Natual Gas and Oil Report

Energies Decline as Natural Gas Turns a “ Cold Shoulder” in the Face of a Record Storage Draw Encouraging Technical Sellers.

Technical Outlook: last week we stated in our report that we expect a rapid test of minor resistance at $15.75-15.80, and we also echoed this projection in an interview with the Dow Jones newswires on the same date of December the eighth. We also forecasted strong support buying on pullbacks first at $14 .75 , and then $14 .20 , which was confirmed as the low on Friday. Our upside target was pinpointed and confirmed exactly between our bracket with the intra-day high posted at $15 .78 on this past Tuesday , December the 13th , and right within the three session time cycle predicted following our report on last Thursday , December the eighth. Looking ahead, the market has since then staged a full retreat by Bull forces, putting the market into a negative posture indicative of a corrective phase. Technical indicators suggest further weakness as the market subsides from a sharp short-term peak , resulting in an overbought condition. We see a continued short-term negative signal emanating from the stochastics, relative strength, momentum, and the MACD which declares a wide negative divergence along with a parabolic reading that is just about to turn negative. From this technical posture , we anticipate a test soon of key pivot support at $13 .50 with a close below this possibly bringing a rapid challenge to intermediate support at $13 .02 and then more critically at $12.60-12.74 before Bull forces reemerge to stem the decline. We expect rebound attempts to be contained by the $14.20 level until the corrective phase is completed. Once this is accomplished, look for a close back above $14 .70 to signal a continuation of the up trend, and an eventual challenge to the highs. However , we see the potential for a rapid diminishing of selling strength once prices get below $13.50 making the market vulnerable to a sharp bullish reversal to emerge from a strong undertone of value buying scaled-down from $13.10 to $12 .50.

Fundamental Supply Update

Today the EIA reported a surprising record withdrawal from storage of 202bcfs, that was well above both Bloomberg and Dow Jones estimates that were in the lower 170s as well as comfortably above our company call for a reduction of 162-167 bcfs. However , the expected bullish reaction, which initially created a strong buying impulse , taking the market out of the early negative sub-$14 .20 level into a sharp vertical advance to the intra-day peak of $14.92, only lasted minutes as these gains quickly evaporated into profit-taking and new short-sellers that soon pushed prices into new negative territory and settling the market , sharply lower to settle below key support at $13 .78. Storage now stands at 2964 bcfs , which is 195 bcfs less than last year, and yet still 107 bcfs above the five-year average of 2857 bcfs. Normally under such a negative reaction immediately following such a bullish news event, one could draw a conclusion that a deeper weakness exists in the core of the market , indicating a potential end to the Bull trend, however , we feel this would be both a premature , as well as an unwise assumption. While it is clear the market is obviously attempting to put in a short-term top, we feel it is likely to be just that, a peak in pricing for the month of December only, as we stated in a news interview with DTN today. We also stated in that same interview that today’s record withdrawal for a week in December will likely come back to haunt this market as it is quite telling and it is the first indication of the true impact of the production lost to hurricanes Katrina and Rita when the industry faces elevated demand from a solid cold week in both key consumption regions of the Midwest and Northeast. Today’s EIA data also serves to put serious doubt in the theory, and one that we never subscribed to, that demand deterioration as a result of the storms in the Gulf region , had served to totally mitigate the resulting lost production. In fact , it is our view, as we have stated clearly in past interviews, that time will continue to prove going forward that during periods of peak demand from weeks of sustained below normal cold, that production lost in the Gulf has only served to exacerbate an already labored and falling supply output dilemma , whose solution is far from visible as the depth and complexity of the possible long-term remedies are yet to be fully discovered , nor are they even totally understood. Given this perplexing situation that is painfully and physically evident from the clearly declining gas yield experienced this past high consumption summer , which with a traditionally higher rig count during peak cooling demand, quickly took a hefty year on year surplus of 260 bcfs and decimated it to almost a 100bcf deficit, and all before Katrina appeared in the Gulf, will in our opinion continue to foster dramatic and volatile price swings that push the upper end of the envelope during periods of peak demand. Having said that, we feel it is too early to label this market as though it has already topped out for the season as winter is far from over , and it is our view that since January , typically the coldest month is rapidly approaching, that today’s record withdrawal sets the stage for this market to more likely post another new record high in the weeks ahead. We also feel that until the degree to which the January cold deviates from normal is more confidently forecasted, and thus perceived, prices are likely to be sustained above the $12 benchmark in our opinion.

Concerning crude oil , the market found little to get excited about outside of some rather benign weekly supply numbers from the DOE along with the typical greed based rhetoric from OPEC in which key members pronounced little future relief from the consumer choking and industry taxing elevated petroleum values that the global economy has been forced to accept under a whole new pricing valuation that escalated primarily at the onset of the Iraqi war in 2003. In fact, in quite a contrary display to any proposed relief, most of the statements by OPEC members, including a declaration by Kuwait of dependency on foreign oil companies to meet future proposed necessary output targets, indicated a possible cut in production in order to circumvent a potential economic slowdown , possibly leading to a drop in demand in the second quarter. This of course is all aimed at keeping crude oil prices above the $50 benchmark, and a far cry from the accepted and well-publicized desired price range for the basket of crude, declared by OPEC , not even a year ago, which was way below the current elevated price. The EIA announced a slight slippage in refinery operating capacity back to 89.6% as gasoline and distillate fuel production fell averaging 8.7 million barrels per day and 3.9 million barrels per day , respectively. Crude oil stocks inched up by a mere 0.9 million barrels from the previous week , ending at 321.2 million barrels and remain well above the upper end of the average range , while motor gasoline stocks increased by 1.8 million barrels yet leaving them in the lower half of the average range. Only distillate fuel inventories inched lower by just 0.1 million barrels last week , and are now in the middle of the average range for this time of year. The only element that seem to stand out as supportive in the weekly update was that both motor gasoline demand , averaging 9.2 million barrels per day , and distillate fuel demand , which has averaged over 4.1 million barrels per day over the same period last year, both reveal elevated demand over the previous year of 1.1 and 0.9% respectively, and is obviously , an indirect boost to crude oil values. However , fundamentally, we continue to feel that due to traditionally high U.S. inventory levels, and the future implications of Asian demand, crude prices are still short-term being artificially propped up by winter demand implications on the products and more critically, Natural gas. Now let’s take a closer look at the weather with WS I as any sudden shift in the cold could have a dramatic impact on the energy mix , and especially natural gas...

WS I Energy Cast 6-10 day Outlook

Winter cold to grip the Eastern two thirds of the country. Below and much below normal temperatures are forecast over most of the Eastern two thirds of the country for the balance of the 6 to 10 day period. The cold weather will initially overspread the Midwest, Plains and Mississippi Valley early next week before shifting to the East Coast and southeastern US late next week. As a result , the central US is likely to see the coldest temperatures early next week , while the East Coast will see their coldest anomalies late in the week. Either way , daytime highs will struggle to climb out of the teens and twenties in the Midwest most of next week. The Northeast will mainly see highs in the twenties and thirties. The South and Southeast will share in the cold weather as well. Highs in the forties and fifties will generally prevail over the southern tier of the country from Texas to Georgia next week. Highs in the upper thirties are even possible in the coldest locations on the coldest days for the balance of the six to 10 day period. Temperature anomalies are expected to average between six and 10? below normal over most of the Eastern and south-central US. Otherwise anomalies are forecast to average between 2 and 6? below normal. In the West medium-range models failed to establish any strong signals for warm or cold weather. Therefore anomalies are expected to average close to seasonable levels over most of the western US for the balance of the six to 10 day period

Conclusion

Natural gas has clearly embarked on a corrective phase evident from the sharp retreat , and aggressive selling that was initiated from the intra-day peak at $15 .78 posted this past Tuesday afternoon. Since then , what has transpired is a powerful sell-off from profit-taking and short-term liquidation , resulting in today’s close below key at support at $14.20, that we feel judging from lost momentum and other critical technical indicators is not over yet. Looking ahead and in lieu of the weak short-term technical posture, we anticipate first a challenge to pivot support at $13 .50 with a likely follow through to lower intermediate support at $13 .02 and then possibly a deeper probe lower to $12 .80 before scaled-down buying emerges with enough commitment to shift selling pressure. With the impact of today’s very bullish fundamental announcement by the EIA’s storage reduction, we see once again , the potential convergence of a bullish weather induced fundamental element with a short-term oversold technical condition, the combination of which often precedes the most dramatic and volatile price accelerations in the markets habitual cycle. This scenario , which almost demands the attention of any cautious trader or market participant, will obviously be mainly determined by the reality of the immediate weather ahead. It is our view that the current sharp sell-off in excess of two dollars from the new historic price peak, set in the afternoon of December 13th is the market’s desire to price in this month’s recent frigid cold along with the brief temperature moderation expected at the end of the month. Yet with the implications of today’s excessive record storage reduction and the likelihood that current known weather could further reduce storage to levels below the five-year average, we see the market vulnerable to another key bullish reversal igniting a return challenge to recent highs and a possible new record set in response to the potential threat of a deeper plunge below normal temperatures approaching in January. This resumption of the uptrend would be confirmed in our estimation by a near-term close back above the swing pivot price of $14 .70 and suggest a return to existing resistance at $15 .78 for a possible thrust to new highs at $16 .50 longer-term. This is where the recently updated shut-in gas production, only improved to 22.28% , declared by the MMS today becomes more influential on prices and so with the eminent approach of what is typically the season’s coldest month , along with the expectancy of larger supply withdrawals, it is our opinion that the unknown factor prior to the revelation of these events will keep the market suspended above the $12 benchmark over the short-term. Only a sudden and dramatic shift in the weather Outlook moderating January’s threat to more seasonable temperatures could result in a more bearish scenario signified by a long liquidation and a sharp drop in prices , revealing a close back down below $12 .25 in our view.

Concerning crude oil, we also see a bearish development in the chart pattern whereby there exists a pronounced overbought condition with several technical indicators suggesting weakness ahead as stochastics, relative strength, momentum, and several oscillators point to further selling , while the MACD displays a wide negative divergence along with the parabolic , which is on the cusp of issuing a sell signal as well. From the technical posture alone , we anticipate a near-term challenge to pivot support at $58.10 with a potential for a further decline to $57 .50 especially if heating oil and natural gas continue to exhibit weakness as they are likely to complete their corrective patterns in the short-term. The recent MMS update declaring shut-in oil production at 426,282 BOPD which is equivalent to 28.42% of the daily oil output in the Gulf of Mexico will have little influence over the bearish forces that are currently prevailing over petroleum values in our opinion. The heavy U.S. supply and a very indirect impact from Winter demand puts crude oil quite a distance removed from the sensitivity to cold temperatures experienced by its distant cousin, natural gas. This clear distinction between the two markets could not have been made more painfully obvious than in this past weeks price-performance whereby crude oil, although stubbornly impressive in its own right, only managed to muster a rally from critical support that we previously forecasted at $56 .25 to $61 plus, and a far cry from its almost $71 peak, while natural gas, the Winter headliner, rocketed to an all-time new high of $15 .78 and eclipsing its previous late September price peak by almost a dollar! We feel crude values are more vulnerable during this corrective phase in the heating fuels to a retest of critical support at $56 .25 before we see another challenge to the uptrend resistance that would need a close above $61 .80 in order to set the stage for a continuation of the bull trend and a test of the breakout price at $62.50.

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

Decemeber 15, 2005

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744