minor loss of 15 points on the day. This should encourage further buying in the petroleum complex tomorrow if stocks manage to stabilize during the session as traders will quickly return their focus on the future path of hurricane Dean as current weather forecasts conflict  as to whether it will weaken over the Yucatán Peninsula and then move more westerly into Mexico bypassing the central Gulf of Mexico and critical oil infrastructure, or possibly miss the Yucatán altogether and take a more northerly track that leads right into the Houston ship Channel which would then ignite all the energy markets into a feverish buying frenzy! This current nightmare scenario is being closely listed by the European weather model as a potential possibility and thus should not be taken lightly. Considering there are two other possible waves coming off the coast of Africa, and it serves as a grim reminder that we are in peak hurricane season and the Bears may find little relief of a more protracted selloff, even if Dean takes a jog to the left especially if the stock market recovers somewhat after the recent 10% correction from the 14,000 level in the Dow Jones posted less than one month ago on July 19.

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

August 9, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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