Petroleum Rebounds from New Lows following EIA update and Stock market recover.

Petroleum Rebounds from New Lows following EIA update and Stock market recovery, while Natural Gas Continues Bounce from recent lows from technical correction and milder Forecast, after increase to Supply Cushion.

Technical Outlook: Since our last report we said looking ahead, we had mixed signals with short term indicators such as stochastics, momentum, and relative strength in overbought territory, while some of the longer term signaling further upside potential. Under this scenario we said to look for a potential challenge and break through the upside at $8.48 to test $8.60 near term and likely within the next 3-5 sessions, yet if this attempt failed, we felt from the duration of the recent advance that fatigue would set in quickly causing a subsequent failure to bring a sharp and dramatic collapse with values easily returning to test key support back below at $7.92 and lower rapidly. This is exactly what transpired as prices failed shortly after our forecast on technical fatigue and as predicted hit our lowest price support that we targeted in our conclusion last week of $7.80 as a bearish pivot point and that immediately lead to a price collapse to new lows briefly breaking down below $7.60 intraday before short covering salvaged values. Looking ahead the market is now exhibiting a mixed technical outlook once again with longer-term indicators such as the linear oscillator, the MACD, and parabolic all declaring a negative divergence still exists suggesting intermediate to longer-term weakness ahead. Meanwhile shorter-term indicators such as stochastics, relative strength and momentum have recently entered oversold territory which initiated the recent reversal and subsequent rebound into positive pricing, however, we feel the recent upswing is likely to be limited in its duration as well as distance with the market expected to run out of upward propulsion somewhere between minor resistance at $7.92 and more critically if reached at $8.0 to $8.10. We anticipate the impending rejection from the resulting failure at the expected lower high will come with a renewed selling strength that could rapidly return the market to test recent lows below $7.60 and could easily materialize into a deeper washout down to press $7.40 and below. Of course the weather and degree of cold remaining as we enter February will be a key influence on price direction, in our opinion and will be discussed further in the next section.

This week's EIA report revealed an expected supply withdrawal of 155 bcfs that was right in line with both previous estimates by Bloomberg and DowJones that were forecasting about the same amount respectively. Storage now stands at 2536 bcfs which is 247 bcfs below last year’s record and yet 174 or 7.4% above the five year average of 2362 bcfs. The market reacted with only a slight dip in prices following the release of the EIA’s supply report on profit-taking before rebounding sharply higher in settling closer to the upper range on the session at $7.80 per million BTUs for a gain of 18.1 cents on the day. Considering this week’s WS I weather forecast for the up-and-coming 6-10 day period, the weather is mildly more supportive to natural gas then it would be for heating oil as the Northeast and the Upper New England area, which is heating oil country, will be spared the extremely colder than normal temperatures that have recently been experienced as of late. Meanwhile concerning the better part of the remaining two thirds of the country that lies just west of the Eastern Seaboard conditions are predicted to remain on the colder side especially for the Northern Central and western parts of the country with only the Southeast and more extremely eastern coast remaining more seasonable or above normal. However after the recent price failure last week from just below the $8.50 level, we feel it would take a more extreme dual zone below normal cold to be sustained in the earlier parts of February permeating both the Midwest and Northeast in order to restore values back up to challenge those highs. Instead under the current forecast with milder temperatures still anticipated on the Eastern Seaboard and Northeast with the colder weather confined to the upper half of the nation west of these regions it is our opinion it will be insufficient to sustain another prolonged rally above the $8.0 level and so we are anticipating another price failure soon. We expect traders will soon be looking for a comfortable level above to get short the market especially with petroleum values recently succumbing to the new headlines of impending recession. It is also logical to expect that the next rally on February cold could perhaps be winter’s last hurrah as the backside of February produces usually the last threat of any severe cold demands upon the market. This could mean and logically result in the next important price peak as potentially the last seasonal selling vantage point for those that wish to capitalize on winter’s passing while at the same time leaving a critical winter fuel running out of seasonal demand while retaining a hefty surplus in supply.

Concerning Crude Oil the market posted an impressive gain of over $2 to settle at $89.4, that was as much based on technical merits as it seemed to ignore an EIA supply update that many initially considered to be bearish. The market rallied a total of $2.42 or 2.7% per barrel and totally recovered the previous session loss of $2.22 or 2.5% that left Crude at the lowest close in 3 months at $86.99 basis spot March futures. Today's reversal following 3 previous consecutive session losses followed an EIA report that revealed an increase to Crude stocks that was well above previous estimates that ranged from an addition of 1.3 million up to 2.6 million and the actual was a rise of 2.3 million to total 289.4 which is still in the lower half of averages. However Crude stocks at Cushing Oklahoma had declined by 800,000 barrels. Motor Gasoline inventories also increased by over twice what had been expected for a gain of 5 million and are now in the upper half of averages whereas only distillates had declined, but by 1.3 million which was near estimates of a loss of near a million, and yet stocks are in the lower half of averages for this time of year. Refinery capacity has also dropped to 86.5% from 87.1% the previous week as production for Gasoline had dropped from the previous week, along with distillate production which also declined slightly from the previous week. So the supply/demand picture remains firm as output of refined products had dropped over the previous week whereas year on year consumption was up slightly for both products over the same period last year. The outlook for future demand definitely looks uncertain as more economic data that is released gradually, continues to point towards a US lead Recession that is eminent, which would indicate softer demand ahead for energy as the purchasing power of the general public continues to be jeopardized by falling home values and thus equity value, combined with elevated Gasoline costs that continues to plague consumer well being, and thus undermines economic growth.. This week’s emergency fed action that reduced interest rates by .75 and the most aggressive single rate reduction in over 25 years obviously seemed at least temporarily to circumvent the immediate threat of recession which induced a dramatic reversal in stock indices as the Dow Jones index staged an over 600 point bullish reversal from low to high which seemed to bleed over into the petroleum complex after which seemed to be a one day delayed reaction. What will now logically follow in our opinion will be a market whose price direction will be predicated upon how much emphasis traders place on the lingering threat of recession driven by housing market that is far from recovery based on one isolated action by the said that many considered was late in coming, versus the ongoing bullish fundamentals that have been the pillars of support for this multiyear uptrend that are likewise far from changing. In the immediate near-term it seems that the down side technical correction from the key $100 benchmark may have sufficiently priced in the impending threat of recession at least for now leaving the market still vulnerable to a considerable rebound as traders begin to reopen their minds to the ongoing threats to supply that were temporarily pushed just outside the spotlight perimeter.

A warm start in the East next week, then turning colder; meanwhile, continued cold in the West.

Above and much above normal temperatures are expected to begin next week across most of the nation's eastern half before colder air arrives by mid-week. Meanwhile, persistently cold weather is anticipated for the western third of the country. High temperatures should reach the 40s and lower 50s early next week in the northeastern U.S., including the Boston-Washington corridor, before more seasonable readings arrive later in the week. The north-central U.S. meanwhile will see a great proportion of cold air arriving from western Canada. Although it does not look as if extremely cold temperatures will arrive, highs will be as low as the teens and lower 20s in the Mid-Upper Mississippi Valley with 20s and lower 30s for the Great Lakes-Ohio Valley regions. Across the Deep South, max temperatures should begin the week as warm as the upper 60s and 70s before dropping to the 50s and lower 60s in much of the region during mid-late week. A general warming trend however may ensue for much of the East near the end of the week and next weekend. To the west of the Front Range, expect persistently cold temperatures with anomalies of 5-10 below normal on average throughout the week. Highs will at best reach the 20s and lower 30s throughout much of the Intermountain West, especially northern sections, ranging to upper 40s and 50s across southern portions of the region. Even the Pacific Northwest may struggle through the 30s and lower 40s including unusually low snow elevations near the coast and southward through northern California. High temperatures for most of the Golden State should be in the upper 40s and 50s, except for 60s in some southern parts of the state through the Southwest deserts. Overall, anomalies of 5-10 degrees above normal are expected in the eastern U.S., especially the Atlantic Seaboard, while the same anomalies to the cold side are forecast across the north-central and western U.S.

Natural gas has as we forecast last week, after failing to even reach $8.25 basis spot much less challenge the previous important peak at $8.48 went into a noticeable dramatic collapse over the previous three sessions taking out all of our downside targets and even exceeding our bearish pivot price support at $7.80 which immediately lead to a further washout down beyond $7.60. We anticipate over the short term for the current rebound in price from technical oversold territory for prices based on the partial below normal cold expected only to impact the country regionally, too soon run out of steam to the upside with resistance most likely to contain the advance between first at the minor barrier at $7.92 with more formidable resistance expected just above this between $8.0 and $8.10 per million BTU. Only if the weather forecasts were to dramatically shift for the first half of February to a more sustained below normal cold to arrive in both the Midwest and the Northeast do we see a change to a more sustained rally exceeding these up side targets and returning the market to challenge recent highs. Until then our forecast remains predicting an important failure somewhere near or below the $8.0 benchmark and then subsequently leading to another noticeable and probably rather dramatic price decline whereby recent support levels at $7.60 could be easily tested again.

Concerning the petroleum complex, this week’s price activity, has now extended the crude oil correction to almost a full 15% from its brief flirt and confirmation above the key historic $100 benchmark. Obviously the threat of recession after the recent Asian and European stock index meltdown that triggered the Dow Jones earlier this week to test the perimeter of confirming bear market conditions of entering 20% declines from the previous year’s high have become more manifest and accepted as legitimate which then indirectly threatens demand for all consumables across the board including energy. While last week we forecast that the ongoing technical correction combined with influence from the threat of recession would test the $88 -- $89 level of support, and despite feeling this level would hold, the market only manage to breach this intraday by any large measure as this week’s low temporarily saw values decrease to the $85 level, however the lowest close was yesterday at $86.99. We still anticipate from the recent price pattern that values will more likely begin working their way back higher at least over the short term as traders begin to weigh the remaining threat of recession versus the potential remedial results injected by the fed that will seem to gain momentum as the stock market recovers. Traders beware of being too quick to jump on ”short the oil market wagon” as the ongoing fundamental threats to supply of limited refinery capacity here in the US, instability amongst key producers such as Nigeria, Iraq, and Iran, along with continued robust energy demand on the global front especially in Asia can rapidly return to the headlines and if the fed can manage to dodge a bullet at least temporarily as Congress scrambles to release a stimulus package any day now, then you can see crude oil prices rapidly return to test the $95 benchmark as the threat of recession is seemingly delayed even if only briefly.

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United Strategic Investors Group