Energies Pullback on SPR Release and IEA Supply Contributions that Temporarily Address Immediate Shortages as Some Production is Restored, Yet the Long Term Damage Dilemma Remains  Natural Gas and Oil.

Technical Outlook: Last week we stated the technical picture served to be only a following indicator, and that trading was being dominated by the fundamentals of the damage assessments and reports of production recovery to the Gulf of Mexico. This past week, now that the storm has passed and a lot of the damage is known, the technical influence has come back into the picture somewhat, however is still subdued in our opinion. For Natural Gas, the technical picture is quite overbought with several indicators still pointing to lower prices ahead. Today the intraday probe to the $10.90 low, confirmed our conclusion from last week where we called for support at $11.25 and then $10.80. Based on momentum, the market needs to earn a close back above the $11.65 level near term to resume the uptrend, otherwise we expect the corrective phase to continue and extend the decline to test the key $10.80 level, and possibly within next week. A close back over $11.65 would precede a rapid test of minor resistance at $12.00, while there is an outside chance that the correction takes values below $10.80 on close, sending the market into a deeper drop to test $10.10 and then $9.75 due to the potential for an island reversal to the downside, which is a very negative chart formation. This scenario seems remote for now, however, in our opinion.

Fundamental Supply Update

Today the EIA reported an injection of 36 bcfs that was well above both preliminary survey estimates by both Bloomberg and DowJones of 29 bcfs as well as 6 bcfs above the closely watched ICAP estimate, yet it was right in line with our company estimate of 32-37 bcfs. The market quickly reacted to the news along with the slightly bearish figures also released by the EIA for petroleum due to the holiday delay, and fell to the day’s low of $10.90 before short-covering and range buyers stemmed the decline. Storage now stands at 2669 bcfs which is 95 bcfs below last year and yet coincidently the same 95 bcfs above the 5 year average of 2574 bcfs. Production needs to maintain at least 66.4 bcfs per week over the remaining 8 weeks to achieve the 3200 bcf level prior to winter by November first week. Attaining this will be largely dependant upon the rate at which flood damaged production is recovered and becomes fully functional again. The news this week that the two Dynegy facilities, Venice and Yscoskey Gas processing plants that are responsible for processing a combined 3.15bcfs per day, could remain off-line for 3-6 months, while a third plant, the Toca 1.1bcf/pd , by EPD may be down for a few weeks was certainly negative news to the supply recovery cause and could obviously be the swing vote. This situation will be key and will be closely monitored by the industry and traders alike as these progress “estimates” are just that, and are subject to change. One must expect that the down time could dramatically improve considering the tremendous pressure to get production back on line due to various reasons not to mention the favored status to announcements of improvements to the recovery rate versus deterioration. Current gas production shut-in showed minor improvement today from yesterday according to the MMS update of 4.02 bcf/pd which has reached a cumulative production loss of over 71.664bcfs as of Wednesday. While prices suffered a strong decline yesterday, that in part was in sympathy with the continued decline in petroleum values due to the emergency gasoline supplies pledged from overseas, that influence rapidly lost impact with the realization that there will be no relief Natural gas supply from abroad. This fact returned assessing value judgement to the tug-of-war between subdued weather demand in a shoulder month and critical pre-winter production impairment from Katrina. With weather already in a delicate balance between milder temperatures in heavy consumption areas and the peak period of a very active storm season, the market is in a phase of enhanced volatility at both ends, with the bears clearly on the defensive, and declines determined more by profit-taking versus new shorts. As we mentioned last week it would take a recovery of shut-in production to be returned to under 50% within this week to facilitate a deeper correction to test possibly $10.80, and although we didn’t expect this recovery so quickly, prices came within 10 cents of our target. Looking ahead, as today’s sharp price rebound testified, any stall or delay to this established rapid recovery, will quickly reignite the uptrend. Concerning Crude Oil, the reversal to the initial threat of a strike from refinery workers at Frances’ Total company, along with the EIAs’ extension of the release of reserves beyond the 30 day period and the IEA release of 2mb/pd of which 1.289m will be Crude and 683,000 will be products, of which 369,000 will be gasoline, helped the sharp drop in Oil that covered almost $3.00 over the past 2 days, yet selling seemed to dry up temporarily with today’s close being the first positive one of the week. The lows of the week and of the last 15 sessions, were seen today also on the EIA update revealing a smaller draw on Crude stocks than anticipated as well as on gasoline, that resulted in a $63.10 print before the market short-covered. The actual draw was 6.4mbs when 10.0mbs was expected leaving 315mbs total and still well above averages, while gasoline inventory dropped 4.3mbs, also below estimates yet leaving supply well below the bottom end of averages, and finally distillates declined only 0.8 mbs and still well above traditional supply averages. The update from the Coast Guard that 52 platforms were lost and 58 damaged may have taken some of the steam out of the selling in today’s session, along with news that the Chalmette refinery, co-owned by Venezuela and Exxon, and one of four major refineries that remain shut down, may not resume normal production until possibly December, threatens to reverse the brief selling spree of this week on news of relief supply from overseas. The latest MMS update showed a slight loss in production of Crude from the previous day to 901,726b/pd from 860,586 b/pd and a cumulative total of 13.607mbs as of Wednesday. Looking ahead, power outages, the flood damage and toxic danger of contaminated standing waters, along with the tedious process of inspecting the miles of undersea pipelines that connect offshore platforms to delivery terminals, threatens to slow the more rapid and stream-lined return of production of this past week. This seems to have contributed to the rebound from lows to a positive close to 2 of the 3 petroleum markets including Crude today. Lets now check on a brief update from WSI as to weather near term

WSI Weather Update 9-12 to 9-18

Summary The more summer-like heat and humidity encompassing the Midwest, Ohio Valley, and Northeast will come to an end during the 6-10 day period as a cooler and drier air masses settles into the these regions late next week. Daytime highs in the 80s to near 90 degrees early next week will fall back to more seasonable 70s and 80- degree readings next weekend. Much above normal temperatures are still forecast for the balance of the 6-10 day period in the Ohio Valley and Northeast, mainly based on the fact that anomalies will average well above normal early in the period. The focus of the warm weather will begin to shift to the southern tier of the country next weekend as the sub-tropical ridge becomes centered over the south-central and southeastern U.S. Highs in the 80s and low 90s will become more widespread in the Southeast and Florida late next week. The South-Central U.S. will experience the most persistent warmth next week as daytime highs are forecast to climb well into the 90s each day. In response to the strong sub-tropical ridging, much above normal temperatures will encompass most of the eastern U.S. and lower Mississippi Valley for the balance of the 6-10 day period. Anomalies will average between 4-7 degrees above normal. Finally, a general moderation from the cool weather will develop over the western U.S. during the 6-10 day period. Highs in 80s and 90s will become more widespread over California and the Southwest late next week. The Intermountain West will see highs climb into the 70s and 80s. The exception will occur in the Northwest, where temperatures are only expected to climb into the 60s and 70s most of next week. Anomalies will average between 1-3 degrees below normal for the balance of the 6-10 day period.

Conclusion

Natural Gas has entered a technically overbought condition that has begun to correct itself confirmed by today’s intraday low of $10.90, but was pre-empted by short term bearish fundamental factors of milder weather ahead, tropical storm Ophelia’s northerly path, today’s higher than expected EIA injection, and most importantly the recovery of shuttered production to under 50% to just over 40% from only last week. While technical concerns have returned somewhat to a minor role in trade influence, in our opinion, it will be more confined to reading momentum and fund allocation near support and resistance levels that are now being more visibly apparent, yet are still being chiefly determined by the aforementioned fundamentals. We see a price range being established with a clear resistance now at or above $12.00, with spot so far unable to close above this, while an attempt to establish support was made today at $10.90 to $11.00 pmbtu after the sharp rebound of 40 cents from this low. Look for technicians to start figuring buy and sell preferences around these two price levels. Only a sharp drop and break of this $10.90 low would cause tech traders to reconsider the range and this is certainly possible, if a sudden improvement to production recovery is declared such as from one of Dynegy’s processing plants, or the Toca facility coming back on line. In order to rally back over $12.00 initially, much less sustain this level with a close, would take a strong negative announcement of suspended loss to production for an undetermined period of time, or more realistically in our opinion, a new threat to the Gulf from another storm. God help us all if the latter takes place! Katrina proved unfortunately how vulnerable we really are, to something no one can control, and that is Mother Nature, and the immense destructive power of these hurricanes. Looking ahead, we see the potential for a further decline to test $10.80 and then the key $10.10 level if the current loss to upward momentum cannot attain a close to $11.65 soon. Concerning Crude Oil, a similar price range is being attempted with resistance scaled all the way up to $70, with the market yet to claim a close above this barrier basis spot, with support suggested at $63.10 today. The direction of Crude is vitally tied to the perception on the Gasoline shortage that was temporarily relieved by the announced supplies being sent from overseas by the IEA, however this positive news was countered by the update of the four major refineries that remain shut down for storm related damage. Just as we forecast last week, that if the Gasoline declined back under support at $2.10, the Crude would pullback to test key support at $66.40, which not only transpired but breaking this level yesterday, brought Oil back to below pre-Katrina levels at $64.49 on today’s close. Remember, even after today’s sharp inventory declines, Crude stocks are still way above average and the same for distillates, with Gasoline being the only member of the group in real shortage. This will continue to be the main issue, and it’s immediate and critical impact on both the consumer and the industrial transport sector for goods and services makes it a vital issue to the economic progress of the nation and thus the world. So the progress of these refineries is critical to the entire energy complex right now.

The Exxon Chalmette plant is one of four refineries that have the oil industry concerned because there is no solid information of when they will return and vague reports that the term could be months. These plants are the four that were hit by the most violent winds and storm surge caused by Hurricane Katrina, which hit the Louisiana and Mississippi coasts on August 29.The three other refineries that oil trading sources say may be out for weeks and possibly months are the 325,000-bpd Chevron refinery in Pascagoula, Mississippi, the 247,000-bpd ConocoPhillips refinery in Belle Chasse, Louisiana, and the 120,000-bpd Murphy Oil Corp. refinery in Meraux, Louisiana. The EIA said on Wednesday that 900,000 bpd production on the Gulf Coast will still be out by the end of September under a “medium recovery” scenario. The Louisiana Offshore Oil Port, said it is operating at 75% of capacity and expects to be back to normal, full operations next week, as soon as Port Fourchon becomes operational. The deepwater facility can handle almost a million barrels of crude oil a day, making it the nation's biggest crude oil import terminal and a key piece of the infrastructure needed to receive supplies being released to the U.S. market from European and Japanese emergency reserves. Any sudden announcement of unexpected progress to one of these four major refineries could trigger a sharp sell-off to Gasoline and thus Crude will follow, and this looks more likely to come from power being restored to the ConnocoPhillips refinery at Belle Chasse due to the efforts of New Orleans based Entergy Corp. Should a positive declaration come soon, say within the next few days, Crude values are likely to fall back to test new lows at $62.90 and then $62.25, but conversely if progress does not resume quickly to complement the factored in supplies expected from overseas, values will rapidly ascend back up to test the key $65.90-$66.25 resistance band, in our opinion. The immediate gasoline consumption needs of the number one user, the U.S., and the long term damage implications to our main production facilities in the Gulf currently indicated, will gradually outweigh the expected demand destruction from the lost commerce and normal activity from the damaged tri-state area along with Katrina’s overall slowing affect on the nation’s GDP of an estimated ½ to1%. This will also fail to quench the expected forced energy needs that are pending this winter, the strongest demand period for petroleum. The higher than average supply of distillates only serves to be a minor counterweight to a potential shortfall in Natural Gas supply for the majority of homes this winter depending on how rapidly the existing 40% production loss is restored.

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

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

September 15, 2005

www.strategicinvestors.us

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