Concensus Report: August 27th, 2009

Crude Oil rebounds back above $72 blindly following stocks chasing the ghost of an Economic recovery Magically somehow without the Consumer, while Natural Gas reflects more the reality of Weak Industrial Demand, a cool summer and quiet tropics yielding the lowest expiration price of the year.

Natural Gas and Oil

echnical Outlook: Since our last report, I said under the current technical scenario looking ahead that I anticipated $2.80 to represent a short-term bottom, and since then the market did manage to penetrate this low intraday to the surprise of many market players, however never closed below this key support despite hitting $2.69 earlier in the session. Even at today’s expiration the September delivery short-covered back above $2.80 into the close as the sellers were forced to buy back to exit and avoid taking delivery along with some selling from disappointed previous buyers that expected higher prices by now. The typical game of chicken at expiration was dominated by the bears for most of the session as values only managed to come a few cents from positive ground near the close after the market remained between $.17-$.20 cents down most of the day until the last half hour of trading as the shorts were forced to close out to avoid delivery. Looking ahead although the new October spot is still grossly oversold, with the futures holding a hefty premium above it’s predecessor September that expired above $2.80, with the new spot trading almost $.40 cents higher, the risk is still substantial that the October could drift deeper into oversold territory before a key bullish reversal transpires. Looking ahead, with all technical indicators revealing grossly oversold status the market remains vulnerable to a sharp and dramatic short-covering rally as the deep correction that has now been extended over the past 17 sessions has reduced the potential gains to be made from further downside movement as price action has already suggested the perception of limits has been established. Based on this posture I anticipate the market will attempt to trade below the $3 benchmark again, however I see the market is likely to find support at a higher low of $2.86 to $ 2.92 before a bullish key reversal ensues and returns values to test overhead resistance levels at $3.31and then $3.40 before eventually challenging my longer range target at $3.80.

Fundamental Supply Update

This week's EIA report showed an injection of 54 bcfs, which was in line with estimates yet slightly above the survey by Dow Jones and Bloomberg that ran closer to 52 and 53 bcfs respectively. Storage now stands at 3258 bcfs, which is 516bcfs higher than last year at this time and 500 above the five-year average or 18.1% over 2758. Following the EIA update the market slumped and then remained on the defensive throughout the remaining session before ultimately closing with a loss of 6.7 cents to end at $2.84 per million British thermal units and a new low for the year for the September expiration, and yet considerably higher than the intraday low of $2.69 set earlier in the day. Most of the market commentary in the media attributed the sell-off to the supply increase as if to suggest another injection during injection season was unusual and a cause to sell, when in reality it came in as expected and the selling came in simply from a lack of buying because the weekly supply addition wasn’t lower and quickly returned trader’s attention to the ongoing weak industrial demand, mild summer, and the fact that Tropical Storm Danny will travel Northward into the Atlantic along the Eastern Seaboard and obviously keeping critical Energy production infrastructure in the Gulf of Mexico out of harms way. This just served to reiterate in trader’s minds this year amounted to a perfect storm for lower prices as the coolest summer in 17 years in the upper Midwest, the recession, and a downgraded storm season allowed the storage surplus to swell this year and continue without threat and remain near 20% above the 5 year average keeping the supply on track to reach a hefty new record level just before winter…that is why the market sold off today, not because there was another supply injection that came in as expected and was actually lower than for the same week last year which was bullish if you were to just isolate this week’s supply report.

Concerning Crude Oil, today the market reversed from earlier lows just below the $70 benchmark at $69.83 before rallying to a positive close at $72.49 for a gain of $1.06 after following a mirrored path outlined by stocks which claimed buying support based on the continuing weak premise of cherry-picking isolated and minor economic stats of little serious consequence while ignoring the larger ongoing facts that undermine the same consumer that ultimately provides the demand for energy and the economy. Contrary to logic and reality, the market construed the news that the FDIC report showing the number of distressed banks had reached the highest level in 15 years and insurance resources for banks had shrunk, a negative development, was somehow bullish just because some market participants had expected worse conditions, and so in essence a relief rally ensued, which is nothing more than manipulation by the media and of course market players of substance. The market also drew support from the positive outcome of the Bond Auction as the Treasury managed to sell $28 billion in 7 year notes at a yield of 3.092% suggesting that signaled a higher appetite for risk. However, the fact the treasury managed to sell more debt based on a very precarious economy that is itself laden with record debt, still growing unemployment, swelling mortgage default and collapsing Commercial property values along with increased bank failures, is instead more evidence of flawed thinking and somehow construing this as evidence Energy demand will soon return is even more obscure a further stretch from reality. While the combination of the Bond auction, Dollar weakness and minor drop in jobless claims of 10,000 to 570,000 for the week ending August 22 may have been enough to scratch out the modest gain for the Dow of another 37 points, but it hardly justified an almost $3 positive swing in Oil. But remember the market is never wrong, only the participants who misjudged its direction are and paid the price for it. However, when the market moves in the opposite direction to its core fundamentals especially while ignoring a major and yet vital conditions such as the lack of real demand, the inevitable correction when the market finally falls back in line with those key and critical influences, the adjustment will be that much more dramatic and unforgiving…its called volatility.

WSI Weather Outlook

6 – 10 Day Headlines

• Warmer than normal temperatures are forecast over the interior western and northern Plains. Anomalies as warm as 7 degrees above normal are anticipated over the northern Plains. Colder than normal
  temperatures are expected to linger over the southeastern U.S.
• Today's forecast is not quite as warm over the northern Plains as yesterday's forecast.
• ?Confidence in today's forecast is average, more notable technical differences develop between the models this morning.
• ?Temperatures may trend colder along the West Coast and warmer over the northern tier of the country than currently forecast. All models advertise a more La Nina-like pattern (negative EPO) will become
  established over North America in early September. The AO and NAO are also forecast to transition to neutral to positive phases.

11 – 15 Day Headlines

• Warmer than normal temperatures are forecast over the central U.S., Great Lake States and northeastern U.S. Colder than normal readings are anticipated along the West Coast and over the southeastern U.S.
• ?No major changes can be expected from yesterday's forecast.
• ?Confidence in today's forecast is average based on the good large-scale model agreement.
• Temperatures may trend colder along the West Coast and warmer over the northern tier of the country than currently forecast. All models advertise a more La Nina-like pattern (negative EPO) will become
  established over North America in early September. The AO and NAO are also forecast to transition to neutral to positive phases.
  Posted: 08/27/09

Conclusion

Natural gas closed with a loss of 6.7 cents to expire at $2.84 basis the expiring September futures for the lowest closing price of this year and over eight years prior to that. Fundamentally the backdrop for natural gas pricing remains weak with industrial demand plodding along at a snail’s pace as the economy is still mired in the grasp of recession despite the propaganda being peddled by those in the media that are being romance by Wall Street. If you have not acknowledged the massive disconnect between Wall Street and Main Street and then simply ask the common man at your local grocery store, gas station, or place of work if they are experiencing any signs of relief from the recession or the benefits of economic recovery. No in reality the majority of Americans still either have suffered losing a job or know someone personally that is now out of work or they are rightfully concerned over whether their current employer will still be in business in the next six months! Yet if you want the talking heads on the financial channels they will tell you based on the Dow Jones now reaching 9500 that we are suddenly in economic recovery in the recession is over…well hallelujah! What a relief, now we can all sleep better at night, and we have some fat white collar multimillionaire stock fund managers and mutual fund executives who suddenly feel based on the economic data they have selected along with the fact that business inventories have been reduced, that it’s now safe enough to put some funds back into the market, to thank for this wonderful and stress relieving conclusion. Meanwhile back in the real world natural gas plummeted to new lows for the year touching $2.69 per million BTU at the session lows basis the expiring September delivery as a true reflection of the dismal conditions of falling industrial demand and a weak economic outlook with heavy supplies with a current storage surplus of 18% above the 5-year average that was sustained after an extremely mild summer with little threat to production thus far from a quiet storm season up to now. Technically however, the market remains grossly oversold leaving conditions vulnerable to a dramatic short covering rally at the first hint of potential change in the status quo in this tells me today’s low may remain as a market bottom over the near term. I anticipate the new October futures may set a higher low somewhere above $2.84-$2.92 before a bullish reversal carries values back up to previous resistance levels starting at $3.40 and ultimately returning the market to challenge my longer-term resistance target at $3.80.
Concerning crude oil today marked another surprising market performance that ignored once again the existing fundamentals of weak consumer demand, further deterioration in real consumer resources as mortgage defaults grow at an alarming rate, and commercial properties continued their collapse as a real reflection of the State of the economy reveals everything but a healthy demand for energy. This week’s EIA report also confirmed the same truth as an unexpected increase of 0.2 million barrels in crude stocks to 343.8 million barrels further substantiates last week’s surprising drawdown of over 8 million was simply an isolated week of refineries finally reloading their allocations after weeks of low production and continued constrained output as demand continues to suffer. Gasoline stocks dropped by a modest 1.7 million barrels yet remain in the upper half of the average range for supply while distillate fuel inventories increased again this time by 0.8 million barrels and remain above the upper boundary of the average range for this time of year. Demand for both products remains anemic as gasoline is down by 0.3% over last year and distillates by 7.9% below last year’s rate of consumption and hardly evidence that energy demand is on the rise or assigned economic recovery is pending! The fact that refineries continue to operate at the below normal rate of 84.1% is just further evidence of the shameless attempt to manipulate pricing upon a consumer that has virtually seen his net worth stripped away from rising chronic unemployment and falling home values with Deutsche Bank now predicting by 2011 almost half of all mortgages will be underwater and in default! That reminds me of the other popular lie that is being routinely bantered about on the financial networks as if it is an accepted fact that now the average American household’s savings rates are going up. This flawed conclusion is based on the fact that the retail market is suffering so much because Americans are not spending money so the logical conclusion is that they must be saving it. Really! What is so logical about that conclusion? More importantly, how can they be saving it if their net worth keeps dropping eroding with home values while credit card debts continue to soar!? Instead could it be that they are not spending money because they don’t have extra money to spare after losing their job or someone within the family has lost a job which further reduces income and now that most homes have lost their equity the only resources left after drawing upon their savings for necessities such as rents food and gas, are credit cards whose debt levels continue to climb which hardly provides proof that the savings rate amongst consumers is now climbing. I would love to see someone provide some credible data or evidence that proves suddenly in the midst of the worst recession since the 1930s that the average American household is suddenly saving money which goes against the grain of the entire credit promoting society and the flawed borrowing system that has become the accepted way of life that unfortunately brought the whole system to its knees in the first place. In conclusion based on the current market composition crude oil seems poised to challenge previous resistance at $74 but may find anxious sellers willing to reenter the market with impatient conviction causing a potential rejection from below this benchmark that should soon return the market to break today’s lows and eventually retest the existing support at the $65 benchmark.

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

Augisut 27th, 2009

United Strategic Investors Group

Guy Gleichmann, President

2641 E. Atlantic Blvd. Suite 208
Pompano Bch. Fl. 33062

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