Commodities Report

Natural Gas & Oil Katrina Changed Course and Changed the Face of a Nation as a Wake of Death and Despair are Left from a Fury that Ignited Energies to Painful New Highs.

Technical Outlook

Last week we stated the market was becoming overbought and showing rally fatigue, but also to expect enhanced volatility and that only a sharp momentum breakout back over $10.00 resulting in the first close above this key bench mark, could continue the bull trend. Last week we also stated that in our opinion, a new storm threat would be needed to ignite such a breakout to test $10.60. Well, this is one of those rare times that like in a few instances in the past, such as in the case of Ivan last year, a fundamental event has impacted trade and interrupted the technical pattern. Currently due to the surprise direct hit of Katrina, the technical picture is now quite bullish with almost all indicators pointing higher, with the MACD and Momentum showing a wide bullish divergence, although many oscillators are overbought. We feel at this point however, the technical signals are only a following indication and will give little guidance as opposed to the fundamentals of assessing the storms affect on production and the amount of supply that will be shuttered and for how long. These are the key components that will be the main factors affecting prices for the next several days in our opinion. These key fundamentals will be discussed in more detail in the next segment.

Fundamental Supply Update

Today the EIA announced a net injection of 58 BCFs that was well below both the Bloomberg and Dow Jones survey estimates of 65 and 63 BCFs, respectively, and it was also 6 bcfs below the closely watched ICAP estimate. It was also below our company call for 62-67 bcfs. It may have had a minor bullish affect, but it quickly took a back seat to traders focus on the degree of damage Katrina did to natural gas’ production infrastructure and pipeline distribution. Storage now stands at 2633 BCFs which is 50 less than last year and 130 above the 5-year average of 2503 BCFs. Keep in mind Katrina slammed into the heart of the oil and gas production areas of the Gulf and shut down eight major refineries and the bulk of U.S. oil and natural gas production. This resulted in a peak production loss of 95.2% of oil and 87.9% of natural gas as of Tuesday. While this has improved a little over the past two days many key areas of infrastructure have reported damage that will curtail production for a period of time that is too early to determine as of yet. The Mississippi Canyon Corridor, which is a pipeline corridor with capacity to pump 800 million cubic feet per day, took a direct hit and the extent of the damage is yet to be determined. Wednesday the key Mars platform was reported as severely damaged by the U.S. Coast Guard. Enterprise Products Partners LP said 8 of its 11 natural gas processing platforms are operational or would be in the next few days, while the other three suffered flooding. They also said the Toca facility would be operational in a few weeks, however on-site inspections were needed to assess the status of the other two plants, Yscoloskey and Venice. El Paso’s Southern gas pipeline reports 550 mmc f/d remains shut in, and further damage assessments will have to wait for floodwaters to recede. El Paso’s 3 pipelines – ANR, Southern Natural Gas, and the Tennessee Gas Pipeline – have reported as much as 3 BCF/d of gas shut in from Katrina, although some shut ins have eased since in daily volumes. What does this all mean? Higher prices. Since Katrina struck early Monday morning natural gas has maintained prices well above the key past record of $10.10 pmbtu and on average well over $11.00 since Monday. We feel as damage reports are released prices will remain in an upward trend until a more definitive improvement in supply recovery emerges, which could be weeks before materializing. Another key issue will be the sediment and pipeline disruption on the sea floor from storm surge and the “sediment shift” which caused supply interruption last year with Ivan. The industry must wait until the ocean calms enough to get divers down safely enough to assess the damage. This is also similar to the indirect delays to resuming production caused by power outages to key distribution facilities from floodwaters. All in all this is an unprecedented production infrastructure nightmare, the likes of which the industry, and thus the country has never experienced before! Initially it looks in many ways to have exceeded the damage inflicted by Ivan a year ago, and when it comes to the city of New Orleans, there is no comparison. Katrina, has dealt a fatal blow to the heart of New Orleans that will be felt for years if not decades to come.

Concerning crude oil, all eight major refineries that were initially reported Tuesday to be shut down, remain down. Only two have even rough restart timetables- Valero Energy Corp’s (VLO) 260,000 barrels a day St. Charles refinery, which says it will be two weeks, and Motiva Enterprise’s 235,000 barrel a day Convent refinery, which could be up within a week. U.S. gasoline prices continue to rise- up over 70 cents in 3 days and driving Crude prices higher along with it. Petroleum Traders Corp, the country’s largest independent fuel wholesaler, says it has been cut off by BP PLC, largely cut off by Marathon Oil Corp due to supply disruptions from the hurricane; and says it’s experiencing huge supply disruptions. Exxon Mobil Corp warns some fuel supply disruptions are inevitable; the company is keeping retail gasoline prices at company-owned stations unchanged. Chevron Corp is restricting supplies to wholesalers from its East coast terminal. Royal Dutch Shell maintains a freeze on prices charged to fuel wholesalers at its terminals in storm-hit areas of Louisiana, Mississippi, Alabama, and Florida. The Energy department has agreed to release 6 million barrels from the SPR to supply needed shortfalls of oil to refineries. Also in the interest of providing some relief to the strained supply situation in gasoline, the EPA waives air pollution regulations that held restrictions on gasoline grades and imports to various parts of the country with reference to summer grade gasoline; the waiver will be in effect through September 15 when the summer rule expires anyway. Further signs of relief came from the news Wednesday that the Plantation Pipeline restored limited service on its fuel line serving the Southeast, and the Colonial Pipeline resumed limited service on its fuel pipeline serving the East Coast. Also, the Louisiana Offshore Oil Port and the Capline Pipeline, two important arteries for moving imported crude oil to refineries inside and beyond the impact zone, also resumed limited service, which may allow refineries that weren’t shut down to maintain runs. Crude oil from the LOOP is being unloaded from tankers then shipped to storage at Clovelly, moving it from there to St. James interconnection with Capline, moving it from St. James into Capline and to ExxonMobil Corp, Baton Rouge Refinery, all at reduced rates. Restart follows restoration of power using generators. Port Fourchon sees no severe flooding, but siltation is a concern and the power is out; this is a key facility needed to support the workers and equipment that will get gulf platforms pumping again. Royal Dutch Shell reports significant damage at its Mars Oil and Gas Platform reporting a collapse of topside structures, and this platform produces the Gulf Coast’s benchmark high sulfur crude – the grade that is most used by refineries but most easily replaced by imports. Royal Dutch Shell also reports damage to Wd-143 offshore pipeline hub, which could delay restoration of production at connecting platforms. New Field Exploration Company says its production platform at Main Pass 138 appears lost in the storm, a facility that was producing 1,500 barrels per day. All things considered, the Oil supply chain has suffered a serious impedance to operational delivery function, the degree to which if sustained much longer, will test supply needs to major gasoline distribution hubs around the country, potentially causing outages and suspending commerce and normal transit as we know it! This extremely critical, yet quite possible situation could obviously advance gasoline wholesale prices way above recent highs of $2.90 to possibly $3.25-3.50 and above, on panic-buying, which would carry Crude values to $75pb and higher along for the ride. This would then put the mid to lower level consumer in a strangle hold that would quickly choke economic growth and put the U.S. suddenly on the verge of a recession phase, a sudden and legitimate concern that economists are already warning the government of!

WSI Energycast 9/5-9/11

Changeable conditions will characterize the weather over most of the central and eastern U.S. for the balance of the 6-10 day forecast period. Though seasonable to seasonably cool temperatures will encompass most of the central U.S. to start the 6-10 day period, most of the Plains and Mississippi Valley will be on the upside of a warming trend late next week. As a result, highs in the 80s will become more widespread during the latter half of next week. Any 90 degrees warmth will mainly be confined to Texas. Any warm weather early next week will be replaced by troughing and cooler weather next weekend. As a result, highs in the 70s in the Northeast will become more commonplace next weekend. The tropics are expected to remain active during the 6-10 day period. In fact tropical depression #13 developed into Tropical storm Lee, briefly Wednesday only to weaken hours later back to a depression but is expected to weaken further and pass east of Bermuda and thus poses no threat to the US coast. Tropical depression #14 has also formed well east of the northern Leeward Islands, and is expected to strengthen into a storm, however it too is expected to turn northward and eventually pass east of Bermuda and thus is not considered a threat to the mainland. But as you would expect there is a system moving westward in the Atlantic, well southwest of the Cape Verde islands that shows strong signs of development, and deserves to be monitored, although is not yet near any important land mass yet.

Conclusion

The fundamental picture remains extremely tense with all eyes focused on damage reports, the production recovery rate, weather and further storm threats, and petroleum values, in that order. The technical outlook is obviously bullish, following the bull breakout ignited from Hurricane Katrina directly unleashing her fury on the critical oil and gas production areas of the Gulf. There has been minor improvement in reducing gas shut in from its peak at about 88% to our last MMS update of 78.6% or 7.86 BCFs per day for a cumulative loss of 42.1 BCFs. With private forecasters monitoring a possible threat to the Gulf or the eastern U.S. by late next week, the market remains nervous with a strong undertone of bullish sentiment sparking more panic buying at the slightest hint of any potential threat to supply. Currently minor resistance is at $12.00 with more significant resistance at $12.50 with a close above this suggesting a strong vertical advance to $13.50 up to $13.80 near term. Look for support at $11.25 and then $10.80 with a fall back below $10.60 signaling a short-term correction due to lost momentum. We feel a shut-in production recovery of below 50% within next week would be needed to promulgate such a move which looks unlikely at this point.

Concerning crude oil, most of the petroleum markets movement is obviously being led by the desparate supply squeeze in gasoline. This past week’s EIA numbers of only 500,000 barrel drop in gasoline inventory to total 194.4 MBs, and still at the bottom end of averages in supply, failed to dampen the fever pitch of buying reflected by the meteoric price high reached this week of $2.90 basis spot! However, with crude yet to close decisively above $70.00 there is some signs that short-term values may have peaked. It is our opinion that the trade and hedge funds have just taken a breather on crude itself, while waiting to see if unleaded values subside and if the refinery situation improves sooner rather than later. For now look for crude to meet minor resistance at $70.00, and more critically at $70.85, with a close above $71.00 signaling a continuation of the bull breakout suggesting a challenge to $75.00, and a very probable target in proportion to recent unleaded values. Should unleaded gas correct with October futures falling back below $2.10, we expect crude to fall back below support at $67.80 for a deeper correction to challenge key support at $66.40. Unleaded is leading the complex and so the refinery recovery rate is critical to the value of the whole complex and thus of paramount importance to the industry, the consumer, and the world, as to crude pricing. Dealing with the existing floodwaters and the resulting power outages will be an integral factor in efforts to restore refinery capacity as well as distribution capability. It is our opinion that it will likely be only a few more sessions, and possibly within next week that the market will determine whether supplies are being restored rapidly enough to prevent a more severe crisis, in which case if they are not, the next dramatic price climb is eminent, led by gasoline. One small consolation to the recent escalation in petroleum values overall, is the old proverbial truism: that “sometimes the only solution to higher prices is higher prices”; in other words if prices keep rising, they will eventually reach a pain threshold that sustained buying can no longer endure, at which point rationing and demand destruction yield a price collapse. The $64 million question is at what price? The recent Crude rally reaching an intraday peak of $68 before Katrina, and without erupting into a stock market crash, or subdued gas consumption, suggest that pain level could be considerably higher.

Speaking of Pain and tolerance, and putting aside the economic outlook for energy prices for a moment; I think its important to pause, reflect, and consider the grief, and suffering, of unexpected and epidemic proportions are fellow Americans are suffering in Louisiana, Mississippi, and Alabama. And unfortunately it will probably get worse before it improves. In today’s world, and especially since 911, we get in a habit of being caught up in our own lives and fears spurred by the news media, focused on terrorism and the unknown enemy, and then suddenly, like a lightening bolt zapping the chair out from under us, Mother Nature deals us a blow that the most wanted of terrorist could not match, either in severity, nor in evoking such emotion of helplessness and despair, that in a strange way, it humanizes us all. But if anything it should impress on all of us that are not in those flood stricken areas of the country, how fortunate we are to have escaped the grief, how small our problems are while our neighbors in the Gulf face death from hunger, dehydration, crime, disease, drowning and you name it, and at the least should move us in some way to help and contribute to the recovery in any way we can.

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

September 1, 2005

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

September 1, 2005

www.strategicinvestors.us

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