Concensus Report: August 28th, 2008

Energy Markets Slump to new lows after Gustav leaves the Gulf with minimal damage as focus returns to weakening US Economy.

Natural Gas and Oil

Technical Outlook: Since our last report we said that 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 we said looking ahead all technical indicators are still grossly oversold with the existing lows at $7.61 holding as a short term bottom that should impulse another test of the recent high range between $8.60 and $8.80 as we head into next week, however the market failed to reach this range after topping out at $8.32 on August 29 and subsequently broke down to new lows virtually testing the $7.0 benchmark with the market now holding a double bottom at $7.02 from which values a rebound again today to close positive. Today’s positive close at $7.32 basis spot for a gain of 5.8 cents left a V-bottom in the chart that technically indicates a short-term low is now in place. With most technical indicators still grossly oversold this price action suggests at least a momentum continuation to the upside for a test of previous resistance at $7.60 scaled up to $7.75 near-term with a potential punch through this band possibly resulting in an upward thrust to the $8.0 benchmark before values fall back. Look for support on pullbacks first at $7.20 scaled all the way down to the existing lows at $7.02.

Fundamental Supply Update

This week's EIA report revealed another consecutive injection of 90 bcfs, which was right in line with both estimates that ran closer to 90 by DowJones and Bloomberg respectively. Storage now stands at 2847 bcfs which is 148 bcfs below last year’s record and now 102 bcfs or 3.7% above the five year average of 2745 bcfs. This report was obviously bearish in retrospect to historic weekly injections and also by the fact that it decisively moved up supplies to 3.7% over the five-year average and thus prices collapsed early in the session to retest the existing low at $7.02 before rebounding from a double bottom into positive territory by the close. Looking ahead the market has almost completely depleted itself of any risk or whether premium that would typically characterize peak hurricane season and is actually grossly oversold in respect to the fact that two existing named storms are still approaching the southeastern US from the Atlantic. Most of the bearish fundamentals have been fully priced in, that being the backdrop of slowing consumer demand from a weakening economy, dramatically lower crude oil pricing, and most recently storm disappointment along with a backdrop of anemic cooling demand this summer as the heat index in key consuming regions was almost a non-event which contributed to storage eventually building up a surplus over the five-year average. However today’s price action confirmed a grossly oversold technical market with a short-term double bottom in place as traders began to realize the greater risk seems to be holding short positions at these lower levels as most of the longs have already vacated the market. With natural gas values already depleted percentage wise well below what petroleum values declined to, traders have begun to look at the prospect of greater profits to be made from a value aspect from current levels considering the remaining storm threat along with the prospect of winter demand ahead. All eyes will be focused on tomorrow’s unemployment numbers which will likely be dismal in their continued revelation of an economy falling deeper into recession, along with a quick return of attention to hurricane Ike and other storm threats possibly to follow as I anticipate further short covering before the weekend.

Concerning crude Oil, today the market failed to follow the recovery and natural gas and instead continued to adhere to the theme of slower demand from the recession here in the US along with further signs of slowing economic growth worldwide. The market also continued its slump as more evidence was revealed that Gustav failed to deliver the severe damage that primed earlier fears just days earlier. October delivery futures fell by $1.46 or 1.3% to settle at $107.89 per barrel on the Nymex in the lowest close since April. Today’s delayed EIA report due to the Labor Day holiday weekend failed to ignite much buying from the Bulls despite a 1.9 million barrel drop in crude stocks to 303.9 million barrels along with a one million barrel drop in motor gasoline supplies to 194.4 million barrels and the six consecutive decline leaving supplies near the lower boundary of the average range. While this would normally be construed as a bullish report as all three products declined although distillate stocks only inched lower, with the backdrop of weakening consumer demand facing the prospect of growing unemployment and continued deterioration to the housing market and obviously buying demand was totally mitigated by bearish sentiment. However it’s my opinion that if gasoline supplies continue to decline much further especially after refinery utilization moved higher to 88.7% compared with 87.3% last week, as further drops in production are now anticipated as the storm shut-ins from Gustav will be revealed in next week’s report, petroleum values may have placed a short-term low this week at the $105 per barrel level. Overall demand has declined noticeably running the last four weeks 3.5% lower than the same time last year. Currently 11% of total US refinery capacity is still shut-in from the storm. October reformulated gasoline dropped 2.6 cents to close at $2.74 a gallon where as heating oil dropped 5.5 cents to end at $3.02 a gallon today. While the fundamentals continue to look bearish for the energy markets as a whole overall, don’t forget crude oil values have dropped almost 44% from the existing highs at $147 per barrel posted in early July and natural gas has dropped a more dramatic 47% from its most recent highs and thus both markets are beginning to look more appealing to the buy side from a value standpoint versus those that are wishing for further economic relief to an already ailing US consumer, however the consumer doesn’t necessarily have much influence over the investment impact of the larger institutional funds that ultimately move the market.

WSI Weather 6-10 Day Outlook

Warm and dry conditions to continue over the West next week

Summary
The warmest temperatures and the most persistent warmth next week are still anticipated over interior California and the interior western U.S. Medium range models feature persistent ridging over the western U.S. and suggest the warm and dry conditions that have been prevalent over these regions for most of the summer-to date will continue. In response, widespread highs in the 80s and 90s are once again expected to be the rule for interior California and the interior western U.S. most of next week. The coldest temperatures and the most persistent cold weather are anticipated over the north central U.S. Medium range models feature a redeveloping trough over the central U.S., and, while some moderation is possible at times, suggest the cold weather will continue the next 7-10 days. In response, highs in the 60s and 70s are forecast over the northcentral U.S. during the next week and 6-10 day forecast periods. Daytime highs may even struggle to reach 60 degrees in the coldest locations on the coldest days. The forecast remains more uncertain for the eastern half of the country than it is for the West. Medium range models continue to display notable technical differences regarding the impacts tropical activity in the western Atlantic (Ike) will have on eastern U.S. While notable differences still exist between the models as to timing of cold fronts and other short-wave features, the one thing that all models agree on is that a Hanna, Ike, and a series of cold fronts will bring and end of the late summer warmth currently centered over the eastern U.S. In response, highs in the 70s and 80s are forecast to become more common place over the eastern U.S. next week. The coolest readings will likely occur over towards the latter half of the week, when portions of New England may see highs struggle to reach 70 degrees. Elsewhere across the country (the Pacific Northwest, Gulf Coast, and southwestern U.S., temperatures are expected to average close to seasonable readings most of next week.

WSI Storm Update

Days 1-3:
(HANNA): Hanna is expected to make landfall near Wilmington, NC Friday night then race northeastward along the Mid-Atlantic and New England coast later Saturday-Sunday. (IKE): Ike is forecast to turn westward/southwestward over the next few days in response to a building high pressure ridge around Bermuda. Most models take Ike near or over the Bahamas by Sunday. All global models now curve Ike northward after reaching the Bahamas due to a significant break forecast in the high pressure ridge off the Southeast US coast. The ECMWF has the leftmost solution...taking the center in across southeast Florida then hooking northeastward. The GFS is the furthest east...missing the Bahamas and calling for Ike to pass between the Carolinas and Bermuda. The NOGAPS and GEM are essentially in between the GFS and ECMWF. The ECMWF had a left bias with many recent storms and the GFS initialized Ike too weak...therefore, a blend of the global models is preferred in the medium range. Upper level winds will remain favorable for Ike to at least maintain Category IV status today. Northeasterly shear over the weekend will likely cause some weakening but Ike should remain a strong hurricane. As the steering flow relaxes early next week...Ike may have another opportunity to intensify. Most of the intensity guidance reflect this scenario with a notable exception being the HWRF which ramps Ike up to a Category V storm and essentially holds it at that intensity through the period.

Days 4-7:
(JOSEPHINE): Tropical Storm Josephine is forecast to weaken over the week as it encounters a fairly strong mid-upper level low over the Central Tropical Atlantic. The GFS dissipate the storm by early next week with the ECMWF taking Josephine well northeast of the Leeward Islands by later next week. At this time, it appears Josephine will not make it into the western Atlantic. (OUTLOOK): An unseasonably deep trough of low pressure is forecast to extend across the Eastern Atlantic with the base as far south as the Cape Verde Islands early next week. The trough will provide very unfavorable conditions for further waves to develop off the west coast of Africa through the middle of next week.

Conclusion

Natural gas today posted a noticeable recovery by closing positive after retesting existing lows near the $7.0 benchmark with $7.02 now remaining as a key support and a double bottom. Near term I anticipate some follow-through upward momentum to possibly challenge a near-term resistance at $7.60 scaled up to $7.75 before the market may run out of steam on short covering before the weekend with some lingering storm threat as we enter peak hurricane season. Also supporting the market is the fact that values have become grossly technically oversold and there may be some bullish influence as petroleum values may also experience a short-term rebound and thus providing sympathy trade support. Look for intermediate support on pullbacks at $7.20 scaled down to the existing lows.

Concerning crude oil, this week has definitely kept the enhanced volatility as the main theme as Hurricane Gustav past yielding major storm disappointment as the original ferocity of reaching a category four storm had stoked fears of creating potentially much more damage than ultimately materialized and thus relieving fears of a much longer extension of supply disruption. Despite the fact that 95.2% of oil production remained shut-in and about 87.5% of natural gas remains off-line according to the US Minerals Management Service, traders obviously anticipate a much more rapid return to normalcy as far as output than had been originally feared. While there remains even a lingering remote threat that hurricane IKE which has already reached category four strength could take a sudden turn west and thus enter the Gulf with a renewed threat could provide some support and short covering influence before the weekend in tomorrow’s session. While many anticipate after the storm’s that are currently being tracked move outside the window of threat that crude oil will begin another leg lower, I am of the opinion this more obvious conclusion may be premature. Now that values have dropped to within six dollars of the key psychological support at the $100 benchmark traders may be reluctant to get aggressively short from current levels considering the continued instability in the international scene with heightened tension Russia and the US over the conflict with Georgia and of course ongoing conflict in the Middle East primarily in Iraq and over the nuclear issue with Iran. Also let us not forget the continued output declines in Nigeria over their ongoing chronic militant war and then the consortium of reduced production in Russia, Venezuela, the North Sea, and Mexico that continues to feed the peak oil theory amidst a backdrop of robust economic growth in Asia and primarily China. These conditions will continue to fuel the Bulls case and provide still a more attractive profit potential for the growing institutional money that has recently moved to the sidelines in the billions of dollars as the US stocks will continue to only provide the promise of further losses as the recession gains traction and the specter of renewed failure in the commercial real estate market now looms large! Tomorrow’s unemployment numbers will continue to bolster the case that I have warned about for many months, that this would bleed over into a commercial real estate meltdown that would then expose a whole new round of bad loans and debt based derivative investments gone awry thus fostering a whole new round of bank failures that threatens to return the US dollar to its weakening state which would in turn revive the commodity appeal. With peak storm season now upon us, higher demand from winter soon to follow, low gasoline supplies traditionally with substantial refinery capacity still down from the storm and with values recently pulled back dramatically from the previous peak at $147 per barrel, and traders may find selling near the $100 benchmark to greater risk especially since OPEC is more likely to announce a cut in production soon and possibly even in the next meeting coming up on September the ninth Indiana as Venezuela continue to lobby for output cut. It has already been factored in that OPEC will leave production unchanged and so if they unexpectedly cut back production due to the dramatic loss in revenue since July it may catch traders flat-footed with the short interest suddenly running to cover! While the US currency has recently rebound in the most dramatic recovery of the year I still feel it has been more in a reaction to the commodity selloff versus the opposite and I certainly don’t subscribe to the Wall Street pundit theory that the other economies in Europe and Japan are more vulnerable and in a weaker position then here in the US. In fact this smacks of more pride in propaganda and wishful thinking with the opposite being more reality when you look deeper into our growing unemployment, our continued real estate meltdown that will soon spread into the commercial arena, and then of course our tremendous record government debt that far exceeds that of our overseas counterparts to which we are debtors, and then finally our ongoing monumental debt laden albatross in Iraq and Afghanistan that in no way the abilities other economies to the degree it does ours as we originated the conflict and are not set uniquely anchored to it! In fact I will venture to say that tomorrow’s unemployment numbers will not be friendly to the US greenback and I anticipate six months from now the US dollar will likely be much lower in value than it holds today!

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

August 28th, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

Back to top