The petroleum complex retreats from pipeline scare and new sky terror threat conquest.

Consensus Report: August 10, 2006

Natual Gas and Oil Report

The Petroleum Complex Retreats from Pipeline Scare and new Sky Terror Threat Conquest, While Natural Gas Continues Volatile Range from Enhanced Electricity Demand yet Subdued Storm Activity .

Technical Outlook: In our last report dated August 3 we said the natural gas market was now overbought. We also said the technical picture had become more definitively bearish as the market was gaining in its downward momentum in our opinion, and that the recent close under the key breakout level at $7.40 was a noteworthy bearish indication. We stated several mainstream indicators such as stochastics, momentum, relative strength, the MACD, the linear oscillator, and others were clearly suggesting further selling ahead, and that only a few indicators such as the parabolic still suggested life to the short-term uptrend, and they showed vulnerability to turning negative themselves. We forecast a pivotal test to break back below the $7.0 benchmark which would quickly lead to a collapse through support at the $6.80 level. This is exactly what transpired as prices this past week fell back below this level declining to $6.76 basis spot before recovering on close. We also said if prices staged a sudden rebound resulting in a close back above $7.80, this 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. Something similar to this has developed as prices have moved back above support at $7.25 but have also remained contained below resistance failing to reach the $8.0 benchmark and more importantly unable to close above key resistance at $7.80 basis spot. Looking ahead we see many indicators such as momentum and stochastics, along with the linear oscillator and the MACD warning of weakness overall, and in our view judging from the posture of the charts configuration it appears the sequential lower peaks going forward from the last high at $8.60+ are loosing strength and this usually precludes a dramatic sell-off. Buyer beware and look for an important second rejection from resistance above at $7.65-7.80 to bring a rapid decline back to test $7.25-7.10 with a collapse back thru support at $6.80 likely, especially if $7.60 is not breached soon. Short traders, we advise using a stop above at $7.80 or a close above this price as a signal to abandon the short futures as we would then expect a rapid return to test $8.0-8.10 resistance should this level be attained.

Fundamental Supply Update

Today the EIA announced a second, and record withdrawal of 12bcfs that was not far from previous estimates by Dow Jones and Bloomberg of a drawdown near 5 BCFs respectively. The market quickly fell further from existing weakness as traders reacted to the break in the stifling heat in the upper Midwest and Northeast as a cold front is expected early next week and the tropics at least for now remain quiet. Storage now stands at 2763 BCFs which is still 306 above last year at this time and 374 or 15.7% above the 5 year average of 2389. Weather will still be the dominating factor in our opinion as many feel the peak heat of summer has passed yet the peak storm threat is directly ahead of us between mid-August and late October. The question is can the potential threat of storms replace the declining demand as temperatures ease in the key Midwest and Northeast? That remains to be seen, however it is our opinion that it will not take long for traders to take profits and liquidate longs if temperatures moderate and especially if peak summer heat may be behind us. That would put almost total reliance upon the storm threat to sustain the current rally, and with storage still on track to hit 3400+ BCFs comfortably, look for the market to react quickly and violently to a storm disappointment. Likewise the sudden arrival of a new legitimate storm threat to the Gulf of Mexico, and the opposite scenario whereby prices could rapidly escalate, is also possible.

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 just as we reported last week after the recent return of Secretary State Condoleezza Rice, failing to achieve anything positive on the diplomatic front. We also hold to our prediction that as time progresses, and the death toll rises along with the intensity of the hatred between not only the immediate two parties directly involved, Israel and the Hezbollah, but also all the supporting masses on both sides such as Syria and Iran as well as the Palestinians, Iraq and basically most Arab nations, versus the West and all those who support Israel, this will go down in History as a pivotal moment, and a black eye in American failed diplomacy for not moving at the critical early stage to secure a cease fire that although may have only been temporary could have given sanity enough time to enter the conflict to where some sort of truce or peace keeping force could be established. Now we will never know, and it maybe too late to stop the escalation. The innocent loss of life to civilians and especially children on both sides, and mostly for the Lebanese people, has already reached a deplorable level and of course the fatalities are irreversible. This weeks attempt by suspected Al Qaeda operatives to inflict a devastating attack on overseas flights rom London to the US is a graphic display of the recent increased tension to the Middle East conflict and should be considered an extension to further retaliation for not only our failure to secure a cease fire but also our dismal orchestration to the debacle in Iraq. The important question is, how far do the failed diplomatic policies of this Administration have to go before America realizes we are going deeper and deeper down the proverbial rabbit hole with a strong chance of a violent Islamic reprisal
being brought to our doorstep here at home as a likely result! While
recent polls clearly show 60% of Americans feel that both the war in Iraq
was a mistake, and that we disapprove of the way the administration is
handling the war, which then logically begs the question, if that is how
we as Americans feel about the war, how do you think Iraq and the Moslem world feel about our conducting the war?! That's right, they don't approve either, and in fact judging from the recent threats and actions of Al Qada, looks like they are seeking a little pay back. So if, and hopefully for all or sake as Americans, and not when, the Islamic extremists seeking revenge for the Bush led invasion in Iraq and total passive posture concernig Israel's attacks, do strike here in America, I wonder if Americans will still feel the administration gets high marks for being strong on security. How does that work? According to certain polls, while the administration gets criticized routinely for its incompetence and almost total disconnect with the deteriorating situation in Iraq, which is now considered by many to be nothing short of a civil war, yet those same news agencies, and almost in the same breath claim the administration still gets high marks for security. So let's break this down, they can't secure the borders in Iraq or had no seeming plan for the insurgency (unless there's an election going on), yet America feels the administration is strong on security? How does failing in reality earn you high marks in theory? I guess you have to go to Fox News to get the answer. The only high marks this administration should get is for pulling a good "snow-job" thru the media on fooling almost half the public into thinking we are secure here at home. In fact the recent addition of Tony "Snow" from Fox News to the position of White House Press Secretary could not be more appropriate. Unless you are one of those devout followers who never asks questions and believes we are safe because the President gets up on the stump and continuously claims he is hunting down the terrorists and that his job is to protect the American people, you need to consider what our experts in the field are saying instead of the media. Well the reality is our military intelligence sources tell us that since the Administration began this disaster in Iraq, Al Qaeda and other anti-western extremists have multiplied exponentially in retaliation. And maybe we as US citizens should prepare for the more likely scenario that Terror has not struck here at home yet because the enemy has not attempted anything of major consequence yet. Remember based on best estimates the 9/11 assault took 10 years to plan, then we certainly cannot afford to get complacent since the last attack was less than 5 years ago! The only thing this Administration has effectively accomplished by wrongfully invading and then occupying for the first time, a Moslem country, is (1) to ignite the hatred and anti-American sentiment of the entire Islamic fundamentalist movement, and (2) which is more critical economically is to escalate Oil prices into the stratosphere by interrupting the balance of supply and cutting off a vital source of output from Iraq that has amounted to over a million barrels a day lost over the past 3 years and subsequently enriched the bank rolls of all the state sponsors of terrorism. So if and when the terror threat returns here to our shores, which from recent activity is beginning to look regrettably inevitable, lets remember to credit the administration that set the stage for it to
materialize! In an article entitled "War helps Recruit Terrorists", in the
Washington Post back in February of last year the then head of the CIA Porter Goss testified to the Senate Committee on Intelligence
that "Islamic extremists are exploiting the Iraqi conflict to recruit new anti-US Jihadists." He also said "These Jihadists that survive will leave Iraq experienced and focused on urban acts of terrorism. "Vice Admiral Lowell E. Jacoby, Director of the Defense Intelligence Agency, testified to the Senate Panel, "Our policies in the Middle East fuel resentment", and that " Overwhelming majorities in Morocco, Jordan and Saudi Arabia believe the US has a negative policy towards the Arab world." Later in the article Goss, the acting Director of the FBI Robert Mueller III and the deputy director of Homeland Security reiterated their belief that Al Qaeda and other Jihadists groups intend to strike the United States. "It may only be a matter of time before Al Qaeda or some other group attempts to use chemical, biological, radiological, or nuclear weapons," Goss said.

And now to bring us up to date, Scotland Yard apprehends some 20 or more individuals believed to be about to execute a rather elaborate plan to detonate explosives on as many as 20 commuter flights between London and US destinations using high-tech liquid explosives. They say the scheme may have up to 50 individuals involved and so obviously numerous suspects are still believed to be at large and so the air transportation system in Europe and the US remains under an elevated terror alert status whereby London has their security warning system at it's highest "Critical" level. What did this mean for Crude Oil prices? Well contrary to the expected initial reaction of higher prices from any other terror strike attempt that might somehow threaten the flow of Oil, this actually posing no threat to Oil infrastructure, had the opposite affect as prices plummeted over $2.0 as traders speculated the immediate suspension to some flights
and the subsequent cancellation to future bookings based on fear could
weigh on Jet fuel consumption over the short term, as prices settled back
at $74 per barrel basis spot. This brought a rather abrupt halt to the recent rally to near contact highs as Crude hit $77 per barrel earlier in the week mainly on the news of BP possibly needing to shut down some 400,000 barrels of Oil flowing from the Alaskan Pipeline from famous Prudhoe Bay due to a corrosive leak cutting off some 8% of the countries Oil output. Prices had already begun to fall back as the Energy Secretary Bodman claimed that the Strategic Petroleum Reserve would be available to supply any needed shortfall from the pipeline interruption if refineries needed it, however due to a comfortable supply cushion over last year and the average, he didn't believe it would be necessary. Saudi Arabia and Mexico also pledged to provide any supply short fall created from the pipeline suspension which provided further impetus for profit taking that began at yesterdays high. Yesterday's EIA numbers on petroleum failed to stir much emotion in the wake of the recent pipeline news and the ongoing tension in the Middle East. Nevertheless the decline in supply was across the board as Crude stocks dropped 1.1 million barrels to total 332.6 while gasoline dropped by 3.2 million and are now in the lower half of averages. Distillates fell by only 0.2, yet remain above the average supply range for this time. Most importantly refineries operated at 91.6% and gasoline production increased to 9.2 million barrels per day while implied gas demand remained robust at over 9.6 million per day or over 1.8% above last year at this time. Looking ahead we still see gasoline as a strong leader to the complex despite the recent sharp decline back to the $2.0 benchmark, and due to the recent increased volatility will still be vulnerable to sharp vertical assaults at existing highs above $2.35 even though we are now deep into the summer drive season and well past peak driving, because we are headed into peak "Storm Season". We also feel Crude should hold support at the $72-73 support level, with the more critical level at $70 and then $68.10 unlikely to be tested unless Iran signs an agreement with the UN and halts their Nuclear uranium enrichment program, and the Israeli Hezbollah conflict ends abruptly, neither of which seems expected in the near term.

W. S. I. Weather 6-10 Day Outlook

With the exception of the southeastern U.S., warmer than normal temperatures are expected to encompass most of the eastern two-thirds of the country for the balance of the next week and 6-10 day forecast periods. The warmth over the southern tier of the country is expected to be more persistent as daytime highs are generally forecast to climb into the 90s most of next week. The southeastern U.S. may see a brief period of cooler weather late next week as a southeasterly flow develops off the Atlantic Ocean. Temperatures are expected to be more changeable over the Midwest and Northeast as a brief period of warm weather early next week will be sandwiched in between periods of cooler weather this weekend and near the middle of next week. However, during the latter half of next week medium range models depict a more sustainable period of summer warmth, and suggest highs as warm as the 80s and low 90s are possible. While it may not be classified as a heat wave, a 3-5 day period of late summer heat and humidity is expected to develop over the Midwest and Northeast late next week. While periods of warm and cool weather are expected times, a rather tranquil pattern in terms of temperatures is forecast over the western U.S. for the next week and 6-10 day periods. The Northwest may average on the cooler side of normal while the Intermountain West may remain warm. However, any prolonged periods of unseasonably warm or cold weather are not expected in these regains at this time. The main concerns in the West develop in the Southwest. The biggest question develops in regards to the strengthen sub-tropical ridge and whether or not it become strong enough to shut-down the influx of monsoonal moisture late next week. While no strong signals for heat exist in the Southwest at this time, temperatures in the law 100s may become more common place late next week.

Conclusion

Natural gas is currently being suspended on dissolving technical momentum while building a series of subsequently lower highs going forward. we feel with the technical picture showing "rally fatigue;" and with the recent searing heat being quelled by an approaching cold front especially in the northeast, the current quiet report in the tropics could be just the catalyst needed to ignite profit-taking from the bulls. This initial selling could give way to a more devastating sell-off if traders reach the conclusion that peak summer heat has passed. The key price levels to look for is stiff resistance at $7.80 above which we feel should hold on close. A strong rejection from this barrier could lead to a rapid return to support first at $7.25 and then $7.10 with a failure hear likely to bring another test of key support at $6.80. Look for a close back above $7.80 as a sign the bulls have a little more ammunition, to step aside and look for another assault at the $8.0 benchmark. However, we feel it would take a significant return to above normal heat in the mid-west or a new storm threat to the Gulf to spark this scenario.

Concerning crude oil, we feel that the recent sky terror threat to loose its bearish grip on prices unless a new chapter is revealed, exposing further threat to economic growth and the travel industry, especially jet fuel consumption. Since, we expect travel will soon resume normalcy, look for crude to return attention to gasoline demand. The Iran challenge which is still paramount, Nigeria's output, and of course the ongoing Middle East crisis in Lebanon. Technically we continue to expect support at $72.50 to $73 to hold with upward resistance at $77.50 to $78.00 to be challenged as the Iran dilemma approaches, the Alaskan pipeline remains restrained, and of course peak storm season draws near.

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

August 10, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744