Petroleum Prices are Range Bound while Natural Gas Continues its Decline

Consensus Report: September 28, 2006

Petroleum Prices are Range Bound while Natural Gas Continues its Decline after Supply Update and Subdued Weather.

Natural Gas and Oil

Technical Outlook: last week we said looking ahead that natural gas was still bearish and that certain technical indicators such as the MACD, relative strength index, momentum and stochastics still reveal core weakness plaguing the market and suggest further weakness ahead likely to bring the market down further to test key support at $4.25. This price level not only was hit but then exceeded with the October spot futures settling below this level at $4.20 after rebounding from an intraday low at $4.05 and the lowest spot price since November of 2002! Today's debut of the new spot November contract only provided more of the same as the Bulls simply remain timid and on the sidelines as prices were weak throughout the session culminating in another decline of $.27 to settle at $5.39 per million BTUs as the negative pattern continues. Looking ahead, while the market is still in the grips of a bearish technical pattern which is strongly influenced by the fundamental picture and benign weather which we will discuss in more detail in the next section, the market is now entering grossly oversold territory whereby we see the window for taking further profits from the short side rapidly dissolving. We expect a near-term challenge for the new spot November futures to be first at the $5.25 benchmark quickly followed by $4.92 and then possibly further selling down to the $4.80 level before value buyers step in with more volume. Look for some resistance and short reentry above at $5.50 with more critical rejection created if the $5.75 -- $5.80 level is attained.

Fundamental Supply Update

Today the EIA reported a net injection of 77bcfs which was slightly below both previous estimates by DowJones and Bloomberg of 83 and 85 bcfs respectively. The market continued it’s slide as today’s injection only served as further confirmation of an environment of diminishing demand against the backdrop of ample supply. Storage now stands at 3254bcfs which is 377 higher than last year at this time and 354 or 12.2% above the five-year average of 2900. With some estimates already coming in again near or above the 80 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 the storm season is near its end as far as African coast origins, while there still remains a remote chance of a western Caribbean storm forming between now and November 1st, the storm threat to the Gulf is almost obsolete for this year and prices have really deflated as this last legitimate 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, we continue to warn against getting overly aggressive on the short side of the market after one of the largest and steepest declines in many years has just transpired bringing the spot October futures to a four-year low on expiration. This makes the Outlook as we approach the winter season with the market very sensitive to any perceived changes in the demand requirements and thus very vulnerable to a sharp bullish reversal should a colder than normal winter emerge taking recent overzealous sellers by surprise. As we have stated in the past week, we believe some of the recent selling has been somewhat exaggerated by the over leveraged position that was forced to unwind from Amaranth Advisors and other commodity funds that got caught long the spread in the winter months as the false alarm created by tropical storm Ernesto triggered a price collapse as softening demand only served to accentuate the pending record supply. This anomaly combined with the bearishness of those claiming to know that a warmer than normal winter is already on the horizon has reduced values and compressed winter spreads to levels exceeded by the expectations of many. We believe as we head into next week as the winter months of December and January are on the verge of both approaching and breaking below the key $7.0 benchmark, that on absolute price terms we could be near a pivotal low whereby the next substantial price move could very well be to the upside as the market tries to price in the approaching demand for winter needs. One strong indication for this opinion is not only the amount to which prices have already declined to recent weeks, but also the fact that the December January spread has diminished to under $.50 leaving little room for further price compression. So while we acknowledge that values are still soft and that there may be little impetus for traders to buy right now, we still feel current absolute price levels going forward are more likely to consolidate at current levels whereby two-sided trade and bottoming action are more likely to transpire, rather than continuing the sharp declines of recent. Also given that the time before winter begins is rapidly diminishing and considering 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 recently declined to a new low of $59.52 per barrel before sharply rebounding earlier this week back above key support at the $62 benchmark and earlier today actually tested a high of $64 before heavy shorts entered causing an abrupt rejection from this level sending prices into a negative settlement at $62.76 and the loss of $.20. With little new headlines emerging overseas concerning any serious threat to supply amongst the common and most prevalent producers such as Nigeria, Iraq, and Iran, traders have been forced to fall back on the basic fundamentals of supply which in the United States appear to be more than adequate, especially after the unexpected increase of 6.3 million barrels of unleaded gasoline reported by the EIA this week along with the approach of a possible recession facing the world's largest petroleum consumer. This along with the stagnation of the Iran US nuclear challenge which has been continuously delayed and is now awaiting the deadline imposed by EU in October, has failed to reignite the emotions of traders over the past week. Recently it seems clear they have been distracted by the prospect of OPEC possibly cutting production at the next meeting in December due to the severity of the recent price decline which no doubt made many members of the cartel uncomfortable. However we see OPEC, at least for now, taking a backseat to the specter of a possible recession facing the United States, as the rippling effect of the crashing housing market which we warned about weeks ago is yet to be fully ascertained, and judging from recent media commentary is being largely overlooked and often even minimized as to its potential impact on the economy. With the driving season clearly over and gasoline supplies this week reaching a level of 9% above last year while distillates are at a premium of 15% over the previous year, we feel the products have clearly put downward pressure on petroleum and will continue to do so until something more significant takes place in our opinion. While the Iranian nuclear standoff still threatens oil prices long-term, and even currently is a factor as on Wednesday Iranian and European diplomats met in Berlin, yet by failing to reach an agreement provided little for traders to sink their teeth into. In fact, it is losing its impact over prices as traders begin to realize the process between current negotiations and then the possible execution of sanctions, which after that may or may not lead to a military option which could ultimately threaten oil supply, involves a lot of time and several what ifs to materialize. The stagnation effect becomes further manifest by the leader of Iran who continues to say they will not negotiate their right to nuclear power and yet profess optimism towards a peaceful settlement by proposing further talks without any detailed conditions of compromise. While this tactic has only served to draw severe criticism from the Bush administration it has been quite successful in satisfying Iran's desire to stall negotiations while continuing uranium enrichment as the US has requested an immediate halt to such operations in consideration for an incentive package that was proposed back in July.

W. S. I Weather 6-10 Day Outlook

Temperatures more indicative of late summer are expected to overspread most of the eastern two-thirds of the country next week. As a result, above and much above normal temperatures are now forecast over most of the central and eastern U.S. for the balance of next week and 6-10 day forecast periods. The exception occurs over the north-central and northeastern U.S. near the U.S./Canadian border, where a cold front is expected to bring seasonable to seasonably cool temperatures late next week. Even though the medium range models display notable technical difference regarding strength of the cold front and the magnitude of the cold air on the back side of the front, European and American models both indicate the strongest signals for warm next week exist south and east of Chicago. In response, anomalies between 2-6 degrees above normal are forecast over most locations south and east of Chicago for the balance of the next week 6-10 day period. Widespread highs in the 70s and 80s and generally expected to be the rule for most of these locations. Highs as warm as the low 90s are even possible over portions of Texas and the southcentral U.S. on the warmest days. Meanwhile, while seasonably cool temperatures are forecast over California and seasonably warm anomalies are anticipated over the southwestern U.S., any prolonged periods of unseasonably warm or cold weather are not expected over the western U.S. next week. The biggest question in the West surrounds how much, if any, warm weather builds into the Northwest late next week. At this time, daytime highs generally in the 60s and 70s are forecast in the Northwest and Intermountain West next week. Highs generally in the 70s and 80s are expected to be the rule for interior California and the Southwest though portions of the Desert Southwest may see highs as warm as the low 90s on the warmest days.

Conclusion

Today the November new spot natural gas contract closed at new lows as the conditions we described in last week's conclusion confirmed our forecast as little has changed this week concerning heavy supply amidst the backdrop of soft demand. Premiums in the winter months continue to erode with the December futures falling to a new yearly low and testing the $7.0 benchmark before settling just pennies above it at today's close. With the January settling not far above it with the spread of now less than $.50 we feel there may not be much more downside to this move before traders begin bracing themselves for winter demand, whatever that may be. Concerning price targets we still see some inherent weakness as little demand increase is suggested from the current weather forecast and there's still room for November values to fall back towards the low levels that October futures reached before expiration. While we do not expect the November futures to take out the October lows which came within five cents of challenging the $4.0 benchmark, we do see a potential near-term to take out the $5.0 benchmark whereby we see stronger support possibly from longer-term value buyers emerging below this level at $4.92 scaled-down to $4.80 whereby we see the potential for the formation of a V-bottom and a strategic low. With regards to the winter premiums we feel the December futures will sustain above $6.50 with January likely to hold above the $7.0 benchmark until a more definitive Outlook from weather forecasters is revealed in their upcoming seasonal outlooks which are usually released in early October. Upon confirmation of the potential formation and achievement of what could be a seasonal low, we anticipate price values will advance abruptly adding no less than $.80 to a $1.0 to values once the low is in place.

Concerning the crude oil and the petroleum complex, the market is still quite bearish in our opinion despite the recent rebound from new lows at $59.52 basis spot culminating in today's intraday high at $64, and based on its current bearish track 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 serves as strong evidence of a possible coming recession that we mentioned in last week's report. Despite the small bounce reported in August home sales we still feel the bottom of the housing crash is yet to be experienced nor has the magnitude of its negative rippling effects throughout the economy been fully assessed or anticipated. Unfortunately as is the case with most major detrimental economic events, they usually take the general public by surprise and become a shocking event that debilitates many. History has recently made this painfully clear both in the fallout from two major cataclysmic events: first in the burst from the Tech bubble in the collapse of all the “Dotcoms” in 2000 and then second and shortly thereafter in the recession immediately following 911. I am afraid the fallout from the coming real estate collapse could be equally devastating if not longer-lasting and more far-reaching as it implicates the main staple of most households being the home itself and not just some stock investment! The pending threat signified by recent an ongoing economic data certainly has influenced the recent breakdown in the petroleum complex which has been also combined with the collapse in the gasoline market. While the timing of such has certainly provided some relief both to consumers and more critically as a potential Band-Aid for the bleeding reputation of the administration, which has literally suffered assault from almost every sector, from Katrina to Iraq and everything in between just before critical elections this November. However the temporary $.50 to $.60 relief at the gas pump may not be enough to quiet the anger most Americans feel over the tremendous loss of life, waste of money in over $300 billion and climbing at the rate of $11 million per hour in the Iraq war with nothing positive to show for it, and only the prospect that things will only worsen if we stay the course. And now to further exacerbate and reveal the negative results of our failing campaign in Iraq, has been the well-publicized recently leaked, 16 agency intelligence report that indicates the Iraq war is breeding anti-Western “Jihadists” at an alarming rate making America and the World, clearly less secure. This is a direct slap in the face of the biggest claim that the Bush administration and the Republican Party have made to justify voting for their continuance of control over Congress,” that they are stronger on security and fighting the war on terror”. Well that claim quite frankly and to be blunt has become laughable! In fact recent polls whereby the majority of Americans and in most cases over 60% have stated the Iraq war was a mistake and clearly not worth the risks, but more importantly and more telling for the administration, that they do not agree with the way the occupation following the war has been conducted. Furthermore to claim that stretching our forces, our money and morale to the limits, by invading a country in clear retaliation for 911 when it was more than clear that Iraq and Saddam Hussein had nothing to do with its execution, is the furthest proof of any competence or strength concerning security or furthering our efforts against terrorism. Gross misplacement of resources making us more vulnerable to an enemy that was already known to be elusive, determined, and resilient doesn't display strength, but ignorance at this level rather reveals weakness to the enemy as well as mistrust and disrespect from our allies, which has clearly been earned and was never more evident than on the world stage recently at the meeting of the last UN General assembly in New York. So unless the rising threat of terrorism reveals itself through another attack on Western interests and more importantly Oil infrastructure, which unfortunately is a pending situation and could be executed at any time, until then, we still feel the path of least resistance for petroleum prices is lower for the short term. With further economic weakness expected here in the US, the ongoing stagnation to the Iran/ US nuclear challenge, and the more than adequate supply levels in both products following peak driving season, and we still expect the $58 price level to be challenged soon. Only a sudden fundamental shift or dramatic move in a production cut by OPEC, or combination thereof, could reverse momentum back to the upside whereby crude prices challenge the $65 benchmark and exceed this level for any sustained period of time. As for the Administration’s hunger for war, 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 28, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744