Concensus Report: September 10th, 2009

Crude Oil returns to challenge $72 after larger supply reduction, IEA forecast, and weaker dollar, yet still ignoring ample supplies and the weak economy, while Natural Gas continues strong technical rebound after favorable EIA update.

Natural Gas and Oil

Technical Outlook: Since our last report, I said looking ahead, this market was obviously still searching for a bottom and that all technical indicators were still deeply oversold with the spot price now targeting $2.40 and possibly $2.36 before the shorts got anxious and began making their exit to lock in recent gains and value seeking longs begin entering the market to secure a vantage point. This is exactly what transpired as the spot market bottomed out at $2.409 before a key bullish reversal commenced that escalated today into a dramatic $.42 cent rally that exceeded both of my initial resistance levels at $2.80 and then $2.92 as prices ended up settling at $3.256 and the first close above $3 since August 28. Now looking ahead most technical indicators have obviously turned to positive and judging from the stochastics, MACD, relative strength and several oscillators there is further upside expected with chartists anticipating the first resistance to the current momentum at $3.40 and then $3.65 before sellers come back in with some conviction. At these levels the market will be approaching over-bought status. Look for initial support at $3.10 and then more critical support at $2.92.

Fundamental Supply Update

This week's EIA report showed an injection of 69 bcfs, which was substantially below the survey estimates by Dow Jones and Bloomberg that ran closer to 74 bcfs respectively. Storage now stands at 3392 bcfs, which is 495bcfs higher than last year at this time and 503 above the five-year average or 17.4% over 2889. Following the EIA update, despite being only modestly below the expected injection, the market found this to be quite opposite to the general sentiment of renewed short interest that expected a much heavier injection and suddenly found themselves scrambling to buy their way out to cover a quickly losing position which due to the layered shorts of the past weeks finally deciding to exit caused a dramatic price change and one of the most volatile sessions and largest single day up of the year. However, to say the lower injection into supply was the single reason for the dramatic rally would be naïve and it actually was more the catalyst or just the confirmation the bullish contrarian traders needed to continue their efforts to reverse the recent control and conviction of the bears that have dominated control over prices now for most of the year. The result was a short term relinquishing of commitment by the bears that yielded the market’s direction earlier at the lows temporarily and yet obviously they used the EIA data today as the excuse to let go of the rest of their lingering commitments to the short side. Fundamentally very little has changed with storage still holding an ample surplus above the 5 year average, little threat from hurricane season thus far, and dismal industrial demand, proving that today’s advance was just as much technically based if not more so than as a result of one isolated supply update that in the overall supply picture didn’t change anything or suddenly derail the market’s destiny with a record heavy supply before winter. This means unless a legitimate threat arrives on the horizon from the tropics that threatens supplies in the Gulf, as soon as the technical rally ends and reaches overbought status, the fundamentals will return soon and prices should resume their quest for the lower range at least until later in the year when winter becomes a more critical concern.

Concerning Crude Oil, today the market closed positive again on follow through from the dramatic rebound posted earlier as the market continues it’s tight symbiotic relationship with the stock market and continued reliance on the traditional crutch of a weaker dollar while ignoring the traditional heavy supply, weak domestic demand, and even worse economic outlook for the consumer looking ahead. The market settled and $71.94 per barrel basis the October delivery after a gain of $.63 or 0.9% in the highest close since August 28. Credit for today’s advance in the media was obviously attributed to the larger than expected 5.9 million barrel drop in crude oil stocks according to the EIA as imports had tumbled 5% after most estimates had expected a drop of less than 2 million. However the report also showed consumption for petroleum products, a more important gauge of implied demand, and also dropped as revealed by an increase in gasoline inventories by a more than expected 2.1 million barrels while distillates continued their climb also rising 2 million and remain at their highest level in over 19 years. Total petroleum products supplied fell 1% to 19.5 2 million barrels a day with gasoline, the most important consumer product, dropping by 2.1% to 9.28 million barrels per day last week according to the EIA. Inventories at Cushing Oklahoma, the delivery point for Nymex crude supplies rose 100,000 barrels to 31.3 million and with OPEC deciding to leave output quotas unchanged, the market may find most of the bullish information already factored in to current prices. The petroleum market also found the updated forecast by the IEA as supportive for stating global demand will average 84.4 million barrels a day for the remainder of 2009 and 85.7 million barrels a day in 2010 which represents an increase on average of almost 500,000 barrels a day. However given the unreliable nature of past forecasts issued by this organization as well as their propensity for quickly changing their outlook at the drop of any sudden change in economic data emanating from the major economies in Europe and Asia, and the market no doubt put little credence to the prediction other than another excuse to extend an already exaggerated short-term rebound. With the broader economic outlook here in the world’s top petroleum consumer looking extremely questionable, and most reputable economists criticizing the proclaimed recent escape from the clutches of undeniably our worst recession and into an overly publicized recovery, as it has been clearly devoid of participation by the all-important consumer, a truth related shake-out looms large. In fact the only condition that has become more clearly exposed is the disparity between the dramatic 50% advance in the level of the stock market this year in contrast with the ever weakening plight of the consumer. The combination of growing unemployment which has now reached 9.7%, the 3.5-4 million pending foreclosures, climbing record credit card debt and increasing default rate, and last but not least commercial real estate collapse that now threatens our banking system again, certainly threatens to derail any credible talk of a sustained economic recovery. And as I have stated in numerous reports previously, until the unemployment growth is not only halted but then reversed with a definitive new trend of job creation, all of these other negative trends will continue as employment is vital to the positive reversal of all the major negative factors that continue to plague our economy. Logically then and to reiterate my earlier warning, as soon as the market decides to embrace the truth about our real economic ills that lurk just beneath the surface, a violent and unforgiving correction will take hold of the petroleum market that will surprise many and possibly benefit few that trade it and yet fortunately provide some much-needed relief to the end consumer when it does transpire. Until then look for the market to continue the current stubborn trading pattern whereby petroleum drops violently after running out of bullish cherry picked economic data that are mostly tied to the stock market and a weaker dollar and then quickly runs up on the first flimsy indication of optimistic future economic growth while ignoring the current reality of a very weak economy. Technically the current momentum has crude oil targeting overhead resistance first at $72.50 and then more critically above this at $74.

Conclusion

Natural gas closed with a dramatic gain of $.42 to settle at $3.25 basis the spot October delivery only a couple weeks before the approaching expiration of the fall contract. I anticipate on the current momentum of the mostly technically based rally prices should continue higher to challenge $3.40 and then possibly $3.65 before approaching overbought status unless the market gains some real fundamental support other than the recent weakness in the US dollar such as from the approach of a Gulf targeting storm. If the market should reach somewhere between my to upside targets and then reverse and resume the downtrend, look for initial support first at $3.10 quickly followed by a more critical test at $2.92 which if broken could yield a rapid washout to much lower prices once again as the short-term fundamental picture remains precarious and weak at best.

Concerning crude oil today marked another sequential advance that marks the fourth consecutive game for crude oil and a continued perpetuation of the Mirage of future increased energy demand that rides on the propaganda of a miraculous economic recovery without the consumer. Yet the consumer represents 70% of our nation’s GDP growth and just because the Fed has pumped an unprecedented amount of liquidity and stimulus into bailing out chosen industries and the banking system it has been generally accepted as gospel by the stock market that somehow the consumer will ultimately benefit and thus return to the shopping malls and housing sector. Meanwhile all of the ongoing economic data continues to prove this theory to be seriously flawed. In fact the current trend in mortgage defaults even amongst good credit holders because of losing employment along with the rate at which credit card accounts are now going delinquent by unprecedented numbers only seems to reveal the opposite is transpiring. It is my belief this will soon reveal that the stock market has been gaining more on the whims of some powerful money managers that are in denial rather than based on sound economic evidence of a real recovery. When this reaches a state at which it becomes clearly evident, not only will many stockholders move to the sidelines just because prudence dictates caution in the wake of uncertainty, but the recent acceleration seen in the precious metals markets already indicates that uncertainty is growing. Don’t forget the stock market hates uncertainty, and the recent pullbacks in the stock market have already revealed how dependent the petroleum market is on this already questionable economic recovery. When the stock market receives its first dose of reality and corrects back several hundred points to challenge at least the 9000 point level, crude oil will fall precipitously by a much larger percentage as the recent correction from the first challenge to the $75 benchmark back to the $68 intermediate support level clearly illustrated. While the recent price rebound dodged my downside objective of $65 from last week’s report, I feel this price target has only been temporarily delayed and will soon materialize as a correction in both markets seems inevitable as the suppression of reality looks to be losing momentum.

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

September 10th, 2009

United Strategic Investors Group

Guy Gleichmann, President

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

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