Consensus Report: October 05, 2006

Petroleum Continues Rebound from Support, while Natural Gas Attempts to Price in a Pre-Winter Low.

Natural Gas and Oil

Technical Outlook: last week we said looking ahead that natural gas was entering grossly oversold territory whereby we see the window for taking further profits from the short side rapidly dissolving. We also said to expect a near-term challenge for the new spot November futures to be first at the $5.25 benchmark, with further selling possible, however on rebound to 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. The market did perform according to our outlook as the low came in at $5.27 before short covering and profit taking quickly reversed values and carried prices significantly higher, hitting buy stops resulting in a break-out thru resistance and confirming our conclusion from last week’s forecast that once the low was placed that we expected the next significant price move to be to the upside of between $.80-$1.0. Looking ahead the technical picture has recently become more constructive with bullish overtones beginning to appear as stochastics, relative strength, the linear oscillator, the MACD, and the parabolic are all in a more positive formation suggesting higher values ahead. We see the next level of resistance likely to be tested above at $6.40 -- $6.65 basis spot, while we expect December futures to soon approach resistance between $8.10-$8.40.

Fundamental Supply Update

Today the EIA reported a net injection of 73bcfs which was slightly below both previous estimates by DowJones and Bloomberg of 74 and 76 bcfs respectively. The market continued it’s rebound as today’s slightly lower injection only served as further confirmation of further profit taking as shorts exited their positions after the recent collapse of 6 weeks. Storage now stands at 33274bcfs which is 404 higher than last year at this time and 360 or 12.1% above the five-year average of 2967. With some estimates already coming in again near or above the 70 bcf mark next week due to the production rate and the weather, we are still clearly on track to exceed the expected supply record storage level of comfortably over 3500 bcfs, which is why the market recently declined so sharply. Now that a temporary new low for the year has been placed, the market is continuing to short-cover and advance as, using what I have coined as a behavior trait of “selective focus”, by ignoring the present supply and considers the potential of increased demand ahead. Certainly this perception for changing demand dynamics ahead is not based on storm threat which is all but obsolete this late in the year, but rather more indicative of the potential this winter delivers a much colder reality than some claimed earlier. That is exactly why last week we warned 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 continues to reveal how the market will be very sensitive to any perceived changes in the demand requirements and thus very vulnerable to further bullish reaction should a colder than normal winter emerge, pushing overzealous sellers out. 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 combined with the bearishness of those claiming to know that a warmer than normal winter is already on the horizon. We believe as we head into next week as the winter months of December and January held above the key $7.0 benchmark overall, that on absolute price terms we may have established a pivotal low this week. Already a substantial price move to the upside has taken place that has confirmed last week’s report almost exactly as values have already increased by the margin parameters that we predicted of $.80-$1.00 from the lows. We continue to 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. However, recent price activity suggests that traders did exactly that by pricing in an early determination that this winter would already be warmer than normal, and now this week you're seeing a rebound from the lows indicating a nuance of doubt concerning this conclusion is entering the market.

Concerning crude oil, prices recently declined to a new low just under our target of $58 per barrel before sharply rebounding earlier this week back above key support at the $60 benchmark on today's news of the first OPEC cut in production in more than two years. This small rebound is still an example of swimming upstream against the strong undercurrents that we mentioned last week of a stagnating impasse between Iran and the UN over their nuclear challenge, the implications of a pending recession potentially impacting the US in the first quarter, and so far, despite some renewed violence in Nigeria relative quiet overseas concerning threats to any major producers or supply. This of course being further complemented by the close of this years driving season while the existing supply of both petroleum products here in the US reach well above historical supply levels. After this week's EIA report whereby crude oil rose a surprising 3.3 million barrels leaving 328.1 million barrels and well above the average range, gasoline inventories rose by 1.2 million barrels and also remain above the upper end of the range while distillate fuel inventories inched up by 0.2 million barrels and yet enjoy the highest premium over historical averages, hardly revealing any upward pressure on prices. This week also revealed a noticeable reduction in refinery operating capacity as some facilities embark on maintenance schedules and thus gasoline production dropped significantly last week averaging only 8.9 million barrels per day while distillate fuel production fell slightly. Despite the fact that gasoline demand remains robust at a 3.9% elevation over the same period last year it was really a nonfactor considering that actual supplies remain about 10% above last year while distillate's enjoy an 18% advantage. However the move by OPEC, although certainly expected by many, prove to be more than enough impetus to confirm the recent short covering rally that began earlier in the week from the sub-$58 and key support level. Today's close at $60.03 per barrel after a gain of $.62, still reflected a substantial retreat from earlier highs as the backdrop of bearishness described earlier could certainly end up diluting OPEC's temporary perception of control over price direction. Serious concern over this dilemma were further addressed by the indication that an emergency meeting on October 18-19 may be necessary to discuss further cuts according to the Algerian Press Service. Otherwise the cartel is otherwise scheduled to meet December 14, and while the output reduction of 3% or one million barrels per day has been set a start date is yet to be given. And as expected the largest single reduction of 300,000 barrels a day will come from Saudi Arabia who plans to reduce their total production to 9.1 million barrels.

W. S. I Weather 6-10 Day Outlook

Notable changes are in store for most of the eastern twothirds of the country next week as the late summer warmth forecast to redevelop over the central and eastern U.S. early next week is expected to be replaced by more winter-like conditions next weekend. In response, highs in the 60s and 70s over the north-central and northeastern U.S. to start next week are expected to fall back into the 40s and 50s by end of next weekend. Meanwhile, highs in the 70s and 80s over the Texas and the southeastern U.S. are forecast to fall back into the 60s and 70s. The latest European and American operational models even indicate lake-effect snows are possible over portions of the Great Lake states and Upstate New York late next week and next weekend. The coldest weather is expected to arrive over the Midwest and the central U.S. near midweek, and the cold weather is forecast to undergo some moderation as it spreads eastward and southward. In fact, 00z European and American operational models indicate the front will stall along the Gulf Coast and that the cold weather will never reach Florida next week. In response, the strongest signals for cold weather exist over the Midwest and north-central U.S. for the balance of the 6-10 day period. Anomalies are generally expected to average between 4-8 degrees below normal in these regions. Meanwhile, the strongest signals for warm exist in the Northwest next week as warm and dry conditions are forecast to persist most of next week. Widespread highs generally in the 70s and 80s are expected to be the rule for the Northwest. The biggest question in the Northwest surrounds the longevity of the warmth. American models are much faster driving a cold front into the region next weekend. In response, American
models offer a colder solution than the European models. Finally, seasonable temperatures are anticipated over
California and the southwestern U.S. next week as the strongest signals for warm weather exist north of the
region. The strongest signals for cold exist east of the region. In response, widespread highs in the 70s and 80s
are expected to prevail over interior California and the southwestern U.S. for most of next week.

Conclusion

Today the November new spot natural gas contract closed at new weekly highs in short covering has reversed values and appears to have placed a potential seasonal low last week at $5.27 with follow-through buying this week elevating values by between $.80 and a $1.0 confirming the V-bottom formation we said was expected in our report last week. This has also confirmed our expectations from last week's report that the November futures would not take out the October lows which came within five cents of challenging the $4.0 benchmark. Remember we also said 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, and now it seems price action has confirmed holding both winter contracts above the $7.0 benchmark near-term even before the upcoming seasonal outlooks are updated in early October. Looking ahead, with the approach of some unseasonably colder than normal weather for this time of year, combined with a more constructive tentacle pattern supporting the market we see the near-term bias has shifted to the upside giving us the expectancy of further price advances ahead versus another decline, short-term.

Concerning the crude oil and the petroleum complex, the market is still bearish in our opinion despite the recent rebound from new lows at below $58 basis spot. Certainly the recent announced OPEC production cut somewhat counteracts the overriding bearish shift in the recent perception to underlying fundamentals. However it is our view that OPEC will have little control over price direction in the near-term should further expected economic weakness surface here in the United States. The coming rippling effect of the decline in the housing market, which we feel is still far from reaching bottom, which ultimately threatens to possibly test the strength of the deepest supports within the nation's economy, will easily override in our opinion any temporary halt to the price decline that OPEC may attempt. The strongest potential to counteract this eventuality in our view would have to be a terrorist strike directly impacting oil supplies and or a reigniting of tension between Iran and the US that also directly implicates the interruption to the flow of their vital source of oil to the rest of the world. With these scenarios remaining as big and precarious what ifs, along with the backdrop of ample supplies of both gasoline and distillate petroleum products along with a more bearish technical chart pattern, and we still feel the path of least resistance for crude oil is lower. Look for rebound attempts to keep pricing contained above at $62.50 per barrel to be followed by a likely retest of support at $58, with a break of this support yielding a close under $57.75, then we expect a washout down to $56.25 to quickly follow.

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

October 05, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744