Energies: Fresh five month lows for Natural gas

Consensus Report: January 5, 2006

Natual Gas and Oil Report

Fresh Five-month Lows for Natural Gas Following a Precarious Supply Increase, While the Bears Enjoy Mild Weather and Profit Taking Tempers Petroleum.

Natural Gas and Oil

Technical Outlook last week we confirmed that the market was in a weak , technical state and continuing a corrective phase, although approaching oversold. We also said to expect a sharp rebound if prices were able to hold above the anticipated test of $10 .60 over the next three sessions. However, due to the persistence of sustained mild temperatures in the eastern US, a fundamental impact, prices collapsed through our support along with today’s bearish EIA update causing the first close below $10 since late July. This dominance over the market’s behavior by fundamentals, has almost made the technical study obsolete in our opinion, however, the current oversold condition is worth reviewing briefly. All major technical indicators are still weak, yet grossly oversold with momentum, relative strength, the MACD, and some key oscillators displaying a wide negative convergence , suggesting more selling ahead. This posture , while still complementing the short side, shows selling pressure diminishing soon, reducing the reward to sellers , while dramatically increasing the risk from vulnerability to a bull reversal. In our view , prices are still subject to a possible further decline to test the key $8.60 breakout level basis spot if short covering doesn’t emerge soon. A recovery back above $10 .60 is necessary over the next three to five sessions in order to at least neutralize the Bear dominance near term.

Fundamental Supply Update

Today’s announcement by the EIA will be a first for a build in January, despite only being by one bcf, if not revised soon. The surprise build caught value buyers poised to take advantage of recent lows not seen since early August, flat-footed as the 1 bcf increase was well above the estimated 60bcf drawdown in the Bloomberg survey and still a far cry from the ICAP estimate that was in the 30s. Following the startling news, prices soon collapsed to session lows at $9.39 after a near flat opening at $10 .18, for a near $.80 freefall, and would have moved lower in our opinion, if traders weren’t skeptical of the bizarre unexpected gain, opening the possibility for a revision to be announced soon. Should a revision be made over the next few days it would not be the first time , someone or some group made a reporting error to the EIA. And thus , if it materializes . Then we logically expect an upward adjustment in prices will quickly follow, especially from such oversold levels. However , if the number stands, storage now totals at 2641bcfs, which is still 79 less than last year, and yet 168 bcfs above the five-year average of 2473 bcfs. The immediate focus of traders now becomes the potential revision , and then the remaining one third of January that is not yet within reach of the forecast. Opinions seem to vary quite a bit as to the degree to which the weather will shift, if at all, back to colder than normal within the balance of the month. It is our view that the general conclusion that overall, January will end up well above normal, is almost fully factored into prices in the low $9.0 to $8.60 level. Now, should a more sustained cold , come into play in late January and sustain itself into early February, we feel a sharp rebound to challenge $10 .60, quickly followed by the $11.40 resistance level, would transpire.

Concerning crude oil, little has transpired since our last week’s update, except for a continuation of the uptrend confirming our forecast and taking out our upside target decisively eclipsing the $62.50 breakout level, resulting in a challenge to resistance at $63 .80 and then logically , short term, failed from this level. Today the convergence of all of the EIA reports due to the holiday weekend, brought two-sided trading as 2 of the 3 commodities showed moderate builds , while only crude, heaviest in supply of the three, experienced a moderate decline of one million barrels to leave 321.6 million barrels in supply and well above the upper end of the range for this time of year. Prices soon yielded to better discretion , and fell back to negative territory as both gasoline and distillates revealed gains. Unleaded increased by 1.4 million barrels , and yet remains in the lower half of the average supply range, while distillates rose by 2.1 million barrels , and also are in the lower half of supply, for this time of year. Both have shown elevated demand levels of 1% for gas and 4.1% for distillates respectively , over the same for weeks, last year. Refineries operated near last week’s levels, at 89.9% of operating capacity and increased product output to meet robust demand in the US. The recent rise in crude prices also prompted OPEC comments , indicating a potential cut in production may not be necessary, at the upcoming meeting in Vienna at the end of the month. Let’s now take a closer look at weather with WSI over the next six to 10 days as it has key implications on the winter fuels and specifically Natural Gas.

WS I Energy Cast 6-10 Day 1-09 to 1-15

Above and much above normal temperatures are forecast over most of the eastern two thirds of the country for the balance of the 6 to 10 day forecast period. The warmest readings are still forecast over the north-central US, where anomalies are expected to average between 10-20 degrees above normal. Daytime highs will climb into the thirties and forties . In most locations. Overnight lows will only fall into the teens and twenties. These temperatures suggest overnight lows over most of the north-central US will average warmer than normal daytime highs this time of year. Un seasonable and persistent warmth is also expected to encompass the south-central and eastern US for the balance of the six to 10 day period though anomalies are not expected to be as warm as the north-central US. The Northeast will generally average between six to 10 above normal for the balance of the six to 10 day periods as highs climb into the thirties and forties each day. Highs as warm as the low and middle fifties , may extend as far north as the Ohio Valley and made Atlantic states on the warmest days. The south-central and southeastern US will also share in the warm weather as widespread daytime highs rise into the fifties and sixties most of next week. Highs as warm as the low and middle seventies are possible on the warmest days. Even though some cooling in the East may transpire temperatures will only fall back from ridiculously warm to unseasonably warm levels. Finally warmer than normal temperatures will also prevail over most of the western third of the nation for the balance of the six to 10 day period. The Northwest will see temperatures average closer to seasonable levels as the warm but wet pattern continues. Seasonably warm but dry conditions will return to California and the Southwest . Anomalies are expected to average between 2 to 5 above normal , over most of the western US for the balance of the six to 10 day period.

Conclusion

As we stated earlier in this report , and in last week’s conclusion, natural gas is still in the grips of a corrective phase, although now below $10 by a definitive margin, looks to be much closer to completing a technical and mostly fundamental correction versus continuing a further and deeper decline. However , as mentioned earlier, the technical indicators hold little influence in our opinion, outside of a vague guideline as to historical support and resistance price points. This is based on the dominating impact from the existing and continuing mild above normal weather persisting into late January , over most of the eastern two thirds of the country due to the zonal Pacific flow to the East. Because of this persistence of unusually mild weather for January, we see the potential for a further decline to test the key breakout support at $8.60, unless either a noticeable revision of 15-25 bcfs is announced soon by the EIA, or a definitive weather shift back to colder than normal in the eastern US, or both. This would also require a more pronounced shift in the jet stream putting that trough that allows a southerly flow of cold Canadian air to migrate into the East, which has yet to materialize. Should this transpire , we would then expect a run back above $10.60 to stage a potential assault to the $11 .40 uptrend resistance level. This would then return , the updated production shut-in of 18.79% of gas production in the Gulf of Mexico, as a relevant factor, which over the past two weeks has gone unnoticed.

With regards to crude oil, the technical posture shows a slightly overbought condition, but the intermediate trend is still higher in our view. Key ongoing supportive conditions are the strong implied product demand in the US, continued healthy Asian economic growth, the newly proposed instability in the Middle East due to the recent stroke disabling the Israeli Prime Minister Sharon, and more directly the pending maintenance cycle an already labored refining industry will soon face ahead of peak driving season. As of today , crude oil production still suffers a 26.92% shut- in in the Gulf of Mexico. This along with the tenuous geopolitical situation, we see crude oil holding $62 .10 first and then $61.40 on pullbacks to eventually stage , a close over $64 resistance to precede an ultimate challenge to the key $65 benchmark. Only a collapse , resulting in a close back under $60 .80 would negate our near term bullish outlook.

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

January 5, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744