Petroleum Testing Lows Following Full Spectrum Supply.

Consensus Report: January 18, 2007

Petroleum Testing Lows Following Full Spectrum Supply Increases, while Natural Gas Rebounds on Approaching Late Winter Cold.

Natural Gas and Oil

Technical Outlook: Last week we said, while the market is giving mixed signals, as prices recently rebounded from oversold conditions, you'll notice the rejection selling from our critical resistance point at $6.80 again proved to be too much pressure for the Bulls, and that we now expected the downward momentum to continue over the next five sessions. We also anticipated a near-term challenge to intermediate support at between $6.20- $6.25 soon to be followed by contract lows at $6.0, with a potential washout liquidation should this more critical support breakdown yielding a test of continuation chart support at $5.75. We said Stochastics, momentum, relative strength, the rate of change and the parabolic all suggested a vulnerability to further weakness ahead. However, we stated a consolidation rebound off of higher lows above the $6.0 benchmark could trigger range trade between this level and intermediate resistance above at $6.65 over the next week if the larger pattern break down was delayed. This latter scenario transpired confirming our forecast after the market hit our initial target of $6.20 and actually exceeded it by $.05 to a low of $6.15 before short-covering. Looking ahead while grossly oversold, the market is still giving mixed signals technically, and based on the slowing downward momentum, gives warning of a possible reversal soon. From our perspective, if the market fails to penetrate the $6.0 benchmark within the next 3 sessions we see the strong probability for a more substantial reverse rally back up to key resistance above at $6.80 with a more realistic chance at breaking through to test $7.0 this time in our opinion. Weather fundamentals may finally be changing enough to complement this oversold market this time as well, which we will discuss next.

Fundamental Supply Update

Last week's EIA report showed a drawdown of 89 bcfs that was closely in line yet comfortably above both previous estimates by DowJones and Bloomberg of 81 and 80bcfs respectively, as well as being quite smaller than the 5 year average draw of 119bcfs for the same week. Storage now stands after the last EIA update at 2936 bcfs which is 354higher than last year and 491 or a full 20% above the five-year average of 2445 bcfs. Traders typical confidence in the coldest month of the year to bring elevated demand has been shaken by what has been termed by the close of 2006 as one of the warmest winter's on record up to now. While the winter weather remaining in the forecast for the balance of January doesn't seem to hold enough promise for the Bulls to grab onto, the mere fact that the recent heavy selling has slowed its momentum may be just enough to temporarily turn the tables in their favor. February spot futures settled today at $6.324 million BTU after a meager gain of nine cents is natural gas bucked the negative petroleum trend. Despite today's crude oil collapse due to its own supply concerns which we will discuss next, the natural gas came out of negative territory and began to react to its heightened sensitivity to the colder weather forecast, over its cousins in petroleum. Weather sources told me today that after colder conditions impact the Eastern Seaboard over the next 6 to 10 days, a more substantial sustained cold is likely to impact the Eastern two thirds of the country just about at the end of January and will likely continue into early February. If this scenario pans out, it could give the desperate Bulls just enough ammunition to get a foothold and provoke a reversal that could ignite a more substantial short covering rally. Even if” Old Man Winter" makes a late appearance, his arrival, if it has any bite, could enable a noticeable price shift just from the resulting exit of the shorts as they profit from their recent bearish domination over the market for several weeks now. While some doubt this scenario, because of the market’s obvious heavy supply overhang, they do well to remember that once a supply number is factored in, and given that winter still has the better part of six weeks remaining, if the downward momentum slows as the selling dries up, this market has a propensity and unique habit of conveniently changing focus to the demand side while ignoring existing supply.

Concerning crude oil, prices have continued the recent sell-off as a similar condition exists concerning supply, however with a reduced sensitivity to the weather as the heating oil requirement represents a smaller percentage of the country's heating needs as well as the fact that petroleum has a whole separate set of bearish conditions to deal with. This week's EIA numbers revealed a full Spectrum supply increase that began with a more than expected inventory jump of 6.8 million barrels for crude oil, while both gasoline and distillate inventories also experienced sizable additions that left all three major commodities at or above the upper end of the average range for this time a year. And this was despite refinery capacity dropping back to 87.9% as a reflection of the recent logistical problems facing the Houston ship Channel and refiners obvious attempts to contend with declining margins. Even the implied demand figures revealed an inherent weakness in demand from the overall warm winter of 2006 as distillates run 3.6% below the consumption rate for the same period last year which seemed to overshadow the gasoline demand which currently is running 1.2% above last year's corresponding period. When you add to this bearish dilemma of the supply demand equation within the world's largest consumer, the recent Saudi comments declining the need for any special meeting or emergency response from OPEC, it only served to exacerbate the selling conviction of traders as they confirmed our forecast from this past Tuesday morning on Bloomberg radio whereby we called for a continuation of the decline to test the important psychological $50 benchmark which also coincides with last week's forecast in our report. Crude oil prices not only took out our target of the $50 benchmark but actually penetrated below it for a brief moment hitting a new 20 month low of $49.90 per barrel before closing back above at to settle at $50.48 for a net loss on the day of $1.76 and the Lowest close since May of 2005. The die seemed cast from an earlier report that was released by the International Energy Agency which had lowered oil product demand for both 2006 and 2007 citing US revisions, mild weather, along with slowing US GDP and apparent lower demand in the former Soviet Union countries. The IEA is now forecasting demand growth of 0.9% for 2006 and 1.6% for 2007, which represents a downgrade of 120,000 barrels a day in consumption for 2006 and 160,000 barrel downgrade for 2007. Some had anticipated these revisions given the slowing US economy and recent weakness in Chinese oil demand growth. This further reiterates what we mentioned in last week's conclusion about the inherent flaw to the theory supported by those that expect Chinese demand would circumvent the potential dropping consumption from the slowing US economy. We also feel now it will further substantiate our call in last week's report for a potential break below the $50 benchmark for a test near-term of $48.20, with a deeper probe to $46 per barrel which we mentioned in this week's Bloomberg radio interview. However it looks now to be more likely to impact sooner rather than what we mentioned as likely for the second quarter.

W. S. I Weather 6-10 and 11-15 Day Outlook

Temperatures of 5-9F degrees below normal are expected across the Southcentral U.S. as well as portions of the central Great Basin.
Today's forecast is not as cool as yesterday's across the Southwest and California while also milder in portions of the Midwestern U.S.
Confidence is near to above average based on reasonably good large-scale model agreement.
Temperatures may trend colder over the Eastern Seaboard through the Southcentral U.S. while warmer in the Pacific Northwest. The European/American ensemble solutions were preferred in today's outlook.
The coldest anomalies during the 11-15 day period are expected in the southeastern U.S., but with below-normal temperatures anticipated for most areas.
Today's forecast trended colder over most of the Eastern Seaboard through Southeastern U.S. than indicated yesterday.
Confidence is near to above average based on unusually good large-scale model agreement.
Temperatures across most of the Southcentral through southeastern U.S. may run even colder than currently indicated in the presence of a deep mean trough.

Conclusion

Natural gas continued its corrective and volatile path this week after practically duplicating the same price action of the previous week after rebounding from oversold conditions and then that was quickly met with strong selling pressure from technicians at the same key resistance level at $6.80 that we mentioned was critical in last week's report. Looking ahead, while we continue to see a strong potential of reaching lower into the recent range for a retest of contract lows at $6.0 per million BTU, however, we also feel that since the support level now between the new low established this week at $6.15 and the previous low of the February spot at $6.0 is likely to hold over the next two to three sessions because of the threat of approaching colder than normal conditions finally impacting some of the more critical consumption areas of the country, this double bottom technical formation could give added strength to the potential bullish reversal from the lows that seems to be pending. Only a full capitulation by the Bulls resulting in a washout close below the $6.0 benchmark, would negate our call for a short-term rally, which at this point would seem premature in our opinion. If this unlikely scenario were to transpire, then we feel it will fall short of setting a new low below the existing continuation chart lows at $5.74 per million BTU, unless the colder than normal conditions in the forecast do not materialize.

Concerning the petroleum complex, this week's EIA numbers again, very similar to last week, added more bearish news to the mix, and today's excessive downward momentum and new lower close indicates a negative backdrop technically to the market that is feeding the energy of sellers and hedge funds that are obviously in liquidation mode. With OPEC kingpin and swing producer Saudi Arabia shrugging off the need for an emergency meeting to counter the recent price collapse in petroleum only further serves to reveal the actual lack of control the cartel has over crude pricing, especially from the recent historic high levels, which confirms what we have said in many previous reports. Also, because of the recent announced production cuts of 1.2 million barrels possibly to be expanded to 1.7 million by next month, their now exists a healthy excess capacity in crude production that otherwise previously did not exist which had put the market on the proverbial banana peel, with producers with their backs against the wall, stretched to output capacity, facing the dilemma of just one disruption, either from an oil workers strike, terrorist act, or natural disaster, away from not having enough oil above ground. How quickly the situation, and thus perception, and of course value, can change. Of course the domino effect of three major events all falling sequentially in place and literally only weeks apart, one after the other, helped contribute to this bearish revelation that resulted in the biggest price collapse in oil's recent history. The first event was the sudden and yet expected end to the Israeli Hezbollah war in Lebanon, which was then quickly followed by the end to peak driving season here in the US, and then finally this was quickly followed by clear economic data revealing a significant slowing to the US economy promulgated mostly by a devastating collapse in the housing market. Now immediately following this unique chain of events is the unprecedented bearish arrival of one of the warmest winter's in recent US history in 2006, which has now allowed US refiners to get an early jump on gasoline production as a more than comfortable heating oil supply due to a lack of demand has taken the pressure off the winter fuel priority. This week's noticeable decline in refinery capacity from 91.5% down to 87.9%, is no doubt an attempt by producers of petroleum finished goods to slow down the rate of decline at the retail end and thus maintain healthy profit margins. This would explain the sudden backup in crude stocks along with the recent resumption to full operations in the Houston ship Channel as the recent fog in December hindering maneuverability finally lifted, allowing backed up Tanker loads to deliver. Looking ahead, however, considering the weather, the economy, and the current supply status along with the recent stagnation of the Middle Eastern affect in traders minds, we see little to prevent a further breakdown in price values below the $50 psychological support benchmark with $48.20 as a near-term objective, and further declines to the mid-$45-46 range possible as OPEC can do little against the convergence of the previous stated conditions. Refiners may find product values, despite their best efforts otherwise, will be forced to follow the source if availability is perceived to be more than adequate, especially in a slowing economy and a worried consumer that is preoccupied with concern over his falling home value! Only a rebound from recent lows back up into lower high range trade could temporarily delay the inevitable whereby prices meander short term just above the $50 benchmark yet are likely to be contained below intermediate resistance above it at $54 per barrel.

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

January 18, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744