Consensus Report: September 13, 2007

Storm Concerns, and Technical Strength, as Gasoline gains on Refinery Obstacles, while Natural Gas Retreats on profit taking after Multi-month Highs, and Storm Threat Reduction.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead technical indicators had remain mixed with the longer-term indicators such as the linear oscillator as well as the MACD and stochastics are over all exhibiting oversold signals whereas momentum, relative strength, and accumulation oscillators warn of further weakness ahead. We stated, under this scenario, as we have mentioned in the past, when the market is conveying mixed signals, we feel it is wise to look for certain price objectives or failures to reveal a more clear picture as to future price direction. We said clearly if the market near term over the next 2-3 sessions failed to close back above $5.80 basis spot, that we expected a rapid challenge to test lower support first at $5.40 with a failure to hold this level bringing a quick collapse back to test more critical support between $5.20 and $5.25 basis spot. This is exactly what transpired as the market to begin the trading week suffered a noticeable collapse that culminated with a sharp selloff on access trading to exactly $5.25 basis spot before a sharp bullish reversal intraday led to an over $.70 rally whereby the market challenged the $6.0 benchmark before settling back and yet comfortably above our key resistance point at $5.80 signifying a full bullish break out. Looking ahead now after today’s sharp decline from the recent failure at minor resistance at $6.50 after yesterday’s close at $6.43 basis the October spot contract, signals are now mixed technically with longer-term indicators such as the MACD, the linear oscillator, and parabolic still indicating room to the upside, whereas shorter-term indicators such as momentum, stochastics, and relative strength, are suggesting further weakness ahead as the market continues today’s substantial liquidation. It is our strong opinion that the market reached overbought status quickly as the fundamental impact of storm concerns converged with a market that was undergoing a sharp technical rebound from short covering. The result is a market that is now subsiding from an overbought extension, and the question now is where will support come back in to play. We anticipate over the near term if the market cannot rebound back above $6.10 on the close within the next two sessions, values will continue to decline back to test $5.92 initially with a more critical challenge at the key support level of $5.80. If this critical support level should be breached on close we see a strong vulnerability to a further collapse down to $5.40 before more significant buying steps in to stem the tide. With the market experiencing enhanced volatility it would not be out of character for a close back above minor resistance at $6.10 to quickly reignite the recent buying fervor to effectively challenge the recent highs near $6.50, but this would require the return of storm fear premium to justify such an advance in our opinion.

Fundamental Supply Update

This week's EIA report revealed an injection into storage of only 64 bcfs that was basically right in line with both previous survey estimates by DowJones and Bloomberg that were running at 65 and 63 respectively.  Storage now stands at 3069, which is exactly level with supply last year at this time and yet 260 or 9.3% above the five-year average of 2809 bcfs. The market ended with an extremely negative close of $.40 that was much more the result of storm disappointment as the surprising eruption of hurricane Humberto, which had reached category one status, made its exit without significant damage or consequence, almost as quickly as it had arrived, rather than a reaction to the supply update. Further news of tropical depression number eight, which had formed and was slated to become tropical storm Ingrid, yet had become less organized and was positioned about 900 mi. east of the Lesser Antilles moving west Northwest, also contributed to the price decline in our opinion as it posed no immediate threat to the Gulf at least for now. The relevant factors that will affect natural gas fundamentally over the next week in our opinion will be predominantly weather driven as traders focus on the possible strengthening of tropical storm Ingrid, and its projected path more importantly, as well as the return of some above normal temperatures currently forecast to return to the Eastern two thirds of the country next week which is explained in more detail in the following weather section. In the meantime as traders wait for these fundamental impacts to be revealed, the market will follow more technical pricing patterns. Remember as soon as the demand impetus subsides technical concerns weigh in along with the reminder that fundamentally the market is well supplied by historic standards.

Concerning crude oil, the market today closed by making history as it was the first time a spot contract closed above the well-publicized $80 benchmark which confirmed the strong probability for this to materialize that we stayed in last week’s conclusion as we clearly stated that the market seemed to be only falling back in a minor way from the existing highs near the $78 benchmark in anticipation of another bullish flag to waive in justification to carry the market to challenge this major psychological barrier! Now after achieving this monumental mile marker, the market will need some strong fundamental fortification to justify sustaining such a lofty height, especially in consideration of the longer-term detrimental effect on the global economy that it implies. The obvious longer-term inflationary impact could collide with the recent escalation in international demand, especially in Asia, whereby economic deceleration as consumers try to cope with stifling fuel costs yields inevitably less demand for energy, and thus the prediction that petroleum will soon suffer a significant drop in value at its own hand could become a self fulfilling prophecy. However, because the evidence of the sea change required to cause such a turn in the tables takes time to materialize, it makes predicting such an event difficult. I use the analogy of a scale, and adds the economic data is revealed it’s like slowly incrementally adding weights to one side of the scale yet by very minute additions. Then suddenly as with a scale, once enough weight is added and the perception changes the scale tips and falls abruptly as the lighter side yields. This immediate and often violent reaction as perceptions quickly change was graphically demonstrated last month when crude oil had previously reached its peak above the $78 benchmark on August 1 only to fall a full $10 per barrel down to $68 plus, and all in only a little over two weeks to complete such a devastating collapse. Perceptions had quickly changed as market participants felt that not only had oil become extremely overpriced but also that demand would soon depreciate in reaction to the massive stock index meltdown that global economies were suffering in reaction to the US housing crisis and the subsequent spread internationally of the sub-prime mortgage disaster. Despite these future considerations the recent escalation to crude oil to this history making precipice was on a continuation of the same basic fundamental influences that caused it to approach their recent highs of the $78 benchmark last week, that being sharp reductions in weekly inventory levels and the ongoing shortage in gasoline. This week was no different as the EIA announced a weekly drop yesterday in crude stocks that was over three times the nearest estimate as supplies dropped a whopping 7.1 million barrels, while gasoline declined by a more modest 0.7 million barrels and yet remain below the lower end of the average range and significantly lower than last year’s supply. Only distillate fuel inventories had increased by a modest 1.8 million barrels and remain in the upper half of the average range for this time of year. Also contributing to the bullish fever was the fact that refinery’s lost capacity declining back to a rate of 90.5% from last week’s level of above 92% which yields little optimism for next week’s supply report, as gasoline production dropped this week despite the higher level of output. When you add to this ongoing bullish revelation from a clearly strained refinery capacity the anxiety of peak hurricane season as to storm systems currently inhabit the Atlantic Basin and obviously the market remains on edge with an upward bias. However, just as last month revealed, at these loftier levels the market becomes much more acutely aware of any sudden softening of demand anticipated or subsequent rapid removal of a supply threat that had temporarily injected fear premium into the price. Whenever a storm that temporarily threatened oil infrastructure in the Gulf either changes course or dissipates naturally without consequence, the exposure of the artificial support becomes instantaneous and then massive selling ensues often resulting in a price collapse! Other then a temporary shutdown reported in a Valero Texas refinery due to a power outage in the Port Arthur area, it looks like hurricane Humberto will pass without any significant damage to oil and gas infrastructure.

 W. S. I Weather 6-10Day Outlook

Late summer warmth is expected to redevelop over most of the eastern two-thirds of the country next week. In response, above and much normal temperatures are forecast over most of the central and eastern U.S. for the balance of the next week and 6-10 day forecast periods. The exception occurs over the southeastern U.S. and Florida, where anomalies are expected to average closer to seasonable levels for the balance of both periods. The warmest temperatures and the most persistent warmth are anticipated over the Midwest and central U.S. Widespread highs in the 70s and 80s are expected to become the rule for these regions next week. Highs near 90 degrees are possible on the warmest days. The best chance for 90 degree warmth still exists during the next Tuesday through Thursday time period, and the regions most likely to see the 90 degree threshold are the lower Midwest and the Ohio and Tennessee Valleys (STL, CVG, BNA, and LIT). While above and much above normal temperatures are forecast on individual days in the Northeast and Mid-Atlantic, the most persistent warmth is still expected to remain west of the

Appalachian Mountains. Easterly winds off the Atlantic Ocean are forecast to remain too persistent to allow for sustainable warm weather to build along the Eastern Seaboard. If off-shore winds were to become more persistent, the Northeast and Mid-Atlantic could trend much warmer than currently forecast. Above and much above normal temperatures are also forecast over Texas on the warmest days next week. Daytime highs in the 80s and low 90s are anticipated in the warmest locations. Meanwhile,cooler than normal temperatures are expected to overspread most of the western third of the nation next week. In response, near and below normal temperatures are forecast over most of the western third of the country for the balance of the next week and 6-10 day forecast periods. The coolest readings are anticipated along the West Coast, where widespread highs in the 60s and 70s are expected to be the rule next week. Interior regions of California and the Pacific Northwest are only forecast to see highs in the 70s and 80s. Even the Southwest is expected to see cooler readings arrive next week. While temperatures are still expected to remain on the warmer side of normal, highs in the 90s to near 100s degrees are anticipate in the Southwest most of next week.

Conclusion

Natural gas has recently retreated from the minor psychological $6.50 level following today’s sharp and formidable decline of $.40, following one of the most rapid three day price escalations in the past several months. Although we anticipate some price consolidation, under the current conditions enhanced volatility is to be expected and the market near term should feel further downward pressure created by today’s momentum whereby rejection from minor resistance above at $6.10 could easily send values back to test minor support at $5.92 and then if broken more critical support at $5.80. Only a sudden rebound resulting in a close back above $6.10 with in the next 2-3 sessions could project the market back to challenge the recent resistance level at the highs which at this point would need more than technical merits alone in our opinion to justify. This makes reliance upon tropical storm Ingrid strengthening further and adopting a path that targets the Gulf more directly, imperative for the rally to continue which at this point seems to be a long shot according to the recent weather forecast. Because of this we feel the more likely scenario is for prices to continue the short-term correction that began today.

Concerning the petroleum complex, this week’s price activity confirmed our last report as prices clearly reached an exceeded our price target at the $78 benchmark and actually managed to edge its way up to last week’s maximum upside target of the $80 benchmark making history This also proved perception that it seemed traders were determined to find another bullish flag to waive in order to justify reaching this well-publicized mile marker. Now the market will need strong evidence to further justify holding such a level, and yet the Bears will obviously remain under strong anxiety as the refinery capacity continues to look vulnerable with gasoline output labored at best. However, perceptions can rapidly change, and it is our opinion that if tropical storm Ingrid turns out to be another no-show as to threatening the Gulf, it may just be enough threat removal to give profit-taking a chance whereby petroleum values could quickly find themselves testing support at $77.50,and if there is any or even a minor return of refinery capacity along with a hint of a return towards normalcy in product output, and a deeper correction down to the $75 benchmark could easily materialize without making a dent in the long-term up-trend! We tend to lean in this direction, especially in consideration that existing supply demand dynamics have not changed much from the previous week except by the one-week inventory numbers which the bullish affect has been somewhat mitigated in our opinion by the OPEC decision to increase production by 500,000 barrels, and then when you add the expectancy of the storm fear premium to deflate soon as the threat failed to materialize, then you see why sustaining the recent highs should be difficult to justify. There is also the technical considerations which we find now crude oil approaching short-term fatigue as the market has clearly reached overbought status, and yet one cannot discount the potential eruption of a short-term infusion of speculative buying from commodity and hedge funds purely on technical merit should the market reach and surpass a level above $81.50 in our opinion, that would probably produce a short-term blow-off top somewhere between $82- $83.50 that would be short-lived as the current fundamentals do not justify this level of value in our view. We also do not expect the ongoing economic data that will be continuously spewing from the guts of the US housing crunch as the spread of this subprime mortgage meltdown continues to infect more mainstream mortgage entities with higher credit credentials as well as other systemic members of the financial structure which will no doubt take its toll on Wall Street. Last week’s employment figures were clear evidence that the consumer is definitely feeling the affects of crisis to his mainstay, the roof over his head losing value by the month! This   could easily render selling as the more attractive and prudent play for oil traders as it would portend another recession warning and subsequent fear of softening demand for resources across the board. Don’t forget as we stated in last week’s conclusion the market can easily correct first on its own determination and sometimes in clear defiance of current logic only to find a fitting headline of justification if it needs to, after-the-fact.

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

September 13, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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