Consensus Report: January 03, 2008

Petroleum breaks Major $100 Price Barrier for the first time in History on initial reaction to EIA update and ongoing Overseas Tension, while Natural Gas breaks out from Bearish range on Severe yet brief Winter Blast covering the Eastern U.S.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead, after the rebound of the debut of the new February spot, tested the commensurate support level which fell in at exactly $6.95, to look for the February futures to remain near term contained by $7.40 on the upside with a possible revisit to retest recent lows near-term. However, the market after hitting our upside target at $7.40 and exceeding it on New Year’s Eve, short covering increased and prices moved towards the next key resistance band at $7.60-7.65 which was also hit and surpassed creating a bullish breakout. Since then prices have reached extremely over bought territory failing at the peak of $7.97 just shy of the key $8.0 benchmark on aggressive short-covering and panic buying. Looking ahead after today’s negative close and minor key bearish reversal giving back $.17 cents to settle at $7.66 after the upside rejection, the market has left a price gap back below between $7.53 and $7.57, which being notorious for filling it’s gaps, makes for an irresistible target. We anticipate from the overbought status exhibited in the stochastics, momentum, and the MACD, that despite the parabolic and positive divergence remaining in the linear oscillator, the upside price influence should soon yield to price fatigue, and likely find rejection to come in from a potential breakdown from failing at a sub-peak somewhere under today’s intraday high at $7.97. We also anticipate from the steep angle of the recent price climb that when the upward momentum stalls, probably near the $7.80 to $7.86 price band, it will be followed by a violent drop that will not only fill in the price gap below, but also break much further taking out minor support below at $7.25 for a likely retest of $7.10 near term.

Fundamental Supply Update

This week's EIA report will be delayed until tomorrow at 10:30 a.m. due to the New Year’s holiday and so currently storage remains at 3008, which is 120 bcfs below last year’s record high and now 220 or 7.9% above the five-year average of 2788 bcfs. Winter weather will continue to be the main catalyst for price direction over the near-term with some sympathy to crude oil trading which was clearly evident today, running a distant second. With current gas in storage still holding such a hefty premium above the five-year average it will take either a new winter blast in the central and northern US or lower price base to attract more sustained buying in my opinion. Looking ahead with warmer conditions currently forecast for the consuming Midwest and Northeast for at least the 6-10 day period, we feel the bears will find the recent price exaggeration to the upside too tempting to ignore, especially with the price gap back below in the mid-fifty cent range as a viable near term target to shoot for on any drop in buying pressure or if Crude oil take a well earned correction. This recent price escalation took many of us by surprise as to the degree at which values increased, however the Winter storm that converged on the Eastern half of the country and extended all the way to the Southern tip of Florida with freezing temperatures was much more severe than had been earlier forecast even though it only lasted a few days. That is why with the sharp contrast of much warmer than normal temperatures that are due to converge on the eastern half of the country due this weekend and extending deep into next week, it should provide good impetus for the short side to enter the market with strength, especially if the bulls do the prudent thing and decide to lock in the recent short term gains. Look for a potential failure somewhere beneath recent highs and likely below resistance at $7.80 and then above this more critically at $7.92, with values then likely to return to test support at $7.25.

Concerning crude oil, the market today posted a record intraday peak after finally breaking above the key psychological $100 benchmark making history and a headline that no doubt resonated around the globe after prices hit $100.09 in afternoon trading before profit-taking settled prices in negative territory for a modest loss of $.44 or 0.4% to settle at $99.18 a barrel on the Nymex. This historic event followed yesterday’s record highest close of $99.62 per barrel. This week’s driving news that influence the historic event was a combination no doubt of increased violence in Nigeria converging with another consecutive larger than expected drawdown crude supplies for the week. US crude oil inventories fell for the seventh straight week, dropping by more than expected 4 million barrels to now total 289.6 million for the week ending December 28 in the lowest in three years according to the EIA. Previous estimates had buried between a range of 1.5 and 2.2 million barrels amongst notable analysts. The product side of the EIA update somewhat mitigated the bullish response as motor gasoline stocks had increased by 1.9 million barrels and was more than expected despite the fact that they remain in the lower half of the average range, while distillate fuel stocks also increased but by a modest 0.6 million barrels, however a decline had been anticipated and yet they remain in the lower limit of the average range for this time of year. Another slightly negative declaration to the report was that refinery capacity had increased by a substantial amount up to 89.4% of operable capacity as gasoline production increased over the previous week while distillate fuel production fell for the week. Another negative factor which indicates an expected softening of consumer demand is that gasoline consumption has shown to be down over 5% overall from the same week last year according to a recent study released by MasterCard advisers. Earlier in the week crude prices posted a sharp increase of over two dollars per barrel approaching the $98 benchmark on Wednesday, January 2 following news of increased violence in Africa’s biggest producer Nigeria as reports indicated militants had killed 12 people in the southern city of Port Harcourt igniting concerns that further output may be lost and add to the approximate 500,000 barrels per day that has already been interrupted from violence in the region. Overall in 2007 crude oil prices have surged 57% or $34.93 per barrel in the biggest annual percentage increase since 2002. On November 21 the New York futures price had reached $99.29 per barrel on international tensions amongst Nigeria, Iraq, and Iran, along with ongoing supply concerns here in the United States spurred on by continued strained refinery capacity and robust energy demand worldwide and mainly from Asia. It is obvious all of these major concerns are of a chronic nature and none of which seem to be temporary and thus have escalated values to where they are today for a record historic event to transpire in the first week of the New Year! Continuing to underpin the recent bullish surge in petroleum values is also the affliction suffered by the weakening US dollar which has returned to above €147 and seeming again to threaten its recent bottom. US inventories continue to take center stage although for this week supplies at Cushing Oklahoma, the delivery point for all crude trading on the Nymex remained flat at 17.5 million barrels. The current commercial US stocks level can support about 1 ½ months of US petroleum consumption. Outside of this The US Strategic Petroleum Reserve which holds 696.4 million barrels, is equivalent to just above one-month of US consumption. This approximate 2 ½ months of aboveground supply as the only buffer against zero reserve’s in the world’s top consuming nation responsible for nearly 25% of the world’s production illustrates how tight the existing supply demand balance really is. It is understandable then why noncommercial traders, including hedge funds and other large speculators, increased their bets for prices to rise in oil last week according to the US Commodity Futures Trading Commission. It is also why such outspoken investment bank giants such as Goldman Sachs and forecasted crude oil to maintain a lofty $95 average pricing for the coming year in 2008. This hardly provides much comfort to an already battle weary consumer that is still reeling from the biggest real estate crisis in the nation’s history since the Great Depression, as the expected price escalation in gasoline soon approaches in the typical pre-summer months of April May.

WSI Weather 6-10Day Outlook

Unseasonably warm weather to continue in the East into late next week

Summary

A strong southeastern U.S. ridge and a progressive and near zonal Polar jet stream along the U.S./Canadian border are expected to combine to bring unseasonably warm temperatures to the eastern two-thirds of the country next week. In response, above and much above normal temperatures are forecast over the central and eastern U.S. for the balance of the next week forecast period. A redeveloping western trough is expected to bring seasonably cold temperatures to most of the western U.S. In response, near and below normal temperatures are forecast over the western third of the country. This pattern is expected to break down during the 6-10 day period as all models advertise the PNA (Pacific North American) will, at least briefly, transition to a moderate to strongly positive phase. In response, all models feature a building West Coast ridge during the 6- 10 day forecast period and suggest the focus of troughing and cold weather will shift into the central and eastern U.S. The main story next week is still expected to be the unseasonably warm weather gripping the eastern two thirds of the country. Widespread highs in the 30s and 40s are expected to be the rule for the north-central and northeastern U.S. most of next week. Highs in the 50s and mainly the 60s are forecast over Texas and the southeastern U.S. Daytime highs as warm as the low and middle 50s are forecast as far north as Chicago and the Mid-Atlantic States on the warmest days. Highs as warm as the 70s are possible along the Gulf Coast. These temperatures support anomalies as warm as 10-20 degrees above normal encompassing most of the central and eastern U.S. for the balance of the next week forecast period. Most of the eastern two-thirds of the country are expected to be on the downside of a cooling trend during the 6-10 day forecast period as the focus of the troughing and cool weather shifts east of the Front Range. Anomalies between 8-15 degrees above normal are still forecast over the eastern third of the country during the 6- 10 day period, mainly based on the warm start to the period. However, highs in the 20s and 30s are forecast to become more common place over north-central and northeastern U.S. during the latter half of next week. Highs in the 40s and 50s are expected to return to Texas and eventually the southeastern U.S. Despite the building western ridge, most of the western third of the country is forecast to see colder than normal temperatures next week. Though the cold weather may modify at times, especially next weekend, widespread highs in the 50s and 60s are expected to be the rule for California and the southwestern U.S. most of next week Highs generally in the 30s and 40s are anticipated over the northwestern and interior western U.S. Daytime highs as cold as the middle and upper 40s are possible over interior portions of California on the coldest days next week. Anomalies between 2-6 degrees below normal are forecast over the western third of the country for the balance of the next week and 6-10 day forecast periods.

Conclusion

Natural gas has staged a short-term rebound this week from its brief foray down to below the key psychological $7.0 benchmark last week which had temporarily established new lows for the debut of the February spot futures. Looking ahead especially after the sharp spike that after today’s intraday peak of $7.97 per million BTU has exceeded a one dollar price band from low tohigh, leaves the market in extremely overbought territory. This technical condition about to converge with the approach of some above normal temperatures soon to permeate the key eastern consuming regions of the United States should provide good fuel for selling conviction and the necessary attraction of renewed short interest in the market to take advantage of the combination of over extended values in conjunction with near record heavy supplies and a comfortable cushion above the five-year. From this scenario we anticipate a near-term failure from somewhere near yet below today’s intraday high and probably near the resistance and between $7.80 and $7.86 that could easily return the market lower first to fill in the gap in the mid-$7.50 area and with expected dramatic downward momentum a deeper washout to test minor support and $7.25and possibly lower! Only on a possible sympathetic move with crude oil if petroleum manages to achieve a more substantial resistance break and close above the key century mark of $100 per barrel do we see a possible and short-lived return of natural gas back up through today’s intraday peak of $7.97 whereby we would still expect the next resistance point at $8.10 to contain the advance. We also feel should this unlikely scenario transpire, that the subsequent selloff in natural gas following this event would then be more dramatic as prices in our estimation would then be artificially elevated only in sympathy with petroleum and thus on the first sign of profit-taking in that market the natural gas sellers would emerge in droves!

Concerning the petroleum complex, this week’s price activity, was impressive to say the least as prices finally hit and surpassed although only intraday, the key psychological $100 benchmark, which has both amazed traders as well as inspired fear no doubt in the hearts and minds of consumers everywhere. This near quadrupling of the benchmark price for crude oil since that monumental blunder perpetrated by the Bush administration in March of 2003 to invade Iraq, which ended up crippling the production of the then second-largest oil producer in the Middle East, which has averaged over 40% in lost output on a daily basis equivalent to millions of barrels and has escalated Asia’s thirst for oil into an unmanageable problem, has now painfully become a major headline. The world should never forget, and hopefully the history books will properly record the seriousness and severity of that disastrous decision and its negative economic implications to the globe many of which are yet to materialize but seem poised to explode in 2008! The next major cycle that is likely to bring this to a very uncomfortable reality is the upcoming summer driving season here in United States and based on the current refinery limitations in the Gulf is likely to result in some of the highest gasoline prices experienced by the consumer since 1980 and could easily launch gasoline by $.30-.40 cents above current levels. However this time it may seem even more devastating as it is likely to converge with millions of consumers possibly facing an even more serious crisis in home foreclosure as thousands of adjustable rate mortgages are about to reset higher. The coming housing induced recession combined with the highest stifling prices for gasoline will test many consumers beyond what many talking heads in the media think they can withstand. And while many may think things will somehow work out, not one comment of denial or downplaying the crisis or continuation of the ignorant blind optimism that spews forth from the Wall Street pundits who refuse to accept the disconnect between the major players that support that market and the general public will provide any comfort to the consumer in the street facing the crisis! However, when that day comes, and the confirmed headlines read that one of the worst recession’s to face this nation has now become painfully evident, stock values as well as the rhetoric of those participants previously beating the drums of marginalizing the impact will likely take a dramatic change as they take to hiding or at least become shamefully silent. And so as we have mentioned in previous reports when this unfortunate set of circumstances transpires it will also spread into a reality as well as perception of demand destruction that will likely affect the value of many markets including energy prices. Until then, we anticipate now that the psychological barrier at $100 has been penetrated, that the market is likely to surpass this noticeably upon the next serious threat headline that emerges from either a credible or perceived source with $102.50 as the next key resistance point that if the threat does not materialize will become a strong attraction for short interest which will easily return values back to test previous supports at $96 and more critically at the pivot price at $94. This week’s price action totally confirmed our last report in our abbreviated holiday edition whereby in conclusion we clearly stated that “given the current international situation and the supply demand dynamics we felt over the near-term that the $94 level would hold up with a strong potential for the up side resistance level at $99 to be tested and within the next 5-7 sessions”, which is exactly what transpired! Looking ahead now we anticipate with some room for profit-taking for near-term support to possibly be tested below at first 97.50 up to $97.80 with a break back below this band of support bringing a possible test of minor support at the $96 benchmark and we feel any temporary break below this level will be bought aggressively and so we do not anticipate a break below the higher low of $95 on the next decline. Unless the market finds a new economic figure that poses serious weakness and further support for the coming recession do we see enough selling to penetrate this level near term and keep the dominating Bulls out of the market. Obviously it’ll take more than this week’s weaker than expected drop in the Institute for Supply Management index which dropped to 47.7% in December from 50.8% in November and clearly a sign of economic contraction as a number of above 50 is required to signify economic expansion. The next key economic number that everyone will be focused on is tomorrow’s non-farm payroll numbers which judging from this week’s drop-in jobless claims has induced some optimism, however there were two days over the holidays where government offices were closed preventing some unemployed to file for benefits that may have skewed the numbers. Even the strongest of optimists are praying for a rather anemic result of an increase between 70k and 100,000 new jobs which still falls far below the necessary 150,000 believed to be necessary to prevent unemployment from growing.

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

January 03, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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