Concensus Report: August 20th, 2008

Petroleum breaks out sharply to the upside on Technical merits, Geopolitical concerns, and poor Securities outlook, while Natural Gas moves up in Sympathy on rebound from grossly oversold technical range

Natural Gas and Oil

Technical Outlook: Since our last report two weeks ago we said that several technical supports had been broken and that a test of new lows below the then existing low of $8.33 basis spot could possibly lead to a temporary bottom at 8.10 to $8.20 which has since then been confirmed and exceeded with the existing low basically holding at $7.80. Looking ahead the longer-term picture is beginning to look more technically bullish as indicators remain still grossly oversold with stochastics, relative strength, momentum, the rate of change, the MACD, Bollinger bands, along with several oscillators exhibiting depleted value indications and yet with this week’s rebound from the strategic support at $7.80 sets the stage for the market to range higher near-term whereby I anticipate resistance to be tested soon above at $8.60 with a potential push up to $8.80 with intermediate support now likely to hold just below current values at $8.20 scaled-back to the $8.0 benchmark. With values recently being stripped all the way down to $7.80, I anticipate any short-term weakness that temporarily returns values under the $8.0 benchmark will be well bought initially.

Fundamental Supply Update

This week's EIA report revealed another consecutive injection, and close to what had been expected at 88 bcfs, which was slightly above both estimates that ran closer to 82 by DowJones and Bloomberg respectively. Storage now stands at 2655 bcfs which is 264 bcfs below last year’s record and now 26 bcfs or 1% above the five year average of 2629 bcfs. This report was obviously bearish in retrospect to historic weekly injections and also by the fact that it decisively inched up supplies by 1% over the five-year average. However with crude oil launching its most aggressive one day bullish assault on the upside in weeks of almost $6.0 per barrel and considering how natural gas had already rebound from a key support level at $7.80 earlier in the week, traders quickly discounted the number and began to focus on weather concerns and bullish sympathy trade taking the market sharply higher. With tropical storm Fay still lurking with the possibility of reentering the Gulf and threatening production infrastructure near the coastline along with some above normal heat forecast for the Upper Midwest next week extending into the 11-15 day outlook certainly improved the Bulls case and made the path of least resistance over the near term pivot back to the upside. Let’s not forget, with spot price is recently falling just below $7.80 confirmed a full 43% drop in spot prices since the recent highs posted at $13.69 in early July, which certainly has attracted longer-term value based buyers who logically feel the market is not only still grossly oversold but now the reward premium is firmly residing to the upside with the short interest finding the reward rapidly diminished below the $8.0 benchmark.

Concerning crude Oil, today the market staged a dramatic bullish rebound of $5.62 or 4.9% taking the October delivery to a close on $121.18 per barrel in the strongest close since August 4. In my opinion today’s reaction following a mixed EIA report that could have been construed as bearish just as easily as bullish was as much the result of technical buying as it was on geopolitical tension over the recent conflict between Russia and democratically sympathetic Georgia which has recently put US interests once again at odds with the historic Bear. Also contributing to the escalation in petroleum values was the recent selloff in the US dollar as weaker economic data continues to flow out of the US economy. Housing figures continue to look dismal only to be superseded by an even more bleak outlook for the US labor market. Concerning the EIA data crude oil stocks rose by the largest weekly increase of the year of 9.4 million barrels totaling 305.9 million and yet remain in the middle of the average range for this time of year, and was obviously a negative supply number however this was somewhat mitigated by a much larger than expected 6.2 million barrel drawdown to gasoline inventories which are now below the lower end of the average range in supply. However, considering we are now on the back end of the driving season and along with the fact that gasoline consumption has been averaging over 4% less than this time last year according to the MasterCard survey, the bullish implications were not necessarily overpowering considering the unprecedented increase incurred stocks. Overall the report was still bearish considering the recessionary conditions that continue to loom large when looking forward concerning the US economy. Producer prices rose 1.2% in July which was much higher than expected 0.3% while housing fell 11% according to commerce estimates. These conditions continue to underpin a weakening US currency which makes commodities more attractive to overseas buyers in Europe to enjoy increased purchasing power. Tensions continue to intensify between Russia and the US after Washington recently signed a deal with Poland to install a missile defense system which immediately drew a warning response from Russia that this move could fuel an arms race that could also inspire a military response that would go beyond diplomacy. The potential implications of Russian tanks approaching Warsaw would certainly not bode well for the US dollar considering it is currently funding two existing wars that are not exactly a resounding success and would only further encourage a run to the euro as a safe haven currency. Today’s launch of almost $25 in the price of Spot gold further illustrates investors moving into solid assets in this time of extreme uncertainty. Further support to the energy complex came as Russia blocked the entrance to George’s main oil port demonstrating their ability to manipulate and influence the control of Europe’s natural gas supply. While Russia’s president has promised their forces would pull back to as far as Ossetia, troops seem to be positioning themselves in strategic locations that are far from declaring an end to the conflict. Russia’s recent move of halting military cooperation with NATO also continues to exacerbate the tension. While no immediate oil supplies seem to be in jeopardy, the fact that Russia is the world’s second-largest producer and that the proximity of the Caspian Sea as a major route for oil shipping lays out a potential major oil disruption concerning supply delivery delays should military engagements escalate. In the larger picture the unsavory scenario whereby the US could be indirectly pulled into the conflict to support our democratic relationship with Georgia obviously pose is a much greater threat to the overall oil supply demand balance which has already been jeopardized by our position in the Middle East.

WSI Weather 6-10 Day Outlook

Late summer warmth to redevelop over North- Central U.S. next week

Summary
The pattern change developing over North America next week is expected to continue next week. In response, above and much above normal temperatures are forecast over the interior western and north-central U.S. for balance of the next week and 6-10 day forecast periods. A deepening trough in the Pacific Northwest and the remnants of Tropical Storm Fay are expected to bring cool and damp conditions to these regions next week. In response, near and below normal temperatures are forecast over the northwestern and southeastern U.S. for the balance of both periods. While the warm weather over the interior and north-central U.S. will briefly interrupted at times, highs in the 80s and 90s are generally expected to be rule for interior California and the interior western U.S. most of next week. Highs in the 90s and low 100s are forecast over the southwestern U.S. Widespread highs in the 80s expected to be the rule for the northern Plains and Upper Midwest on the warmest days next week. The coolest temperatures in the southeastern are anticipated near the middle of next week, when highs are only forecast to climb into the low and middle 80s. Even after the remnants of Fay weaken next week, the Eastern Seaboard will struggle to see the warm weather anticipated over the Great Lake States as high pressure building off the Northeast coast will bring and easterly flow off the Atlantic Ocean. As a result, daytime highs will struggle to climb out of the 70s and low 80s along the Eastern Seaboard most of next week. Finally, seasonably cool temperatures and damp conditions are expected to redevelop in the Pacific Northwest next week. Highs may struggle to climb out of the 60s and low 70s in Seattle and Portland on the coolest days next week.

Conclusion

Natural gas, today seems to have broken out of its bearish range consolidation in our opinion as prices seemed poised to challenge overhead resistance at $8.40 which could quickly yield a more critical challenge to continuation resistance $8.60 and that’s taking the market to a whole new higher range whereby support could become reinforced above the $8.0 benchmark and resistance now set higher between $8.80 in the $9.0 benchmark. Weather will continue to play an important factor as any last above normal heat in the key consuming regions of the Midwest and Northeast may put a last bite into supplies before the critical winter demand period begins. Of course the fact that we are now entering peak hurricane season puts the same scenario in play whereby any major storms entering the Gulf could temporarily disrupt production at the critical pre-winter timeframe as well. Traders will continue to focus on these key elements of technical price levels, the impact of the weather, and of course sympathy trade with petroleum.

Concerning crude oil, this week has definitely created doubt in the bearish outlook that Wall Street was so quick to embrace and create a hopefully happier environment to foster more stock buying as inflationary fears were receding. However obviously with values recently unable to even touch $110 per barrel let alone the $100 benchmark before value buyers jumped in with both feet, this naïve rose colored outlook has become quickly obsolete as the grim reality began to return of a crude oil market whose longer-term supply prospects continue to look precarious at best simultaneously while the potential attraction to stocks looks even less appealing. Let us not quickly forget that output in Russia, the North Sea, Mexico, Nigeria and Venezuela all continues to drop year on year while the world’s largest growth economy in China continues to March at double-digit pace with the GDP running at over 10% with automotive travel expected to go back on the increase shortly after the Olympics ends this week.The fact that securities traditionally do poorly during a recession, certainly doesn’t provide any optimism that a near-term bottom has been made when you look at the recent labor figures. The four-week average of new state filings for unemployment benefits rose by 7250 to 445,750 in the highest since the recession of 2001. The four-week average of continuing claims rose by 66,250 to 3.3 3 million and the highest in five years! Year on year the initial jobless claims are up 39% while continuing claims are up about 30%. Historically claims have never increased by more than 20% without a resulting recession! This only continues to add fuel to the warning that I have made for several months now that not only are we facing a full-fledged recession but the case continues to build for a major breakdown in commercial real estate fueled by ongoing unemployment woes that will further debilitate an already ailing banking and financial industry that is destroying investment confidence. Despite the best efforts of the ongoing idiotic blind optimistic rants from such ridiculous carnival acts as Fox New’s Neil Cavuto, or from the likes of Larry Kudlow who both could not have been more wrong about minimizing the potential economic fallout that was to come from the subprime residential mortgage meltdown, they will not be able to hide the seriousness and obvious negative impact of the commercial subprime mortgage meltdown that is soon to come. When this new round of commercial loan failures triggers a whole new wave of subprime commercial mortgage backed securities that begin to implode submerging a whole new list of derivative investors who succumbed to the lure of these higher interest rate harbingers of debt some of the largest household names may not survive! And so just like the recent fears reverberated through the financial sector as Wall Street pondered and continues to weigh the potential bailout necessary for the survival of Fannie Mae and Freddie Mac, so will the commercial real estate break down ignite a whole new wave of fear and uncertainty in the financial system that unfortunately could bring the US economy to its knees as it once again will return the US dollar to possibly retest recent lows and no doubt raise the attractiveness of commodities such as oil and grains whose longer-term supply/demand fundamentals are favorable in contrast to stocks and securities whose value will continue to be undermined by a lack of faith in the integrity of the system! On technical concerns I anticipate crude oil will find support on pullbacks at the intermediate level of $117 and then more critically at $115, which after holding these supports and more likely the higher level, crude now looks poised to challenge the pivot break out level of $126 per barrel after today’s strategic mile marker of $121 has once again been surpassed.

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

August 20th, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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