Petroleum Prices Rebound Moderately while Natural Gas Continues its Decline

Consensus Report: September 21, 2006

Petroleum Prices Rebound Moderately while Natural Gas Continues its Decline after Bearish Supply Update and Subdued Weather Outlook

Natural Gas and Oil

Technical Outlook: last week we reported that natural gas was still bearish and that certain technical indicators such as the MACD, relative strength index, linear oscillator, momentum and the parabolic still reveal core weakness plaguing the market. We also said this suggested a challenge to new lows at longer term support at $4.50 -- $4.60. This is exactly what transpired as the recent price collapse continued bringing the current spot month to a new low at $4.59 per million BTU during today's intraday low of the session before short covering brought prices back up to $4.78 on the close. This confirms spot prices falling to a 2 1/2 year low further revealing the extreme bearishness of the current chart pattern. While we acknowledge the extreme oversold condition, the recent decline only further describes the core weakness that plagues the market that we mentioned in last week's report. Looking ahead, several indicators such as the MACD, relative strength, momentum and stochastics, still suggest further weakness ahead leaving room for the spot price to continue the current collapse down to new lows at $4.46 with a possible washout down to $4.25, and a critical support, whereby stronger shortcovering would likely emerge.However, we caution against aggressive short positions from current levels as the recent sharp decline has gone almost unhindered by any buying and this leaves the funds that are accumulating on the sidelines the opportunity to reenter at any time leaving the last short vulnerable to an early death!

Fundamental Supply Update

Today the EIA reported a net injection of 93bcfs which was slightly higher than both previous estimates by DowJones and Bloomberg of 89 and 90 bcfs respectively. The market accelerated its slide as today’s higher injection only served as further confirmation of an environment of diminishing demand against the backdrop of ample supply. Storage now stands above 3100 at I believe the earliest time in the market's recent history, and now totals 3177 bcfs which is 356 higher than last year at this time and 352 or 12.5% above the five-year average of 2825. With some estimates already coming in again near or above the 90 bcf mark next week due to the production rate and the weather, clearly the expected supply buildup leading to a record storage of over 3500 bcfs, which we have predicted for weeks now is keeping negative pressure on values. Now that peak storm season is technically behind us as far as African coast origins which ends in the first week of September, while there still remains a remote chance of a western Carribean born storm between now and November 1st, the storm threat to the Gulf is almost obselete for this year and prices have really deflated as this last legitemate supply obstacle diminishes. That is why we feel values could still break further to lower long-term support numbers based on production and the current weather picture.However, one warning to overreactive bears out there, spot prices are near to longer term production cost now that values have dropped to 2-1/2 yera lows, and the reward for the short side basis current spot pricing does not have much more room to decline from here in our opinion. The key dilemna is how much farther can winter premiums compress in relation to spot. With all spreads now diminished to under a dollar except for the Nov/Dec spread which is now under $1.50, we feel the better part of this decline is now in the past as well. One must still excercise caution when contemplating a long position or going long the spread prematurely when a market experiences such a deep collapse in such a short period of time. Usually its for a reason. Could it be the anticipation of the highest storage attainment in the market's breif history! Buying purely on the assumption that winter spreads typically expand this time of year based on historics, while ignoring the power of the current record supply accumulation can be costly as the sum of over $4.6 billion in estimated losses just incurred by hedge fund Amaranth Advisors so graphicly demonstrated. Now that the market has given up months of premium based on fear and speculation and the artificial inflation of some big players who have now exited their wrongful bets, and actually sent prices possibly beyond the known supply factor and further into the negative range on a preemptive expectation by some that a warm winter is almost inevitable, maybe now putting the cart somewhat ahead of the horse in our opinion. So while we acknowledge that values are still soft and that there may be little impetus for traders to buy right now, we feel current absolute price levels going forward are more likely to consolidate at current levels whereby twosided trade and bottoming action are more likely to transpire from here rather than continuing the sharp declines of recent. Longer term we see after the large concession the market just gave, that prices are more prone to appreciate from current levels rather than sustain lower values over an extended period, especially if the warm weather scenario doesn't materialize early this winter. We still feel after our analysis of current weather forecasts it's too early to make a conclusion on the degree to which this winter will deviate from normal. This could turn out to be a major misjudgment if these assumptions turn out to be incorrect and thus end up yielding a colder than normal winter following a grossly oversold market which would result in a dramatic upward spike that has become an almost normal behavioral trait for Natural Gas.

Concerning crude oil, prices continued there freefall with the expiration of October futures at $60.47 after briefly touching $59.80 at yesterday's intraday low, a first since last November and a reaction to increases in both unleaded and distillates which took precedent over another drop in crude stocks.The breakdown in the price of unleaded gasoline also continued, which up to now has been a complex leader in the up trend, as prices broke $1.50 basis spot, and also a multi-month low. This week’s EIA update gave little support as the larger decline of 2. 8 million barrels for crude stocks leaving 324.9 million barrels was easily overshadowed by another consecutive yet unexpected increase, albeit only by a modest gain of 0.6million barrels in unleaded gasoline leaving them above the upper end of their average range. Distillate fuel inventories only served to further exacerbate the bearish cause with a hefty increase of 4.1 million barrels as they remain well above the upper end of the average range for this time of year even though most of it was experienced in the ultra-low sulfur diesel fuel. Only the implied gasoline demand figures, which remain firm at 9.5million barrels or 3.1% above last year, indicate some strength for pricing over the longer term. Refineries operated at a robust 93.4% of capacity last week as gasoline production increased over the previous week averaging only 9.2 million barrels per day. Today's close in crude oil basis November's debut at spot at $61.59 for a gain of $.85 is a token technical bounce likely fueled by short-covering and profit taking after this year's largest energy decline. With no immediate threat to any key producer overseas as the Middle East has remained somewhat quiet except for the recent colorful verbal exchange in New York at the UN general assembly speeches between the US and Iran concerning the ongoing uranium enrichment dilemma. President Bush didn't win any diplomatic awards as he repeated his usual dictator type rhetoric aimed at the usual suspects, chiefly Iran, Syria, Hezbollah, and all supposed opponents of his idea of democracy, which in lieu of his failing campaign in Iraq seemed to invite only the token attention of those forced to listen because he had the floor. This was further evidenced by the minimal 15 seconds of applause he received at the close of his speech, which was delivered in his usual style of talking down to his subjects like a school teacher scolding a less than obedient class, which hardly evokes the cooperative response from the world's leaders, much less any respect. Maybe that is why Venezuelan President Hugo Chavez, who in a very flamboyant and colorful, yet disrespectful display of targeting Bush directly, calling him "Diablo" (the Devil) and humorously stating that he can still smell the "sulphur" from when Bush spoke earlier, received an extended 40 seconds of applause from the audience! Had this been anyone other than George Bush, such as almost any previous President, Mr. Chavez may have received no applause and likely condemned for his disrespectful display. Instead the applause is the clearest sign of the World's disagreement with His policies and His dangerous idealism of democracy "enforcement" which is failing so miserably in Iraq. It was painfully clear that the world does not agree with the Bush administrations attempt at nation building, the supposed spread of democratic freedom in the name of His supposed "war on terror", which has been largely wasted on his side-track into Iraq. But more blatantly obvious, did anyone notice at the UN that virtually the entire group of the World's leaders were in agreement with Chavez in his outbursts of criticism for Bush’s policies, and actually laughed at the reference to the President of the United States as the "Devil"?! What a disgraceful, low this administration has reduced the country's image to, evidenced by the response of our peers and unfortunately our future partners in the real "war on terror" against the real enemies in Osama bin Laden, Alqaeda and thousands of others that are avidly multiplying daily in retaliation to our flawed position in Iraq! Further stagnation to the ongoing impasse between Iran and the West has been supported by recent rhetoric proposed by Iranian President Mahmoud, Ahmadinejad indicating the dispute could be resolved through talks and that “we are ready for new conditions". However, he did not specify what those conditions would be and thus further talks between the EU and Iran continue as the deadline for further uranium enrichment has been extended to the first week in October, which continues to indicate they are in control of their destiny. As we stated last week, the current fundamental position with traditionally heavy supplies, a weakening gasoline market, the slowing US economy and a stagnation to the major long-term threat to the world's supply demand balance posed by the US/Iran standoff leaves bullish support, or a bearish short term trend reversal more dependent upon the wildcard of a Gulf storm or a random terrorist act or the reigniting of Middle Eastern tension. Let us now take a closer look at the weather over the next 6-10 days as it poses some price implications especially for natural gas.
W. S. I Weather 6-10 Day Outlook

El Nino-like pattern become established over the country next week Summary Seasonable to seasonable cold temperatures are expected to encompass most of the eastern two-thirds of the country next week. As a result, near and below 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. Meanwhile, near and above normal temperatures are forecast over the western U.S., particularly the Pacific Northwest, as a warming trend is expected to develop along the West Coast. With the exception of a brief moderation near the middle of next week, below and much below normal temperatures are expected to the rule for most of the eastern two-thirds of the country next week. In response, widespread highs only in the 50s and 60s are forecast to become commonplace over the north-central and northeastern U.S. most of next week. Highs generally in the 70s and
80s are anticipated over the south-central and southeastern U.S. The biggest changes next week are anticipated in the Pacific Northwest, where a warm and dry El Nino-like pattern is expected to become established. Just how warm the Northwest becomes will be contingent on the strength of the shore winds. For now, all models indicate daytime highs as warm as the 70s and 80s will rule for the Northwest during latter half next week. In response, above and much above normal temperatures now forecast in the Pacific Northwest for the balance of the next week and 6-10 day forecast periods. Though California and the southwest may trend warmer than currently forecast, the strongest signals for
warm weather exist north and east of the region. As a result, daytime highs generally in the 80s and low 90s are
expected to prevail over interior California and the Southwest most of next week. Highs in the 60s and 70s are forecast in coastal locations

Conclusion

Today natural gas closed after reching new lows across-the-board in all contracts as the conditions we described in last week's conclusion confirmed our forecast as further storm disappointment has plagued the market following the advent of an unusually mild summer that ended abruptly and early taking any above normal demand with it. And now with Florence, Gordon, and now possibly Helene which all passed after posing no threat to the US Gulf, and in some measure actually contributing to demand destruction in the Northeast as cooler winds and temperatures qwelled airconditioning demand, this year's storm season is almost over with no impact on production facilities in the US. As this pattern in the tropics continues to contrast the earlier and well-publicized and overly hyped storm season that initially was proposed by many to possibly rival last year's record turnout, it only serves to further cement the conviction of sellers and discouraged bulls as they flee the market. This has traders now firmly focused on the possible winter ahead and the pending economic slowdown and its possible impact on Natural Gas. We expect a likely retest of key support of $4.60 with a possible further washout to $4.25 before a near term bottom is established. However, with values recently pricing in many of the known negatives and some implications for a warm winter having been already priced in, we see time running out for the short play soon. We anticipate the strong possibility for the recent decline to start consolidating with the expectancy that the December and January premiums will be hard pressed to violate the $6.50, and $7.00 levels respectively.
Concerning the crude oil and the petroleum complex, the market has found little to stop its current bearish track as it has taken out our intermediate price target from last week's conclusion at $62.50 per barrel and is still in line to reach our more critical support at $58 per barrel. Not only is the market in the grips of a very bearish technical pattern, but the recent Philadelphia Fed survey's surprising decline of -.4% for September rings loud of strong evidence of the coming recession that combined with the recent alarming houseing decline is a clear path to a slowing of US economic activity ahead. This spells further weakness ahead for the petroleum complex. Of course if something unexpected were to suddenly indicate that the strained relations between the US and Iran were to suddenly jump into high gear indicating the sanction phase could either be cut short or bypassed altogether and replaced with immediate military action which of course would threaten physical petroleum production and supplies, then under this remote and unlikely scenario the bull market would rapidly return to the major headlines. We see this as an extreme longshot at best as the current and very unpopular administration can hardly afford even proposing another military campaign against a Muslim country. Especially considering our intelligence gathering reliability is suspect and regarded as flawed at best, and thus unreliable when one faces the challenge of approaching an enemy with possible Real Weapons of Mass Destruction. We as Americans must acknowledge the costly and devastating consequences of attacking or invading a nation on flawed intelligence and virtually no plan or strategy for the aftermath as was in the case concerning Iraq. But the most obvious reason why the administration is less likely to press for military action against Iran is the fact that the one precedent this party holds above its thirst for military aggression is it’s insatiable appetite to retain power which is already in jeopardy as the November elections loom large and thus any planned military operation concerning Iran will definitely be postponed till after assessing the results of who retains control of Congress in the next two months.

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

September 21, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744