Consensus Report: November 8, 2007

Petroleum Recoils from Record Trade above $98 after profit taking from Mixed EIA Report, Continued Overseas Tension, Weaker Dollar, and Speculative Fever, while Natural Gas Collapsed after Bearish Supply Update and Disappointing Milder Weather.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead after such a strong run whereby the December futures has eclipsed a virtual vertical advance of over $1.20 in only eight sessions, the market has left some indicators such as stochastics entering overbought status which could attract profit-taking in the near-term. We also said should the market over the short term find rejection from below minor resistance from a lower high, sub $8.80, then look for rejection selling to return the market to test support, first back at $8.10 and then if broken a more critical test at $7.80 would follow with strong buying defenses expected. This scenario took place almost exactly, however, the market collapsed with such ferocity and negative momentum that prices not only hit our downside target at $7.80 per million BTU but also exceeded this level by a full $.30 hitting and intraday low of $7.50 before reversing values strongly into the close in settling back up above $7.70 in today’s session. Looking ahead technical analysis now reveals a mixed picture with several indicators declaring the market grossly oversold such as stochastics, momentum, and relative strength, and yet longer-term indicators such as the linear oscillator and the MACD, suggests a rather wide negative divergence still exists pointing to further downward movement ahead. With this configuration we anticipate a strong probability for retesting today’s low’s at $7.50 with a significant possibility for the market to break down further with a potential to challenge minor support at $7.25 with a weaker scenario that could bring a more critical test at $7.10 into contention. Look for follow-through upside movement from today’s minor key reversal that resulted in an upside move of over $.24 from low to high to be contained under resistance above at $7.80 that if breached on close should then invite stronger rejection forces from above this level at $7.92. This level should contain the market near term until something more significant develops fundamentally which will be discussed in the next section.

Fundamental Supply Update

This week's EIA report revealed an injection into storage of a higher than expected 36 bcfs that was comfortably above both previous survey estimates by DowJones and Bloomberg that were running near 31 respectively.  Storage now stands at 3545, which is 99bcfs above last year’s record high and now 291or 8.9% above the five-year average of 3254 bcfs. After the market experienced the noticeably higher by almost double than the 5 year average as well as considerably more than expected injection into storage, the market staged the typical knee-jerk pullback in prices hitting the intraday lows at $7.50 during the morning session before staging a rather strong reversal that culminated in a better than $.20 rebound bringing the market into positive territory on the close. For natural gas which is considered the key winter fuel as almost 60% of US households depend on it for winter heating needs, the contributing primary value motivations are simple, mainly weather and then technical concerns, and in that order. Last week’s rather provocative upward price escalation was largely due to an expectation of the arrival of this season’s first Winter blast along with some sympathy trade to petroleum’s recent meteoric threat to challenging the $100 per barrel benchmark. However, when the expected colder weather was somewhat delayed and also less severe than anticipated, prices quickly reversed and they dramatically collapsed giving back almost entirely, the big gains that where posted from previous lows that began only 13 sessions earlier, as traders quickly remembered the fact that storage this year had reached the highest level in the market’s history, confirming the exact scenario we warned about in last week’s report if the colder weather did not materialize as expected. We clearly stated last week to repeat word for word, ”traders will now be earnestly reading into the weather forecast to determine to what degree temperatures fall below normal and more importantly for how long as the current upswing in prices will need to see some sustained below normal conditions in the major consuming regions of the Midwest and Northeast in order to justify elevated current pricing in the face of a new record high supply in storage for winter needs, in my opinion.” Now looking ahead, after the recent price collapse all the way down to minor support at $7.50 witnessed today, traders again will be eagerly anticipating the arrival of some colder weather and possibly the coldest thus far expected to arrive the latter half of next week before cautiously committing funds again, to the buy side. We could easily see from this past week’s negative momentum a further slide in values down between $7.25 and than $7.10 and a new monthly low, before traders step in more aggressively to buy this market, especially if petroleum values begin a much-needed correction that may be prompted by a reactionary stock market liquidation that has already begun as more evidence of an approaching recession has recently been revealed. This current economic condition also portends softer demand for natural gas from the consumer that can only be superseded in the importance by a bitter cold winter forcing the beleaguered consumer to buy out of necessity.

Concerning crude oil, the market today again closed down for the consecutive second negative day after fed Chairman Ben Bernanke, warned the Joint Economic Committee of Congress that the US economy faces a possible slowdown. However it is our contention that the fed chairman’s words will have little lasting effect over containing petroleum’s recent exaggerated price escalation and realistically have as much control over preventing crude oil’s assault on the $100 benchmark as they have been successful in preventing the subprime mortgage meltdown that will no doubt ultimately confirm his warning! Realistically, it won’t be until the market perceives the eminent arrival of economic data confirming that recession approaches rather than the words from the fed chairman that only now seems to concede the inevitable, becoming the determining factor in our opinion. Until then we still see the current petroleum juggernaut likely to at least rechallenge the recent electronic high reached earlier in the week at $98.62 and possibly a new high over the near term before the resulting profit-taking or more committed short interest emerges in anticipation of further evidence and confirmation of the impending recession that could ultimately lower petroleum values to a more rational level. And if by chance prior to this expected selling event the market happens to flirt, even if briefly, with that key psychological $100 benchmark, only time will tell and yet could easily transpire over the next five days. Current conditions that continue to support petroleum values and sustain them above the $90 benchmark are the fact that US inventories remain at the lowest level in two years and the fact that recently storm conditions in the North Sea have impeded some 540,000 barrels of oil output. The market had closed negatively yesterday after experiencing a $4.0 price decline from pre-report highs reached on overnight access at $98.62 after the EIA revealed a drop in US crude inventories of only 800,000 barrels which was about half the decline anticipated. Crude stocks now total 311.9 million barrels which is still the lowest since October of 2005. Proud act results were mixed as gasoline stocks declined by this same 800,000 barrels leaving supply below the lower end of the average range while distillate inventories increased by a fractional 0.1 million barrels and remain near the upper limit of averages for this time of year. However, despite the slightly disappointing figures, I still feel the market’s current momentum is in play and a second attempt to reach recent highs will no doubt transpire soon despite the recent warning from the fed chairman re-stating the obvious, although the fact that the most important economic individual in the free world has now openly admitted this condition obviously makes this situation more credible as a threat to demand and thus is expected to carry more weight. However, physical conditions in the North Sea such as Norway’s Statoil Hydro ASA announcing on Thursday that it will shut in 320,000 barrels of oil due to deal force winds that are expected to peak overnight along with the announcement by Conoco Phillips that they plan to shut 140,000 barrels a day and BP who also shut 80,000 barrels a day of oil output remains as a strong support to the short term up trend and temporarily defies selling the market in sympathy with recent weakness in the stock market from the threat of recession. The weaker dollar as the euro now flirts with new high’s at 147 continues to underpin higher values for the strategic barrel that is numerically validated by the U. S. Greenback. Refinery capacity remained unchanged operating at 86.2% and so demand continues to look somewhat precarious and still rather anemic as gasoline production fell last week averaging 8.9 million barrels while distillate fuel production increased averaging 4.2 million, however while demand for motor gasoline edged up to 0.8% over the same period the previous year distillate demand was weaker at 2.4% below the same period last year. It is our belief that these figures will continue to soften as time presses on and the consumer continues to weaken along with home values at least until seasonal demand picks up with the arrival of winter.

 W. S. I Weather 6-10Day Outlook

Conclusion

Colder weather to return to eastern half of the country late next week Summary

A progressive and near zonal jet stream is expected to bring warm and damp conditions to most of the central and eastern U.S. this first half of next week. Widespread highs in the 50s and 60s are forecast to overspread the north-central and northeastern U.S. during the Monday through Wednesday time period. Highs in the 60s and 70s are expected to become the rule for Texas and the southeastern U.S. Cooler readings forecast to arrive over the eastern two-thirds of the country during the 6-10 day period (next Wednesday through next Sunday), when all models feature a deepening eastern trough and suggest a storm system will draw below and much below normal temperatures into the central and eastern U.S. In response, highs in the 40s and 50s are expected to become more common place over the north-central and northeastern U.S. during the latter half of next week. Highs in the 50s and 60s are forecast over the southcentral and southeastern U.S. The warmest temperatures and the most persistent warmth next week are anticipated in the southwestern U.S. While readings are not expected to be quite as warm as this week, all models feature persistent ridging over the southwestern U.S. and suggest daytime highs in the 70s and 80s will rule for most of next week. While warmer than normal temperatures are forecast over California and the interior western U.S., readings are not expected to be as warm, even relative to normal, as the southwestern U.S. Meanwhile, cool and damp conditions are forecast in the Pacific Northwest next week as a deep trough in the Gulf of Alaska is expected to be slow to weaken. Daytime highs 40s and 50s are generally expected to be the rule for the Pacific Northwest most of next week. Temperatures may begin moderate next weekend.

Natural gas has broken down considerably yet from exactly that price range we forecasted in last week’s report sub $8.80 as values last Friday peaked from just about $8.70 and then subsequently over the past week culminating in today’s low at $7.50 taking out every one of our downside targets along the way including our lowest support at $7.80 which was confirmed in yesterday’s almost $.50 route from high to low. Weather of course now becomes the most dominating factor influencing price with technical concerns making up a distant second and as always when both conditions happened to coincide and then suggesting the same direct same to follow is when the most dramatic price behavior transpires. Also confirming our prediction in last week’s report promising elevated volatility in the near term was Natural Gas dramatic price wing eclipsing both a vertical launch and collapse in excess of a dollar and all in less than two weeks! Looking ahead, at least in the interim, it seems the market may be setting itself up for an even more dramatic price break out to the upside as near-term values are approaching extremely oversold territory which could easily collide with a sudden increase to demand on the market from the arrival of this season’s coldest weather, if the arctic trough from Canada delivers pre-Thanksgiving which has transpired in the past. Only time and weather conditions will tell over the near-term that if such a perfect combination of complementing technical conditions and fundamentals converge resulting in a key reversal from new lows that would no doubt result in a short-term assault at new highs above $8.70 that would certainly be characteristic to this market’s price behavior historically!

Concerning the petroleum complex, this week’s price activity, similar to last week continues to defy gravity and even traditional wisdom as prices recently came within less than $2.0 of the psychological $100 benchmark, and all without the assistance of a major disruption headline that typically was needed to propel prices to a historic new all-time high in past years. Rather the current price escalation which has already exceeded those past peaks by over 26% has been on the back of a broader consortium of fundamental factors that has provided the perfect catalyst for fear based fund allocation and yet all the while being legitimately supported by the undertone of the same conditions of limited production capacity worldwide and questionable refining capacity here in the United States, along with ongoing threats to key producers internationally, the weaker dollar, and robust growing demand worldwide and mainly in Asia despite the approach of a noticeable threat to demand approaching from recession here in the US, the world’s top consumer. However, we still feel and reiterate as in past reports, once the perception of a real recession is eminent here in the United States and the resulting economic slowdown in the world’s top consumer of petroleum seems inevitable, so will be a clear and noticeable effect on crude oil values that especially from recent stratospheric heights that the market has managed to attain, will provide the perfect catalyst for a formidable price correction, from a combination of profit-taking and fear of a more sustained demand destruction yet to come. This scenario however, will take more time in our opinion to transpire as the economic evidence necessary to facilitate such a conclusion is not released all at once and instead has to accumulate over time just like weights being added to a scale that once they become too heavy and the scale tips, the result will be a violent drop. When this inevitable price reaction is to transpire is of course the current 64 million-dollar question and in our opinion will provide certain clues just prior to its culmination. One of these clues I believe will no doubt be provided by the stock market as it obviously will take a much stronger knockdown than yesterday’s 360 point collapse in the Dow Jones to confirm that the subprime melt down is infecting more than just our largest financial institutions as a preemption to recession. It is my belief that the recent decline of over 8% in the Dow Jones over the past three weeks is unfortunately only the beginning of the potential carnage that has yet to transpire in the equity markets as many of the so-called experts and talking heads in the media continue to sugarcoat and attempt to shield the public from the reality of the obvious economic fallout that logically will result when you strike a consumer driven economy right in the heart of his most valuable asset, his home! And it should be viewed as almost criminal, to suggest that the recent stock market performance, of which less than half of US households actually participate in, with an even smaller percentage actually holding any value as over 90% of total stock ownership is concentrated amongst the top 20% of the wealthier sector of the population, making their recent highs in both the Dow Jones and the NASDAQ the furthest indication of the economic well-being of the average consumer, yet it is repeated continuously by such propaganda pushers as Fox News and others as an indication of the country’s financial health meter! The most recent studies reveal that from the year 2001 to 2004 the percentage of households that actually own stock declined from 51.9% to 48.6% and the first decline ever recorded. Furthermore, the percentage of households with more than $5,000 in stock value fell from 40.1% to 34.9% and also the first decline and within the same time frame. Even the average value of stock holdings for the middle 20% of the population that owns stock was $7,500 in 2004 and a dramatic decrease in portfolio value from the $12,000 average recorded in 2001. What is more frightening from the conclusion of this report that was released in August of 2006 from the data that was collected through 2005 was that the typical American family relies on home ownership and home equity for their financial security, not the stock market, and that the only bright spot was that homeownership was on the rise up until that date! Well that date at the end of 2005 just so happens to correlate with the peak in real estate values just before the market in housing went over the proverbial cliff! In conclusion, one can easily decide for themselves how credible the predictions are from the talking heads in the media from such eternal optimists as the likes of Cavuto, Kudlow, and others, who continuously put a rosy spin on the obvious deteriorating economic conditions that are in play, by simply going back about six months ago and replaying their predictions of the coming utopia of ideal economic conditions and the minimal, if not almost nonexistent threat that the small sector of the economy that the subprime victims represent! In fact the general public would probably if only briefly, finds some good gut wrenching laughter at the thought of sending some of these marquee, TV financial gurus, copies of their own euphoric outlooks of the recent past shows, so that they could cringe with fear in a state of extreme embarrassment over the stark contrast from today’s reality versus their previous “fairytale prognostications”! In the meantime the real world will continue to digest more realistic indicators as to what is about to transpire as the fed, evidenced by today’s noticeably nervous chairman’s comments about the impending slowdown, and from such telling facts as Gold recently hitting 26-year highs at $848 an ounce and the euro reaching 147 and its lifetime high along with crude oil of course coming within $2 of the uncomfortable $100 benchmark, and all three conditions more a revelation of the world’s uncertainty and fear of inflation, and yet hardly conditions that characterize a healthy consumer much less one who enjoys a bright economic future! Over the near term we anticipate a continuation of elevated volatility within the crude oil market whereby a near-term test of the $100 benchmark is expected to fall short of its mark again with rejection forces from a lower high bringing values back to test key support at the $94 benchmark over the near-term after values above between $98 and $99.25 or possibly tested over the next five sessions. However we do feel over the median term between now and the end of the month there exists a distinct possibility due to the ongoing tenuous situation in the Middle East, the weaker dollar, and other supportive conditions, that the sudden arrival of severe cold in the Northeast could eventually trigger an upward penetration of the $100 benchmark to new highs between $102.50 and $105 on the strength of Heating oil demand. Especially if the recent banking debts from the likes of Citibank, Bank of America, Washington Mutual as well as Fannie Mae and Freddie Mac incurred from the economic fallout of the subprime contagion fails to spread more rapidly over the near term taking down the stock market in a more dramatic fashion than has already been experienced which initially could cause sympathy selling across-the-board as traders would be looking to liquidate any market position of profit as they scramble to meet margin calls or take advantage of perceived temporary buying opportunities in stocks. This week petroleum values confirmed our prediction from our last report by hitting an exceeding our upside target range of $97.50 to $98 a barrel for crude oil.

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

November 8, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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