Crude Recovers on Iran's Defiance.

Consensus Report: August 31, 2006

Crude Recovers on Iran's Defiance, while Natural Gas Continues Decline from Storm Disappointment and Cooling Temperatures Ahead.

Natural Gas and Oil

Technical Outlook: In our last report last week we said natural gas was more definitively bearish and that we expected prices to fall back through support at $6.45 and then test $6.10 and possibly lower, especially if the tropical storm Ernesto failed to threaten production areas. This not only transpired, but prices fell down through our target at $6.10 all the way to $5.97 before staging a mild recovery on close. Looking ahead, especially after today's continued sell-off, the momentum still suggests further weakness, and technical signals remain weak overall yet entering oversold territory by historical measures. However we strongly advise against putting too much emphasis on strictly technical indicators as we saw how influential the fundamental storm impact or lack thereof, of the storm's miss was in contributing almost totally to the sharp sell-off that we predicted. Remember prices declined well in excess of a dollar in all contracts across the board from the storm disappointment as Ernesto's ultimate path spared critical oil and gas production areas as it made landfall into Florida, failing even to reach hurricane status. Looking ahead the momentum, stochastics, oscillators as well as parabolic all suggest a test of $5.75-$5.80, which if penetrated, could bring a test of yearly continuation lows at $5.45 set back in July. Only a sudden rebound challenge back above the $6.25 level could temporarily stop the bleeding and stabilize prices.

Fundamental Supply Update

Today the EIA reported a slightly lower than expected net injection of 48 bcfs that was below previous estimates of Bloomberg and Dow Jones that were closer to 54. Prices quickly continued their fall that began earlier in the week as traders began to contemplate not only the disappointment from Ernesto failing to reach hurricane status as well as bypassing critical production areas, but also the likely cooling effect the storm will have on the upper Atlantic states as it continues its northward course and thus further diminishing an already moderating heat demand. Storage now stands at 2905 bcfs, which is 280 higher than last year and yet still 320 or 12.4 % above the five-year average of 2585. This record heavy supply keeps us comfortably on track to surpass the 3400 bcf benchmark by averaging a mere 55 bcfs per week over the remaining nine weeks of the season and well below the five-year average that is typically about 67 per week for this time of year. This fact reiterates the premise that unless a storm appears on the horizon and makes a direct threat to production facilities in the Gulf there is little in the way of the weather demand to prevent the market from falling to new lows, a statement that we made last week to both the Bloomberg weekly survey and to Dow Jones newswires, which was confirmed by price action this week in the September expiration and also by the price level the new spot October contract fell to today. Looking ahead we continue to see traders expand selling activity with little fear or reason to short cover from existing weather conditions unless a new storm threat appears.

Concerning crude oil, this week's EIA update Wednesday gave little support to the recent retreat in petroleum prices led by the gasoline collapse that started over two weeks ago as the data announced a second increase of 0.4 million barrels of unleaded while crude stocks also increased by 2.4 million barrels to now total 332.8, along with an increase in distillates of 1.3 million barrels giving the entire complex an across-the-board increase to supplies that leaves all of them above the average supply for this time of year. With no major new headlines erupting overseas that directly threaten petroleum supplies combined with the perception that gasoline demand here in the US has peaked for the summer driving season only served to complement the declining price action that returned crude prices to test the key $68 benchmark, and a level not seen since mid-June. Only today's return to elevated tension between Iran's nuclear intentions and United States clearly stated opposing position demonstrated by President Bush's words of warning that Iran's defiance should have consequences, exerted some mild buying pressure that provided the impetus for some noticeable short covering from yesterday's lows resulting in another close back above the key $70 benchmark today. Also in the backdrop is the ongoing support from instability in the Nigerian delta region whereby oil workers for Royal Dutch Shell threaten to strike in response to the recent clash between militants and oil workers 10 days ago that resulted in an employee's death. Adding fuel to the fire of the Iran/ UN nuclear standoff was this week's report released by the International Atomic Energy Agency stating that Tehran shows no intention to freezing its ongoing uranium enrichment program. This continues to underpin in a primary and dominating manner, this years continued up trend in crude oil as the defiant position demonstrated by Iran's nuclear enrichment program directly falls in-line with an administration here in the United States that promotes a policy that thrives on perpetuating fear, igniting and inflaming both cultural and religious differences, and avoiding real diplomatic efforts, all towards achieving the objective of expanding the industrial military complex and the resulting profits from such a campaign. Evidence of this could not be more clear when one simply looks at the reality on the ground in our miserable disaster in Iraq which is costing America in every conceivable way. First and foremost in the lives of our brave soldiers, then monetarily by over 300 billion tax dollars and climbing, and also in reputation as this administration's deplorable foreign policies earned the mistrust of our allies while simultaneously galvanizing and igniting newly found hatred from within the Arab world. The Bush administration's failing campaign in Iraq is also spawning new enemies according to our own US, and Israeli military intelligence sources. In fact it is most likely that because we are so bogged down in our failing attempts to gain control of the insurgency and resulting violence from the lack of a comprehensive military plan from the beginning, that prevents this administration from instituting military action already concerning Iran's position on the nuclear issue. That fortunately combined with a growing dissent and opposition from within the American people many of which surprisingly are even emerging from the conservative movement and members of his own party. And why not, when you receive such a miserable failing grade on foreign-policy as measured by reality such as in Iraq, then why would you expect to get the nod of approval to continue to expand the application of the same except on an even grander scale based on theory? Are we actually expected to continue to give this administration approval to exercise military operations based on a tragic record of failure!... simply because the president is now parading around the country still claiming to be strong on security and that his job is to protect the American people? How long do we have to endure these hollow words when the reality on the ground continues to prove instead, that religion and power combined with ignorance and greed, only perpetuates death! As for the myth of being strong on security, the administration is running out of time in its expectancy to keep the American public in the dark, as logic and common sense is rapidly shedding light on an enemy that is multiplying just outside the gate. With our own intelligence provided by the CIA, the Defense intelligence agency's and the FBI warning us that it is just a matter of time before an Islamic fundamentalist group strikes a blow here in United States in direct retaliation for this administration's existing foreign policies and mainly for our hypocritical debacle in Iraq!

WSI Weather Forecast 6-10 day Outlook

Cooler than normal temperatures are forecast over the south-central and southeastern U.S. Warmer than normal readings are expected to encompass most of the western U.S. Anomalies are generally expected to average between 2-5 degrees cooler or warmer, respectively, than normal.

. Today's forecast reflects a cooler solution for the southeastern U.S. than previously forecast.

. Temperatures may trend warmer or cooler over the eastern third of country late in the period depending the exact track of a potential tropical system all models suggest will develop in the central Atlantic next week.

. Cooler than normal temperatures are expected to encompass California and the southeastern U.S. With the exception of the

Northeast, warmer than normal temperatures are forecast over most of the northern tier of the country.

Conclusion

Natural gas took out all of our targets from our last report dated August 24 when we forecast a price collapse that would follow news that tropical storm Ernesto would likely bypass the critical production areas in the Gulf of Mexico even though the storm ended up taking a different path then we thought originally after it entered the Florida Straits. Our low end price target at $6.10 was not only hit but exceeded basis today's spot price penetration below the $6.0 benchmark. Now not only is the bearish technical picture more pronounced but with the absence of any near-term storm threat, the path of least rejection is clearly lower, barring any short covering or profit-taking from the recent oversold condition which normally still needs a solid reason to initiate enough buying to fuel a substantial reversal. We anticipate a near-term challenge of $5.75 with further liquidation likely to precede a possible retest of yearly lows at $5.45 before the value buyers and short covering stems the decline.

With regards to crude oil and the petroleum complex, we also see the market in a weaker technical condition as prices gravitate more readily to longer-term support between the $68 benchmark and today's prices just above $70 per barrel. The market also seems to be subsiding, as if to be cooling down after the recent and overheated run above contract highs at $78 per barrel in reaction to the massive worldwide collision of headlines from almost every sector, led by the Israeli Hezbollah conflict, the terror strike in Mumbai India, the North Korean missile launch, increased tension between Iran and the US over the nuclear challenge, further instability in Nigeria, and even anti-American oil propositions suggested by Venezuelan leader Hugo Chavez in his well-publicized open-door policy to expanding petroleum trade with new buyer China. Now it seems clear, especially after achieving at least what has turned out to be a temporary cease-fire in Lebanon, a recent collapse in the petroleum complex leader the unleaded gas market, along with more evidence of a possible definitive economic slowdown that may lie ahead for the US, that near-term, a test of major support and possible breach to a new lower price range may be in store for crude oil. We anticipate the upside to remain contained below intermediate resistance at $75 per barrel unless tension between Iran and the United States escalates more rapidly than currently anticipated. We also see a likelihood that the down side parameter on crude oil could expand further resulting in a rapid washout down to between $62.50 and $65 per barrel should the key support at the $68.10 level break down on close. However we feel this scenario would need the assistance or combination of a temporary diplomatic settlement to the Iran nuclear challenge along with further evidence of the slowing US economy which currently seems a strong possibility judging from the evidence recently in the crashing housing market.

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

Agugust 31, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744