Natual Gas and Oil Report

Volatility Permeates the Energy Complex as Winter is Eminent with Natural Gas Poised to Lead the Advance

Technical Outlook: last week our pricing model was again confirmed almost exactly to the penny as prices firmed from the higher low posted last Thursday at $11 .06 basis spot December. The market then , just as we predicted and within the three to five day session time frame called for, hit our upside targets first breaking resistance at $12 .06, and then closing yesterday, above key resistance at $12 .20 to settle at $12 .329. Then today to completely confirm our upside objective for the week, prices challenged our target at $12 .70 with the intraday high posted at $12 .695 before giving back all of today’s gains and closing down 38.7 cents , to settle for a loss at $11 .942. Despite today’s negative close and the market’s giving back about half of yesterday’s gain, the technical picture remains constructive with most indicators positive with stochastics, relative strength, and several oscillators pointing to higher prices ahead. The MACD, as well as momentum are pointing higher with a wide bullish divergence, along with a positive parabolic reading. With this current pattern, we expect for support to hold on pullbacks with scaled-down buying from $11 .86 down to $11 .62 basis spot December. We also anticipate another challenge to key break-out resistance at $12 .70 with a strong chance of an acceleration through this point, for a powerful advance to challenge new highs above this at $13 .50, and soon, possibly within the next five day sessions! Only a negative fallback close below $11 .55 negates this bullish aspect for another retreat to key support at $11 .25.

Fundamental Supply Update

Today , the EIA reported an injection of 53bcfs that was basically in line with both estimates by Bloomberg , and Dow Jones of 51 and 52bcfs , respectively. It was also just below the ICAP estimate of 55bcfs and yet right in line with our company call for 52-57bcfs. This leaves storage now , at 3282bcfs , which is 40 less than last year at this time , and yet 179bcfs above the five-year average of 3103bcfs. Prices put in a volatile session , climbing at one point in excess of $.36 , to the intraday high at $12 .695 before collapsing back to a negative close near the low of $11 .90 to settle at $11 .942. This was basically , the result of profit-taking , combined with technical selling that escalated on lack of follow-through from the highs and some sympathy for the weakness in the petroleum complex. Overall prices are still elevated from last week as the market prepares to receive the coldest air year to date to descend down from Canada into key consuming regions. We see a strong potential for more separation from the petroleum complex as natural gas will remain far more sensitive to fluctuations to colder weather, especially in the Midwest , as there are no back up reserves to fallback on if a sudden surge in demand removes gas from storage at a rate that is perceived as too aggressive to replenish within this season or in time to keep a safe buffer against depletion from future withdrawals. The technical posture of the market already suggests more separation ahead from crude values as it shows a much more positive pattern already over crude oil. Weather still holds the ultimate determination for prices ahead over technical considerations , and we feel with the forecast for much below normal cold , in both the Midwest and Northeast next week , that there is a bias towards the Bulls’ camp over the near term. Concerning crude oil, the market posted a modest gain yesterday of about $.77 per barrel on the EIA news of a surprising draw-down of 2.2 million barrels. When most analysts expected , another gain. The petroleum complex drew strength yesterday also from an unexpected draw-down in gasoline of 0.9 million barrels last week , leaving them in the middle of the average range for this time of year, while distillate fuel inventories rose by 2.6 million barrels last week , and the first increase in several weeks , and yet supplies are still in the lower half of the average range for this time of year. However, today crude oil gave up all of yesterday’s gains , and then some closing at the lowest level since mid-June , and bringing our target from last week’s report of $56 .25 within reach. Today’s volatile collapse in petroleum from the intraday high of the week seemed to be triggered by Natural Gas’s inability to follow-through to the upside on yesterday’s momentum in a seeming suspension of fear of the cold weather , pending next week. While both markets , seemed to follow each other at different times in the day crude oil certainly finished as the weaker of the two as technically it took out the previous day’s high only to end in an outside day down by closing below the previous day’s low and settling at a new multi-month low of $56 .34. With natural gas falling back from key resistance, crude oil found little to support itself on winter fears and its ties to heating oil as the supply situation is not anywhere near as critical as with the gas. Looking ahead , crude oil is likely to fall farther , unless the forecast shows signs of a more sustained Arctic type below normal cold impacting specifically the Northeast , which would directly impact heating oil , and thus elevating its follower, crude oil. Unless there is some type of international incident such as a labor strike in a key producer like Nigeria or Venezuela or a sudden terrorist act that disrupts supply from a viable source, the combination of current adequate supplies in the US , along with a dismal technical posture, indicate the path of least resistance for crude oil is lower still. Let’s now take a closer look at the weather over the next six to 10 days , with W. S. I as the implications are paramount to Natural gas and indirectly crude oil through its dependency on heating oil for direction.

W. S. I Energy Cast November 21 to 27

The below and much below normal temperatures are still forecast over most of the eastern US for the balance of the six to 10 day forecast period. In fact, the much below normal temperatures are more widespread than previously forecast, and are now expected to encompass the Mississippi Valley , as well as most of the eastern US. Though some moderation from the cold weather is possible at times, a prolonged period of below and much below normal temperatures can be expected over the Mississippi Valley and eastern US next week as a series of Arctic air masses will rotate into the persistent eastern troughing. The coldest temperatures will arrive late next week as a portion of the Polar Vortex rotates through eastern Canada. Daytime highs are only expected decline into the 20s and 30s in the Midwest and Great Lake states for most of the six to 10 day period. Highs in the thirties and forties will prevail in the Ohio Valley and the Northeast. Even the Southeast and Florida will share in the cold weather. Highs will struggle to climb out of the fifties and low sixties. In the Southeast. Florida will only see highs in the sixties and seventies. Anomalies are expected to average between 3-8 degrees below normal. Over the Mississippi Valley and most of the eastern US for the balance of the 6-10 day period. The warm weather in the West is not as widespread as previously forecast. While above normal temperatures are still forecast over most locations west of the front Range, the focus of the much above normal temperatures has shifted to the Northwest during the 6-10 day period. Highs in the50s , and low60s are expected in the Northwest. Most of next week. California will continue to see highs climb into the sixties and seventies most of next week , though the seventies will become less widespread as the week progresses.

Conclusion.

Natural gas in our opinion , has concluded a short-term corrective phase with $11 providing a strong intermediate low and may end up remaining as a strategic low over the next two weeks due to the impact of the Arctic cold descending from Canada into key consuming regions. Over the near term look for natural gas to be increasingly sensitive to any fluctuations in the degree of cold weather in both the Midwest and the Northeast. We expect further separation from the weakness in the petroleum complex as natural gas reacts to the coldest weather year to date , and will finally be forced to reveal its true , production limitations that were seriously damaged by the wrath of hurricanes’ Katrina and Rita. Not until a weekly storage withdrawal is declared by the EIA following a solid cold week of winter demand will we have any real semblance of a true idea of the potential damage to the production infrastructure suffered at the hands of these two unprecedented juggernauts. Then and only then will we have a more educated and clearer picture of the possible supply dilemma that we face as we enter the peak demand cycle of winter. The technical picture indicates further strength to values ahead as yesterday’s almost $.80 breakout confirmed. Look for scaled down support from value buying between $11 .86 and $11 .62 with key resistance soon to be challenged above at $12 .20 and then $12 .70 with a strong possibility of an acceleration straight through to $13 .50 upon confirmation of more sustained below normal cold extending beyond Thanksgiving weekend. Only a collapse back under $11 .55 would indicate some core weakness remains, and in order to prevail over the robust bullish speculative forces, would need to stand in utter defiance of the cold to negate our bullish outlook. Obviously , a sudden shift in the weather forecast back to more mild early November- like conditions could result in the same negative scenario, but at this point , would require a dramatic change in the jetstream ending the trough in the East that is conducive to the southeastern Canadian Arctic flow.

Crude oil today confirmed a very bearish short-term technical chart pattern by posting an outside day down settling at a new multi-month low. Fundamentally with 321.4 million barrels of US crude inventory and well above the upper and of the average range for this time of year, supplies are hardly under threat from the proposition of a cold winter. We expect a near-term challenge to lower support and $52 .90 basis spot crude unless heating oil can manage a reversal and bring another challenge to overhead resistance at $1.84 short term. Resistance for crude oil should prove difficult to breach at $58 .10 unless winter poses a more formidable threat going forward. However the market is still vulnerable to the impairment to refinery output imposed by the storms in the Gulf of Mexico. This last week , refineries still operating at the subpar level of 86.2% due to the storm damage , and are thus still heavily dependent on imports. This situation could of course , could be exacerbated by an abnormally cold winter inflicted in the Northeast , causing a squeeze to heating oil inventories , which are conversely , currently in the lower half of the average range of supply for this time of year. Should this scenario transpire due to a frigid Arctic assault on the Northeast, crude oil values would no doubt rally in following the products higher. That is why Natural Gas can indirectly , have a strong impact as we feel it could lead the entire energy complex in reaction to the stress of a harsh and demanding winter. Being the number one heating fuel utilized in the United States, a squeeze on natural gas supplies brought on by sustained demand from a cold spell could trigger a domino effect that would ripple through the entire petroleum complex , led by heating oil. According to the latest MMS update today’s shut- in oil production is 717,807BOPD which is equivalent to 47.85% of the daily oil production in the Gulf of Mexico and has reached a cumulative total of 87,837,679 barrels year to date. Today’s shut- in gas production is 3.648BCFPD , which is equivalent to 36.48% for a total cumulative loss of 453.122BCFs , which is equivalent to 12.414% of the daily production of gas in the Gulf of Mexico. In either case, these are not insignificant production outages and can only be ascertained as to their severity, when the stress of above normal demand is placed upon them , which will soon be tested from the approach of winter. The first real test , should be felt next week. In a similar warning , stated in an interview on television on CNBC by X. T. O. Energy executive Bob Simpson, whereby he said that as much as 5% of Gulf natural gas production may be permanently lost due to hurricane damage from the two storms , causing spikes as high as $20 per million BTU this winter. Earlier on Thursday , and on the same line of thought , a Federal Energy Regulatory Commission(FERC) official warned that high absolute levels of storage , may provide insufficient protection against supply problems this winter , making note that the absence of 4BCF of gas output on a daily basis is not insignificant, brought out in the Dow Jones newswire update. This should keep an upward bias to prices going forward on natural gas and indirectly will provide up trend support to the entire energy mix through its affinity with heating oil until a more decisive supply demand balance can be determined , which logically can only be revealed after more of the winter cycle has transpired.

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

Novemeber 17, 2005

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744