Consensus Report: August 03, 2006

Natual Gas and Oil Report

The Petroleum Complex Firms as the Middle East Violence Impact Fades, While Natural Gas Collapses from a Break in Record Heat and Storm Disappointment.

Technical Outlook: In our last report dated July 27 we said the natural gas market was now overbought. We stated that Key indicators such as stochastics, the linear oscillator, the MACD, certain channeling indexes, as well as the longer-term parabolic, all suggested the market is extremely vulnerable to a correction as most of these indicators have become overextended to the upside. We expected a sharp retreat from a second rejection at the $7.25 resistance band resulting in a close back below $6.75 which would negate our short-term uptrend and return the market to short-term range bound bearish trade. We also said only a further assault to the upside resulting in a settlement closing above the key $7.25 resistance level would negate our short-term bearish outlook temporarily for a possible challenge to the more critical resistance price at $7.40. What transpired this week surprised us to say the least and was another extreme example of why Natural Gas is the volatility leader and champion of the exaggeration reaction. The Bulls extended their domination over prices by breaking through key resistance at $7.40 leading to a sharp vertical advance towards a blow-off top at continuation resistance way above the value range and $8.60, and then managing an impressive close at the $8.20 level this past Monday. While the technical picture certainly supported the recent price action, we believe however this was a graphic example of how a fundamental condition could override the existing technical indications and thus put the market into a grossly oversold condition that clearly by this week's retreat from its recent highs of over a dollar in only a couple sessions has now set the stage to follow through on our earlier forecast. Looking ahead the technical picture has become more definitively bearish as the market is gaining in its downward momentum in our opinion. We also see today's close under the key breakout level at $7.40 as a noteworthy bearish indication. While several mainstream indicators such as stochastics, momentum, relative strength, the MACD, the linear oscillator, and others are clearly suggesting further selling ahead, only a few indicators such as the parabolic still suggest there is life to the short-term uptrend, yet display vulnerability to turning negative themselves. We anticipate a pivotal test soon to break back below the $7.0 benchmark which would quickly lead to a collapse through support at the $6.80 level. Only a sudden rebound resulting in a close back above $7.80 would negate our bearish short-term outlook and then likely confine the market to range bound trading between $7.25 support and $7.98 resistance over the near-term.

Fundamental Supply Update

Today the EIA announced an injection of 19 bcfs that was almost in-line with previous estimates   by Dow Jones and Bloomberg of 16 and 20 bcfs respectively. The market quickly fell further from existing weakness as traders reacted to the break in the searing heat wave that has dominated the better part of the entire country over the past two weeks and that was inflicting maximum demand draw on the power grid in the upper Midwest and Northeast right up until early this evening as the first sign of the cold front moves in tonight and into the weekend along with the negative impact of storm disappointment as tropical storm Chris weakened and was forecast to possibly be downgraded to a tropical depression over the next 24-36 hrs . This was in stark contrast to last week's dramatic in the first time withdrawal during a summer month ever in the market's known history along with a warning of continued heat transferring from east to west as we entered this week. So with the market retreating quickly from extensive highs at the traditionally stiff resistance level at $8.60, and an upside target that we put on the market during a Bloomberg radio interview earlier this week, the additional news of the storm downgrade provided the catalyst for further liquidation that resulted in a $.50 retreat down below key resistance at $7.40 on close with today's settlement at $7.29 basis spot. We feel now the   bearish implications of the existing record surplus will come back to haunt the Bulls as the weather breaks from the cold front entering the upper Midwest and the North and the storm becomes a non-threat allowing attention to return to the supply side of the market. Current storage now stands at 2775 bcfs, which is 360 higher than last year at this time and still 447 bcfs or 19.2% above the five-year average of 2328 bcfs. So we are still more than adequately supplied as the industry only needs to average injections of 48 bcfs over the remaining injection season to end in the first week of November with a record high 3400 bcfs to supply winter needs, which is well below the average that runs closer to 67 bcfs per week normally received just to bring the ending storage to 3200 which has been considered over the last two years as the new minimum benchmark required. It is our view that the awareness of this situation combined with weather forecasts that indicate the extreme abnormal heat experienced recently will begin to dissipate from the Midwest and even more noticeably in the Northeast beginning tonight into this weekend, could trigger some substantial profit-taking and renewed short interest in the near-term. So far the Atlantic Basin looks to be relatively quiet over the next week and a half, of course the sudden arrival this past week of tropical storm Chris was a graphic reminder of how quickly that situation can change.

Concerning crude oil, there seems to be little sign of relief to the recent violence in the Middle East between the Israeli military and Hezbollah as the return of Secretary State Condoleeza Rice, failing to achieve anything positive on the diplomatic front, so graphically illustrated. However the bullish impact over the market seems to be waning as the petroleum complex saw two-sided range bound trading above and below the key $75 benchmark this past week. The violence continues to keep traders on edge however as neither side seems to want to give up any ground or show any signs of compassion to the mounting number of innocent lives that are being claimed from the conflict. In retaliation for Israel's recent launch and second straight night of airstrikes upon southern suburbs of Beirut the Hezbollah has threatened to attack Tel Aviv. On Thursday Nasrallah the Hezbollah leader vowed to strike Tel Aviv in retaliation for Israel's bombardment of the Lebanese capital. Israel responded by stating that if Hezbollah did strike Tel Aviv they would target Lebanese infrastructure further. However in a glimmer of hope Nasrallah extended an olive branch during his lengthy statement by saying Hezbollah would stop   rocket attacks on Israel if their forces halted their attacks upon Lebanon. The Israeli forces are now stationed across 11 villages in southern Lebanon according to the IDF, trying to clear out Hezbollah militants from a 5 mile wide security zone before any international peacekeepers are deployed according to AP reports. The Hezbollah pounded northern Israel with more than 200 rocket's Thursday, killing eight people and injuring several, according to Israeli police. This was after Israel resumed air strikes on Beirut's suburbs. As of mid-Thursday the recent escalation to violence has claimed 642 Lebanese civilians and soldiers and 2303 have been wounded in the three-week-old Israeli military offensive against the Hezbollah militia according to Lebanon's internal security forces; at the same time Israel has reported 68 deaths including 27 civilians. In efforts of diplomacy France circulated a revised draft resolution for the UN Security Council on Thursday calling for immediate halt to Israeli Hezbollah fighting and spelling out conditions for permanent cease-fire in Lebanon. Meanwhile the US State Department said it had hoped for a cease-fire resolution by Friday, but that US diplomats were prepared to work into the weekend to achieve a truce. A sticking point in the negotiations has been the timing of the cease-fire. While France and other European countries support Lebanon's request for immediate cease-fire the United States and Britain have stubbornly insisted that an immediate cease-fire would not eliminate the long-term threat that Hezbollah imposes on Israel. Since no one, except for maybe God, if he exists, can guarantee a cease-fire that would eliminate the complete threat from Hezbollah unless you can totally eradicate the Hezbollah from the planet, and so this premise is beginning to weaken in its sensibility and more importantly is becoming more and more viewed by the world as a ruthless speculation on what Hezbollah might or might not do that is beginning to look more like a stall tactic designed to continue the conflict in the support of a more sinister hidden agenda. Just like in Iraq the existing facts on the ground continue to reveal that the current plan is the furthest scenario from achieving real peace in the region, and thus when we look back after a cease-fire is finally achieved in Lebanon everyone will realize this administration's foolish insistence on some future fantasy cease-fire that will miraculously answer an age-old conflict that goes back over 50 years only managed to extend senseless atrocities taking place resulting in a despicable and relentless loss of innocent lives many of which are children. When a young gang member patient is suddenly rushed into the emergency room bleeding all over from multiple gunshot wounds, does the ER doctor say to the nurse who is immediately taking action to stop the bleeding," no don't bother stitching up his wounds right now because he's probably only going to go back outside and get shot again, so put him in another room to bleed until I come up with a more comprehensive plan that will not only stop the bleeding but possibly prevents him from getting shot in the future." Is anyone out there seeing how ridiculous this administration's feeble attempt at diplomacy really is? But should anyone be surprised considering the only claim this administration can make at diplomatic efforts in the Middle East is its miserable failure in Iraq! And so the chronic continuation of conflict in the Middle East seemed to bring consolidation to the petroleum complex at the same time that the bullish impact is beginning to fade. This resulted in crude oil settling into a strong support between the $73.50 and $75 benchmark. Yesterday's EIA report was moderately bullish as current stocks dropped by a more than expected 1.8 million barrels leaving 333.7 million and still well above the upper end of averages while gasoline declined by a fraction or 0.1 million barrels and remain near the middle of the average range. Only distillate fuel inventories rose by a marginal 0.7 million barrels and are also above the upper end of the average range. More importantly refinery capacity fell back to 90.8% last week and so commensurately gasoline production decreased slightly from the previous week averaging just over 9.0 million barrels per day while the important implied gasoline demand remained robust at an average of 9.6 million barrels per day and still 1.6% above the same period last year keeping a strong undertone of bullishness to the entire complex and maintaining its leadership in the energy bull trend.

W. S. I Weather 6-10 Day Outlook

While next week is not expected to be nearly as warm as this week, near and above normal temperatures are still forecast over most of the continental U.S. for the balance of the next week and 6-10 day periods. The strongest signals for warm weather and the most persistent warmth exist over the Mountain West and central U.S., where above and much above normal temperatures are expected to continue for most of next week. In response, daytime highs generally in the 80s and 90s are expected to prevail over the northern Rockies and north-central U.S. most of the next week. Highs generally in the 90s and low 100s are forecast to prevail over Texas and the south-central U.S. The most changeable conditions next week are anticipated in the Northeast, where the warm and humid weather early in the week is expected to be replace a much cool and drier air mass near mid-week. In response, highs in the 80s and low 90s in the Northeast early next week will struggle to climb out of the 70s and 80s near the middle of the week. The southeastern U.S. will also see changeable, but less dramatic, conditions as slightly cooler and less humid conditions arrive late next weekend. Finally, temperatures over most of the most of the western U.S. are forecast to average close to seasonable levels for the balance of the next week and 6- 10 day periods. In response, highs in the 90s and low 100s will be the general rule for the Intermountain West, interior California, and Southwest next week. Highs in the 70s and 80s are expected to prevail along the West Coast.

Conclusion

Natural gas has initiated an extremely volatile pattern as prices are pulled back and forth between technical concerns but more predominantly by the fundamental forces of weather and mainly the searing heat wave that has dominated the country over the last two weeks with little relief except in its transitional movement from the West into the Midwest and Northeast this past week. A secondary influence and one that turned out to be very fleeting was the brief threat of tropical storm Chris which still poses a minimal, if any, and lingering threat to the Gulf of Mexico as it approaches in its weakened state early next week. Once the market has completed its cycle of price factoring to ongoing fundamentals of the elevated heat, we see the market likely to give up more ground as traders begin to realize prices got well ahead of themselves with the advance of over $3.0 basis spot in less than 10 sessions while existing supply still remains at record levels for this time of year! Substantial profit-taking and further along liquidation could develop in response to moderating near term forecasts in the absence of an immediate storm threat to the Gulf. In fact, quite a dramatic decline could quickly transpire returning the market to test lower support below the $7.0 benchmark if weather moderates enough over the next two weeks whereby traders arrive at a conclusion that this summer's heat may have peaked already leaving the storm threat as the last possible scenario to support the short-term bull trend. Because despite the recent heat wave and the resulting violent upward price gyration, the industry is still easily on track to exceed, and by a new record high of 3400 bcfs in November to begin winter, oversupplied by all historic measures.

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

August 03, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744

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