Petroleum Settles Above $90 at New Record Close on Bullish EIA Report.

Petroleum Settles Above $90 at New Record Close on Bullish EIA Report, Overseas Tension, Weaker Dollar, and Speculative Fever, while Natural Gas Moves up in Sympathy despite Bearish Supply Update and Mild Weather.

Technical Outlook: Since our last report we said looking ahead, technical signals were now more pronouncedly bearish with stochastics, momentum, relative strength, and most short term indicators suggesting significant weakness ahead, with a likely challenge to minor support at $7.10 and in our conclusion expected prices to possibly fall back below the $7.0 benchmark this week, and all of these things transpired with values falling below the key $6.70 support level intraday before rebounding sharply this week back above minor resistance at $7.10 today. Now looking ahead after the key reversal from below the 3 week support at $6.70 the technical outlook is more constructively positive, however, signals are now mixed with shorter term indicators such as stochastics pointing higher while the Linear oscillator and MACD suggest weakness while still others such as Relative strength and momentum are more neutral. Based on this configuration we rather rely on price objectives to govern the technical outlook to become more confirmed and reveal whether the bulls or bears have established more control. Looking ahead based on the rapid advance today that seemed a little too much too soon, we anticipate prices will likely fail the first time up to challenge intermediate resistance at $7.25, bringing values back down to test $7.10-$7.0, remaining within the same range until a more meaningful headline fundamental arrives to break the market out of the range, which would then affect a return to test the critical $7.42 resistance level and then eventually, judging from price behavior I expect prices to retest the recent high at $7.61 soon.

This week's EIA report revealed an injection into storage of a higher than expected 68 bcfs that was comfortably above both previous survey estimates by DowJones and Bloomberg that were running near 54 and 56 respectively. Storage now stands at 3443, which is now only 15 bcfs less than the supply last year at this time and yet 232 or 7.2% above the five-year average of 3211 bcfs. After the market experienced the noticeably higher than the 5 year average as well as considerably more than expected injection into storage, the market staged the typical knee-jerk drop of about 10 cents to quickly challenge session lows before rebounding, mostly in sympathy trade with Crude Oil, quickly into strong positive trade, ending near session highs to settle at $7.188 for a gain of .21 cents basis spot November. The market today was definitely influenced in my opinion by the surge in Petroleum as well as some minor rumblings about a potential tropical system called 90L that is lurking disorganized east of Puerto Rico and currently experiencing heavy 20-30 knot wind shear that makes future development questionable yet is still moving west at between 5 to 10 miles per hour, along with forecast for some colder than normal temperatures to impact the Central Midwest and Northeastern US next week which also contributed to the late strength. Overall, the fundamental picture after today’s heavy injection returns the market to possibly end injection season over the next 2 weeks with a new record high in storage, even if by a margin of only a few bcfs, and yet certainly adequately supplied to the point that if Petroleum was not near the robust records that it is one could argue that Natural gas is at least 50 cents above fair value. However, if the first cold shot of winter like air arrives just after Halloween as predicted, prices may again defy logic as well as gravity and seek new highs next week to the dismay of many.

Concerning crude oil, the market today closed again on an explosive continuation of the recent short-term uptrend as spot December futures closed at a new all-time contract high of $90.46 per barrel for a gain of $3.36 in the first historic close above the key psychological benchmark that ignited a resurgence of past predictions for reaching $100 per barrel, and the level once considered outlandish, is now uncomfortably within the realm of reality. However we want to remind market participants of an equally sobering reality check in that most of the recent $10 price escalation has been more attributable to speculative fear based fund allocation based on the threats to supply, that although some of which are legitimate, most of them, especially concerning renewed sanctions against Iran as well as the recent aggression from Turkey against Kurdish rebels in northern Iraq, have failed to interrupt the flow of any substantial amount of identifiable oil. Now the recent EIA update released yesterday did validate price direction in our opinion as an across-the-board petroleum supply reduction was revealed. However when you look deeper into the numbers, it hardly justified the distance or the amount of the price move in that direction fundamentally. The most dramatic reduction was in crude stocks themselves which dropped by a larger than expected 5.3 million barrels leaving 316.6 million total and yet remain near the upper end of the average range for this time of year, while motor gasoline inventories also decreased by 2.0 million barrels and yet are at the lower end of the average range, while distillate fuel stocks also decreased by 1.8 million barrels and yet remain in the upper limit of the average range for this time of year. While price behavior seemed to isolate the full spectrum reduction along with another slight drop in refinery capacity which was reported at 87.1%, the market still conveniently ignored the fact that motor gasoline demand averaged 9.2 million barrels per day and still 0.2% below the same period last year. The gasoline demand figures continue to reveal a weakening consumer that is beginning to show his vulnerability to a deteriorating housing crisis that only brings the promise of getting worse over the near term. As we have mentioned in earlier reports this condition cannot be ignored by the petroleum market indefinitely, and judging from the recent stock market liquidation that has dropped the Dow Jones industrial average by almost 700 points between recent highs posted October 11 at almost 14200 and intraday lows testing 13500 posted this past Monday which could indicate a strong petroleum correction may soon be to follow. Let us not forget how quickly oil prices dropped from $78 per barrel down to $68 a barrel back in August on the heels of a 10% Dow Jones meltdown in less than a month! Recent housing data along with the bleak forecast for 2008 will not provide a bullish demand outlook from the consumer on any score as massive foreclosures and personal bankruptcies continue to increase in the wake of banking and mortgage institutions tightening credit in the obvious effort to remain solvent and survive! Further evidence of this was revealed in a recent report in USA Today stating over 2 million consumers are behind in their mortgage payments with today’s depressing forecast released by the Congressional Joint Economic Committee that stated they anticipate as much as 2 million more consumers will enter foreclosure over the next 18 months due to subprime adjustable rate loans that will be ratcheting up to much higher current interest rates from the low rate acquired at inception. This came on the heels of another report that suggested home values could drop as much as 20% over the same time period! Despite the fact that sales of new US homes unexpectedly rose in September after the figures for previous months were revised down, resurrecting concern the housing slump will continue to restrain economic growth, purchases increased 4.8% to an annual rate of 770,000 units matching a median forecast of economists surveyed by Bloomberg, however in August purchases were revised to an 11 year low of 735,000 according to the report released by the Commerce Department today. Of course this news quickly fades into the background as the National Association of Realtors reported sales of previously owned homes dropped 8% in September to 5.04 million, the lowest level since record-keeping began in 1999, bringing the inventory of homes for sale to a 10.5 months supply also the highest on record. These figures reveal a more true revelation of the housing crisis as existing homes account for 85% of the market with new homes making up the small margin remaining. Further indication that the softening demand from the consumer is spreading further into the economy was evidenced as orders for big-ticket manufactured goods dropped an unexpected 1.7% last month following an even bigger 5.3% plunge in August and the first back-to-back declines in factory orders in more than a year raised new worries about how much harm would be inflicted on the economy from the severe housing slump and resulting credit crunch. The JEC report said that states will lose $917 million in property tax revenue as housing values are depressed by the wave of foreclosures. Senator Charles Schumer, chairman of the JEC, summed up the gravity of the situation when he said,” state-by-state, the economic costs from the subprime debacle are shockingly high, from New York to California, we are headed for billions in lost wealth, property values and tax revenues”. These revelations have to affect economic growth, which translates into poor earnings, which means lower stock values, which lowers the prospects of economic growth, and that is ultimately digested and translated into weaker demand for consumables across-the-board, especially if everyone is suddenly scrambling to pay margin calls on falling stock values or just in preparation to free up capital to possibly buy them back at lower levels such as back in August. Continued support for the upward escalation has also been fueled by recent bombings from Turkish military troops with the assistance of fighter helicopters upon Kurdish rebel installations in the Hakkari Province along the rugged Turkey Iraqi border that supposedly claimed the lives of 32 rebels in retaliation for losses incurred when Kurdish rebels killed 12 Turkish soldiers and an unconfirmed report that possibly eight more soldiers were kidnapped recently. The Kurdistan Workers Party or PKK, continues to make surprise attacks upon the Turkish military across the border despite demands from the Iraqi government as well as the United States to immediately cease such rogue attacks and stand down. This recent nuance of violence in northern Iraq which had earlier been one of the few stabilized and relatively peaceful regions in the country has only served to further increase tension within the region and although failing to yet interrupt the legitimate flow of any oil supplies, much like the ongoing controversy with Iran over their nuclear ambitions, is apparently providing enough fear of threat to supply to temporarily elevate prices.

Gradually turning cooler across the eastern U.S. next week; warming in much of the West Summary.

As opposed to what the eastern U.S. has witnessed during most of the autumn thus far, it does appear that a change toward cooler, more fall-like conditions is slowly going to evolve next week. Meanwhile, it will generally remain warm over the western third of the country, and continue trending warmer by the weekend along the West Coast.

High temperatures from the Northeast corridor to the Ohio Valley are expected to generally be in the 50s and 60s while 60s to 70s will prevail in the Southeast. The Great Lakes to mid-Mississippi Valley region will likely begin the week with highs in the 50s and 60s, but only 40s to 50s are anticipated by late next week and over the weekend. The Upper Midwest may even struggle out of the 30s by the end of the period after starting the week in the 50s. Across the Deep South, look for readings to warm to seasonable levels after a cool start with highs mostly in the 70s and lower 80s over Texas. In the West, temperatures should begin lowering somewhat in the Southwest but will remain above to much above normal. Highs will be mostly in the 70s and 80s, although some lower 90s will be likely to start the week. Generally 50s and 60s can be expected in the Great Basin, Pacific Northwest, and along the California coast, while 70s and 80s should dominate interior California. Finally, we'll have to monitor the tropics for a potential system in the northwestern Caribbean next week that could eject northward along the East Coast by the end of the period. It is still well in advance, but there is at least a threat to monitor.

Natural gas has fallen back into a more specific technical price pattern this week after retreating decisively back to test key support last week at $6.70 on close which held, prompting a key bullish reversal. Prices then quickly rebound from the three-week lows and then as forecast recovered back up to test $7.10 and breaking above this resistance followed through today in sympathy with surging petroleum values and managed to close near session highs at $7.18 per million BTU. We continue to anticipate trading to remain range bound between minor resistance above at $7.42 and $6.80 over the near term or until late next week when possibly forecasts colder temperatures may arrive igniting a potential bullish break out back up to test recent highs and the key failure point at $7.61. While they’re still remains a low probability for a late season tropical storm to develop in system 90L currently building just east of Puerto Rico, our price outlook is not acknowledging this as a likely fundamental impact scenario at this time.

Concerning the petroleum complex, this week’s price activity, similar to last week continues to defy gravity as well as fundamental logic as it seems even more obvious now that fear based trading has begun to strongly influence fund allocation. But remember, the market is always right and as a free-flowing entity with clearly a mind of its own does not need to conform to anyone’s determination of value ratio to either existing fundamentals, technical conditions or both. And so we warn that the market is setting itself up for a strong and sharp price decline as the potential for the existing extremely overbought technical condition as well as ongoing stale news items in northern Iraq and Iran along with the weaker dollar are already well priced in. This especially in lieu of the fact that the specter for softening demand from the world’s top Energy consumer grows more ominous daily as economic fallout from the subprime housing meltdown continues to reveal an approaching recession, which could suddenly ignite a wave of profit-taking that could escalate into a full-scale liquidation in short order! The first sign of this likely scenario may not only erupt from the now attractive opportunity for traders to lock in profits and simultaneously sell oil from all-time historic highs, but also because the first shoe may have already dropped with the recent 700 point decline in the Dow Jones in anticipation of further consumer debilitating debt that is expected to accelerate providing concrete evidence of economic slowing in a similar reaction to the sharp decline back in August except this time its based on more confirmed corrosive data with wider reaching implications. It is only a matter of time in our opinion that the economic slowdown that seems inevitable from a consumer driven economy plagued by the specter of future increased foreclosures brought on by falling home values and tighter credit restrictions will begin to negatively affect demand for consumables across-the-board including energy. Remember strong evidence of demand softening through materialized actual inventory numbers do not have to be revealed before prices begin to collapse, instead only perception needs to change anticipating the approach of softening demand and then a rapid decline begins with the justification often arriving in the headlines after-the-fact. Now this may not transpire before the upward momentum takes crude prices to unexpected new highs above existing already stifling levels above $90 with the market now targeting $92.50, before the impending stall out occurs, but one thing is for sure as history bears out, the bigger they are the harder they fall, and so the ensuing and resulting price decline will no doubt be equally shocking! In fact due to the recent steepness of this week’s price advance it would not be surprising to see post peak values in crude oil prices decline by more than five dollars per barrel in a single session and I anticipate a rapid return to recent support level at the $85 benchmark basis spot over the near term. Don’t forget the recent price escalation to a level not seen ever before in the market’s history, and already having reached a full 16% premium over last year’s all-time high of $78 reached during the Hezbollah Israeli conflict will now exert tremendous political and economic pressure upon OPEC to increase production and ease prices to relieve the threat it poses to global growth as well as upon the Bush administration to take emergency measures such as through the Strategic Petroleum Reserve, especially as Winter approaches with peak demand for heating oil anticipated upon an already strained consumer in the Northeast .

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United Strategic Investors Group