Energies Fall from Storm Induced Peaks as Damage is Factored in and Production Natural Gas and Oil Recovery Continues.

Technical Outlook: last week we said, that although the market was still somewhat marginalized by the importance of the impact of Rita’s aftermath on production facilities, and that technicals would gradually return to influence pricing. We also stated that while the overall posture of the market was quite bullish some indicators were giving obvious overbought warnings and that resistance was now clear at $14.80 and to look for support to be tested on pullbacks first at $13.80 followed by $13.50 with a more critical and pivotal support at the deeper level of $12.70 which if attained would attract more buying interest in our view. This week prices confirmed our forecast almost to the penny as prices failed at $14.75 earlier in the week only to then fall today to test and take out both our initial supports at $13.80 and then $13.50, settling below this, for a one-day decline of over $.80 leaving our lowest target of $12.70 as the market’s next objective. Looking ahead technical indicators are now overall bearish with stochastics, relative strength, the MACD, the parabolic, along with several momentum oscillators suggesting a further decline is in progress. This also after the market failed at almost the same price peak reached by the October spot month on expiration at $14.80 which the November spot almost reached peaking at $14.75 yesterday. This important barrier, which now has formed an apparent double top, has put a temporary ceiling on prices at least for the short term. We expect the market over the next two to three sessions to test trendline support at $12.70 to $12.75 with short-term resistance at $13.50 scaled up to $13.65 likely to contain rally attempts.

Fundamental Supply Update

Today the EIA reported a net injection of 44bcfs that was in the complete opposite scenario to last week, right in line with the two popular survey estimates by Bloomberg and Dow Jones that were both anticipating an injection of 46, whereas our company call was well above this at 54-59; while last week the surveys were off, both being well above the actual number while our company estimate was right in line. Meanwhile, despite the number declaring a slightly lower supply being added to storage, prices quickly ignored the minor bullish news, and quickly focused on the higher than expected amount of production recovered recently along with the quieting and yet relieving news of a rather tranquil weather report in the tropics over the next six to 10 days. The actual numbers reported by the MMS show a noticeable improvement to just over 66% of daily natural gas output still remaining off-line as of today versus 69% reported as of yesterday and 79.4% as of the end of last week. This combined with a benign weather report and the fact that prices seem to fail yesterday at the same level the October spot contract peaked on expiration at $14.80 seemed to be the impetus for the sharp and precipitous drop in prices posted today. According to the EIA storage now stands at 2929bcfs which is 151bcfs below last year at this time and only 40bcfs above the five-year average of 2889bcfs. Once again this is the second week the injection failed to provide the 60 plus bcfs needed to put us on track to exceed the psychological comfort of the 3200bcf benchmark by November. Instead storage seems on track to end closer to 3100bcfs to face the demand of winter, which will be a daunting task considering the consistently lower than average injections the industry produced in the face of the higher than average demand created by this past summer. The fact that 233bcfs of cumulative production has already been curtailed since hurricane Katrina’s landfall in late August and well exceeding the total of 172bcfs of lost production attributable to hurricane Ivan spanning over a five-month period, is hardly a situation that encourages selling and rather since it is an ongoing impediment to supply we anticipate it will soon influence a price reversal. Should this winter result in higher than normal demand from colder than average temperatures then obviously the consumers worst fears will materialize in dramatically higher fuel costs as natural gas is the nation’s number one heating resource. We see the current momentum likely to take prices down to the $12.50 – $13 price bracket before selling dries up and the negativity of declining petroleum values is factored in, of course the rate at which gas production infrastructure is restored from the current 6.6% disability remains as a primary influence to short term price values.

Concerning crude oil, prices declined today to the lowest price since late July on the news of continued noticeable improvement to the production recovery at key installations including the announcement of power being restored to six of the seven refineries knocked out by Rita in the Texas and southwestern Louisiana production regions. Imports of gasoline and other fuels jumping 26% to 4.5 million barrels last week, and the highest since 1990 also weighed heavy on the market. The impending arrival of large cargoes of both key petroleum products in gasoline and distillates released from emergency stockpiles by the International Energy Agency seemed at least temporarily to outweigh the longer-term and obviously bullish implications of lost production in the Gulf of Mexico, the heart of oil and gas infrastructure of the number one consumer, the U. S. Even the higher than expected product draw-downs that were announced Wednesday morning by the EIA, failed to suspend the selling momentum. The EIA reported that crude oil stocks inched lower by 0.3 million barrels to total 305.4 million barrels while gasoline inventories dropped by a more than expected 4.3 million barrels last week leaving them just above the lower end of the average range. Meanwhile the more important distillate fuel inventories due to their pending demand this winter declined by a larger than expected 5.6 million barrels last week leaving them just above the middle of the average range for this time of year. What was even more important in the government’s weekly update was that refineries operated at a greatly reduced 69.8% of operating capacity last week and the lowest in many years due to the outages caused by hurricane Rita and the remaining effects of Katrina. According to the MMS, just over 80% of daily oil output in the region was off-line following hurricanes Katrina and Rita, compared with 87% yesterday, and 97.8% that was reported shut-in as of last Friday. This continues to leave the questions posed by the unknown rate at which the recovery of this critical production infrastructure will commence from here on, to remain as a constant irritant to the market and thus the catalyst for continued enhanced volatility throughout the entire energy complex. Let’s now take a closer look at whether for the short term with WSI.

W. S. I Energy Cast October 11-15

Summary

Weather more typical of autumn pattern is expected to become established across much of the eastern U.S. during next week as a transition in the large-scale pattern takes place. Meanwhile, an expanding ridge of high pressure will lead to warmer-than-normal weather for most locales west of the Continental Divide. Residual troughing will lead to a cool start to the week along portions of the Eastern Seaboard, although this should gradually get kicked out to the east as the pattern upstream progresses. High temperatures will be mostly in the mid 50s to mid 60s across New England while 60s to low 70s will be likely in the mid-Atlantic region.

Any warm-up will be brief however with cool weather arriving toward the end of the week and next weekend. Farther to the west, the lingering trough along the East Coast will be of little influence and some short-wave ridging early next week should allow for near- and above-normal temperatures across the Ohio Valley through Midwest. Highs will not be nearly as warm as this week’s, but 60s to low 70s are forecast before the advancing trough and associated cold front drops readings to the 50s and low 60s toward the weekend. The Southeast should start out with highs in the 70s to low 80s before the same trough allows for cooler weather to arrive by the end of the week and next weekend. Across the western U.S., much the opposite is anticipated with warming temperatures as a ridge re-establishes control. Highs will range from the 60s in the Northwest to the 70s and 80s in California, warmest over the interior valleys. The Southwest will see maxes climb in the 80s and even lower 90s on the hottest days late in the week.

Conclusion

Natural gas is in a fairly strong sell mode from the combination of negative technical indicators coming off an important failure at key resistance along with the fundamental pressure from sooner than anticipated recovery of vital production infrastructure over the past few days. However, prices have only managed to fall back to test logical price supports that we anticipated and forecasted under the current pricing pattern confirming our technical outlook in last week’s report. We expect near-term, and possibly within the next three sessions, a likely test of trendline support at the $12.70-$12 .75. Should the market fail to hold this support on close, than a more severe correction down to the $11.50 – $11.25 level could follow, however we don’t anticipate this to transpire on technical concerns alone but would need the help of a more rapid restoration to production than is currently being reported such as production off-line being brought back to post Katrina yet pre- Rita levels of about 3 ½ percent before the end of next week. Considering this may be an unlikely and unreasonable expectation trendline support is likely to be met with considerable fund buying and the placement of winter commitments by hedge funds and industry players that do not intend to miss the major move by waiting too long for lower values that may never come. Especially in a market that in the span of one trading session can move in excess of two dollars and be quite unforgiving to those that procrastinate in the wake of the biggest bull trend in the market’s history! Of course the potential for another tropical storm possibly entering the Gulf over the critical next 30 days with an outside and yet diminishing chance over the ensuing 30 days of the remaining hurricane season is the proverbial wildcard. Once the correction is over, we anticipate a strong resumption of the upward trend eventually manifesting a close over $15 per million BTU, that would be preempted by a near-term close back over the pivot price at $13.95, in our opinion.

With regards to crude oil, we feel the market will continue to be lead by the direction of the products and more noticeably distillates, and more specifically heating oil, as the market begins to focus and anticipate the impending demand of this winter. Currently prices are still being heavily influenced by the perception of the gasoline crunch and the recent relief thereof implied by softening demand figures. The Energy Department reported that total product supplies over the four week period through September 30th, have averaged more than 19.9 million barrels per day which equates to a 2.9% reduction in demand from the same period a year ago. Daily demand for motor gasoline was on average 8.8 million barrels for last four weeks, 2.6% below the year ago level, while distillate fuel demand average 3.9 million barrels in the for week period, also down yet by 3.8% from a year ago. The sharp drop in gasoline prices which culminated at 6.7 three cents per gallon or 3.5% to settle at $1.8405 per gallon today were a result of the decline in demand by 230,000 barrels per day while production and imports simultaneously increased. While the market reacts to an apparent softening of demand at the consumer end, we caution reading too much into a market that’s still by a measure of all things considered, has not given up much ground when one looks at recent closing values, the time of the demand cycle, and what lies ahead. If you just isolate crude oil prices which recently peaked at $70.85 that fateful Monday following the onslaught of hurricane Katrina and never closing above $70, values only today managing to settle below $62 for the first time since late July, tells us the market is still stubbornly holding on to inflated values considering this decline took place during a shoulder month when gasoline demand is on the decline normally and heating fuel demand is yet to be identified. Percentage wise the markets have given up little in the wake of what is debatable as to optimistic progress in restoring critical production infrastructure. It is our opinion that the market is only recoiling and preparing itself for an even larger price move upward that will likely reveal higher values not yet experienced as the implications and the longer-term effects of serious curtailments to key production facilities are tested when peak demand arrives this winter. One should expect a price reprieve and healthy correction when there’s no pressure on the system and we are between demand cycles. But on the other hand, it’s when stress is placed on the system from the pressure of demand that things can come unglued and get out of hand. They’re still remains too many bullish unknowns such as potential remaining output recovery delays, longer-term damage yet to be revealed, potential storms on the horizon within this season, and of course the reaction to possible colder than normal winter forecasts that will soon be reported by the major weather agencies in the weeks ahead; all that can inject renewed buying interest in a market that lends itself to exaggerated upward price move’s especially following a healthy correction. This week prices confirmed and took out all of our support levels that we forecasted would be tested should the market fall below our critical price at $65.10 followed by the important pivot at $63.90 which we said would quickly lead to a test of basing support between $62.55 and $63 per barrel, which transpired today and yesterday resulting in a new low close outside the recent trading range and establishing a multi-month low. Looking ahead the market’s momentum seems to suggest a test of $60 per barrel possibly down to key support at $59.25, with scaled-down buying expected to $58, however strong buying is anticipated on the first attempt to breach the psychological $60 benchmark. A resumption of the up trend would be signified by a close back above $65.10 and would require a new announcement in the news indicating further impairment discovered in long-term production facilities and more specifically to refineries, the arrival a new storm as a potential threat to the Gulf, further escalation of threat to supplies overseas such as in Nigeria and or the combination of any of these bullish developments, all of which are credible and valid concerns.

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

September 29, 2005

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

www.strategicinvestors.us

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