Consensus Report: October 12, 2006

Petroleum Hits New Lows on Ample Supply, while Natural Gas Falls back, Despite Colder Outlook short term.

Natural Gas and Oil

Technical Outlook: last week we said looking ahead that natural gas was more constructive with bullish overtones beginning to appear suggesting higher values ahead, and that we expected the next level of resistance likely to be tested above at $6.40 -- $6.65 basis spot, which was hit and exceeded with November spot reaching $6.80 before falling back sharply. We also said we expected December futures to soon approach resistance between $8.10-$8.40, which transpired as December just exceeded $8.20 before falling back. Looking ahead, especially after such a sharp retreat from new weekly highs whereby the spot month has given up over $.70 in the past two sessions and over $1.0 in the last four, technical studies have turned short term negative with stochastics, momentum, the linear oscillator, relative strength and the parabolic all suggesting more selling in the near term. However, due to the fact that the market is already grossly oversold and with the time before winter kicks in rapidly diminishing, we see the downside likely to be limited over the short term with reaching new contract lows in the winter months debatable. The challenge of reaching below $5.27 basis spot November and December getting below $6.97 could very well be answered next week. In preparing for winter trade many value buyers assume October is the last opportunity to lock-in low prices before the cold. Look for a challenge of support at $5.40 -- $5.50 first, with buying likely to emerge before a possible attempt at contract lows.

Fundamental Supply Update

Today the EIA reported a net injection of 62bcfs which was slightly below both previous estimates by DowJones and Bloomberg of 64 and 65 bcfs respectively. The market still continued it’s decline from earlier on recent perceptions that the record existing supply has little sign of relief from the current weather pattern, and more importantly from recent proclaimed forecasts for a warmer winter coming, yet with little to no substantiation for that conclusion. The current colder weather that is impacting the Midwest and Northeast now and into next week is extremely abnormal for the month of October and is likely to reduce weekly injections substantially over the next two weeks. Based on this, and the degree to which it may curtail supply exceeding the key 3500 bcf benchmark by the beginning of November, could limit the market's downside substantially over the near term. Of course this would need some follow-through from typical colder weather to arrive in November to help build the case for a possible colder than expected winter in order to sustain values going forward. Storage now stands at 3389 bcfs which is 410higher than last year at this time and 358 or 11.8% above the five-year average of 3031. Looking ahead, we see after the last two days price drubbing, and with the approach of some very unusually cold weather in the Midwest and Northeast entering the picture now and late next week which will affect supply, that prices may have oversold the current conditions and underestimated the impact of the recent heightened demand and its potential impact over a precarious production that is still suffering some output loss from Katrina and Rita. Let us not forget how quickly this can be revealed such as when the two weeks back at the end of July experienced a sudden surge in demand from a heat wave that plagued the Midwest and Northeast and then the limited production yielded two weeks of supply withdrawals for the first time in a summer month in the market's history! This scenario could easily transpire during the upcoming winter, whereby it would only take a couple weeks of enhanced demand from below normal cold to take a substantial bite out of the 358 bcf surplus over the five-year average that exists, to suddenly reveal and remind everyone how precarious and unreliable the existing production rate can be.

Concerning crude oil, prices recently declined to new lows just under our target of $58 per barrel dropping below $57.50 per barrel before rebounding later today to settle back above minor support at $58 on little more than some technical buying and some encouragement from the distillate drawdown in this week’s EIA update. Overall we see the petroleum complex remains firmly in a bearish short term trend as this weeks price action confirmed our Outlook from last week as the news of the first OPEC cut in production in more than two years failed to prevent prices falling to a new yearly low. It is our view that the market is still 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 relative quiet in the Middle East in so far as violence that directly impacts a major producer. This of course being further complemented by the focus switching from this years driving season to this year's winter demand, which has also been downplayed by those already presuming a warmer winter approaches. This all the while the existing supply of both petroleum products here in the US has reached well above historical supply levels. After this week's EIA report whereby crude oil rose a surprising 2.4 million barrels leaving 330.5 million barrels and well above the average range, gasoline inventories rose by 0.3 million barrels and also remain above the upper end of the range while distillate fuel inventories declined by 1.6 million barrels, it still paints a bearish backdrop to petroleum overall. The high sulfur heating oil fell by 1.8 million barrels, the largest decline since March 24th which may have contributed some support to today's price rebound. Yet distillates hold the highest premium over last year, hardly revealing any upward pressure on prices. Refinery operating capacity held firm from last week at 89.2 percent while gasoline production dropped slightly whereas distillate fuel production decline significantly. The only somewhat bullish aspect of this weeks government report was again reflected in the implied demand figures revealing that gasoline demand is up 3.3% over the same period last year and distillate fuel demand is elevated 2.4% above last year, which holds bullish longer-term implications for the market should any sudden supply disruption take place. However, this week was rather uneventful concerning any new headlines overseas and thus yielded a rather bearish and listless market which contributed to achieving the new lows in oil. Yesterday spot crude hit a nine-month low of $57.59 after the international Energy agency cut back demand projections for this year and the next. Demand for global crude according to the agency will be 84.5 7 million barrels per day down 110,000 from the previous forecast. Next year consumption is expected at 86.0 2 million barrels, and a downward revision of 200,000 barrels. Despite OPEC's agreed output reduction of one million barrels which begins next month its 11 member consortium are still debating over how to disseminate the cut amongst the group and whether Saudi Arabia the cartel's biggest producer will agree. The kingdom's biggest will producer Saudi Aramco, has vowed to continue shipping crude to all of its Asian and European customers next month. While OPEC has immense power over global crude markets, due to pumping about 40% of the world supply, it has still lost some of its grip recently over the control of prices as the severity of the recent decline revealed. Just as we stated in last week's report the impact from market forces reacting to economic slowdown here in the US and the perception that with the housing crisis expected to only worsen in the coming months that a recession in the first quarter is a possible grim reality, has taken centerstage and thus taken a lot of wind out of OPEC's sails. But as stated earlier it is also a combination of factors that have converged at near the same time such as the end of the Israeli Hezbollah military conflict quickly followed by the end of peak driving season here in the US leaving a more than adequate buffer of about 9% in supply over the previous year and all at about the same time traders realized the Iran/UN nuclear challenge was losing its intensity and that any real eventual threat to actual petroleum supplies would not be realized until after going through a rather long and drawn-out process

W. S. I Weather 6-10 Day Outlook

Temperatures next week are expected to turn more seasonable on the whole along the eastern seaboard while the coldest weather encompasses the majority of the western two thirds of the nation. This will be in response to a mean trough quickly retrograding into the western US. Anomalies of 5-15f degrees below normal will be likely anywhere from the upper Midwest to the Pacific Northwest with only the warmer readings, compared to normal, occurring underneath a ridge along the Gulf Coast. On a day by day basis, the cool weather impacting the eastern seaboard early next week will moderate rapidly. In turn, highs in the upper fifties and sixties to start the week should rise to the upper sixties and lower seventies late before starting to drop back a little next weekend. The warmest weather on the whole should occur in the southeast through Texas, although even here a trend toward more seasonable readings should develop as the Gulf Coast Ridge undergoes a gradual weakening. While the Great Lakes Ohio Valley will trend cooler a bit faster than the northeastern US, the coldest weather will tend to be found in the upper Midwest as arctic air spills out of Canada. High temperatures in the forties and lower fifties at best can be anticipated on the coldest days, with thirties not out of the question. West of the Rockies, below too much below normal readings will dominate in the presence of a deepening trough. Highs will struggle out of the forties and fifties in the great Basin, with colder readings likely in the northern Rockies -- high plains. Max temperatures along the Pacific Coast will be less extreme with highs mostly in the fifties in the Northwest and sixties to seventies in California through the Southwest.

Conclusion

Today the November new spot natural gas contract closed at $5.78 per million BTUs after losing $.37 following yesterday's loss of an additional $.30 plus. This brings the market within a one or two days reach of the previous low posted 10 days ago at $5.27. Under the current technical pattern which in our view is short-term negative, yet grossly oversold, simply reinforces this markets history of increased volatility when approaching its strongest demand cycle. Given that the market has just posted both an advance of over $1.50 quickly followed by a decline of over $1.0 within the past 10 sessions, proves the enhanced volatility behavior. Looking ahead we only anticipate an increase to such emotional swing pricing as opinions on the upcoming winter and its degree to which conditions vary above or below normal, seem to differ. Near-term we feel after such a sharp decline following the short covering rally of last week that prices may now have reached undervalued status considering the approaching weather is extremely cold for October and should similar conditions prevail going into November and the official start to winter, traders may find themselves scrambling to buy back short positions on the heels of aggressive value buyers and hedge funds eagerly seeking to get in on cold weather positioning and capitalize on the oversold conditions created by a perception of a coming warm winter that may be flawed. Remember those promoting the forecast that the upcoming winter will be warm is based on an El Niño phenomenon and is yet to be confirmed. According to weather sources that we feel are credible the degree of El Niño detected so far has been very moderate and needs another month of development in order to ensure more confident confirmation. Otherwise based on the faint degree of El Niño currently recorded, past winter's following weak El Niño's have produced just as many colder than normal winter's as have there been warmer. Certainly the existing heavy supply has impacted price levels, yet we warn getting aggressively short from current levels ahead of a winter that is yet to arrive, whereby a precarious production, still laboring from noticeable output remaining off-line from last year's plundering by headliners Katrina and Rita, could suddenly be tested by a sharp increase in demand which could immediately reduce the existing surplus by a substantial amount. The price reaction in the event of such a realistic scenario would produce a substantial upward price spike in our opinion considering the recent influx of short interest into the market over the past month and a half. Should this materialize over the near-term prices would be quick to bottom out near the recent lows of $5.0 and $5.27 basis spot along with December futures near $7.0, quickly followed by an almost vertical acceleration quickly taking out recent highs at $6.80 basis spot, and $8.20 for December futures, and thus forming a more pronounced V-bottom formation that we said was expected in our report last week. While early this week the market hit new weekly highs and exceeded our price objectives confirming our report from last week, the sudden and sharp retreat over the last two days was unexpected, and we feel may be out of sync with the fundamentals.

Concerning the crude oil and the petroleum complex, the market is still bearish in our opinion and price action certainly confirmed our forecast from last week as the rebound attempt was contained well below our upward price resistance point set at $62.50 per barrel only to fall back just as we predicted to retest support at $58 basis spot. This week also confirmed our call for a break below this support to be followed by a likely test of $56.25 per barrel should the level at $57.75 be broken on close which happened yesterday and thus we are still on track to hit our objective. The technical pattern for crude oil is also oversold similar to that of natural gas, however, has longer-term bearish characteristics in our opinion. Concerning the fundamental picture we also see more bearish implications for the petroleum complex ahead as the possible looming recession scenario plays out here in the United States, the Iran/UN nuclear challenge stagnates further as the administration avoids any confrontation that may spike gasoline prices going into the November elections, and winter holds less of a threat even if colder than normal considering the hefty surplus of heating oil with distillates enjoying a 17% supply cushion over last year. As stated last week the wildcard for the petroleum complex remains a possible terror threat directly to oil infrastructure and or a weather anomaly of an extreme and unexpected bitter winter here and in Europe, or both, which at this point seems remote. While all traders continue to keep OPEC's production decisions in consideration, it will still take a back seat to a possible economic slowdown here in the United States, the magnitude of which is yet to be revealed nor anticipated, should the expected recession be severe and would no doubt reach beyond our shores in its impact on global growth which would certainly put OPEC's influence in further jeopardy in our opinion. This view, has already in a minor way, been confirmed over the past week as OPEC's headline decision to cut output for the first time in over two years failed to stop the decline in petroleum values from reaching nine-month lows. This coming week we anticipate the overhead resistance point to contain rebound attempt's in crude oil to drop down from our parameter last week of $62.50 per barrel to now hold at $61 while the market sets its new target objective at $56.25.

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

October 12, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744