Energies: Mild Winter Continues to Depress Natural Gas.

Consensus Report: January 12, 2006

Natual Gas and Oil Report

Mild Winter Continues to Depress Natural Gas , while Iran’s Nuclear Pursuits Support Petroleum

Technical Outlook: Last week , we stated fundamentals were still dominating trade over technicals and containing the market to weak , oversold status. Looking ahead conditions are still the same in our opinion, and mainly due to persistent mild weather , which we will discuss in more detail in the next section. To confirm last week’s Outlook , whereby we said the technical indicators , suggested more selling ahead unless short covering emerged soon , and to expect a possible test of the $8.60 breakout level, the market settled below $9.00 for the first time since late July , at $8.94 basis spot. We still feel prices are on track to test this same $8.60 level , and soon, possibly tomorrow , given current momentum, and the lack of buying commitment. Only a sudden rebound close back above $9.64 would neutralize the bearish acceleration and would be needed in our view, to suggest a short-term bottom is in place.

Fundamental Supply Update

Today’s EIA report of a withdrawal of only 20 bcfs was indicative of the recent unusually mild weather that has persisted in the majority of the consuming regions and in most of the country for that matter. The announcement was well below most survey estimates, including Bloomberg and the Dow Jones estimate of 34bcfs. The small withdrawal from supply was more in line with the ICAP call for 21bcfs , and it was also right in line with our company call for a decrease of 17-22bcfs. Storage now stands at 2621 bcfs , which is only 2 less than last year and also 276 , above the five-year average of 2345 bcfs. Prices had experienced two-sided trade before collapsing in the afternoon to new multi-monthly lows and yielding to the weak demand pressure from benign weather and the shallow draw expected next week. The market also quickly abandoned the sympathy trade with the recent strength of the uptrend in petroleum as the two markets have been moving in opposite directions as of late.

Crude oil recently shrugged off , this week’s overall bearish , EIA update, revealing sizable supply increases to both products that were well above previous estimates, despite a moderate drop in crude stocks. This was due mainly to traders heightened concerns over Iran’s unexpected decision to resume its nuclear program, much to the chagrin of the United States , as well as all members of the free world. The break of the two-year moratorium on processing enriched uranium in the name of pursuing a purely civil motivated Energy production campaign , ignited immediate protests from numerous critics who insist the motives of the Independent Rogue State are obviously otherwise inclined. The physical removal of two UN nuclear seals late this week, along with defiant claims from Iranian President Mahmoud Ahmadinejad stating that “Iran would not be intimidated by all of the fuss created by the big powers,” according to the BBC, solidified the seriousness of the situation. Return response from hawkish Secretary of State Condoleezza Rice indicating military action is not on the agenda now, and in favor of diplomacy, referring to the UK, Germany, and France threatening to refer the matter to the UN Security Council, seemed to ring hollow as it would no doubt result in only a lengthy and protracted process of economic sanctions, due to the current self-induced inundated quagmire the US finds itself in Iraq, according to many military experts. The fact that Iran , currently produces about 3.8 million barrels per day, almost twice that of Iraq’s current unencumbered output of 2.1 million and OPEC’s second largest producer according to their data, certainly speaks of the potential severity of the situation , should this critical amount of oil flow somehow be interrupted if tensions escalate into a confrontation. The market is obviously trying to anticipate such possibilities and thus prices are reflective of these contingencies evidenced by the afternoon surge to the intraday high at $65.05 before subsiding in late trade to settle unchanged at $63.94 . In addition to this paramount issue questions still remain over the reliability of natural gas supplies from Russia to Europe , as the agreement reached between Russia and the Ukraine has again come under fire as the Parliament is unhappy with the arrangement , earning the displeasure of Ukraine President Victor Yushchenko who threatened to dissolve the Parliament. Neither of these situations have yet to disrupt any serious supplies of petroleum, but as always , the market wastes no time in injecting fear premium , which can quickly overcome the reality of actual adequate supply, especially in this environment of tight forward supply awareness. And finally to round out our review of hotspots around the Energy world, four foreign workers were kidnaped by militants at a Shell operated oilfield in Nigeria, and this comes shortly after Shell was forced to recently declare force majeure on an oilfield in the Delta after a pipeline explosion caused by militants in late December, resulted in shutting down 180,000 barrels per day. All of this combined has provided strong support for a petroleum complex that is otherwise adequately supplied, especially here in the United States as of the Wednesday , EIA update. The DOE announced an unexpected decline in crude stocks yesterday of 2.9 million barrels from the previous week , leaving 318.7 million barrels , and still well above the upper end of averages for this time of year. However , quickly mitigating any implied short-term bullish overtones from the drop, they also announced motor gasoline inventories rose by 4.5 million leaving them in the middle of the average range , while distillate fuel stocks jumped by 4.9 million barrels, more than twice what was expected , and are now near the upper end of the average range for this time of year. Refineries operated at 89.8% of operating capacity, nearly unchanged from the previous week as gasoline production dropped significantly, while distillate fuel production increased slightly. Let’s now take a closer look at the weather over the next 6 to 10 days , as it still holds importance to the Energy complex, especially the winter fuels.

W. S. I Energy cast 6-10 day Outlook January16-22 Though much above normal temperatures are not as widespread as previously forecast, warmer than normal temperatures are still expected to encompass most locations east of the Front Range for the balance of the 6- 10 day period. Widespread high temperatures in the 30s and 40s will prevail over the north-central and northeastern U.S. on the warmest days. Highs in the 50s and 60s will continue over the south-central and southeastern U.S. The Midwest, Ohio Valley, and Northeast will see daytime highs climb into the 50s on the warmest days. Highs as warm as the low 70s are possible over Texas and the southeastern U.S. The warm weather in the East will be briefly interrupted by periods of cooler weather, where anomalies may fall back to seasonable levels at times. However, these cooler periods are expected to be short-lived and not last more than a day or two as warm weather will quickly redevelops. The eastern U.S. will experience one of these cooler periods early in the 6-10 day period. The Plains and Mississippi Valley will see the cooler weather arrive next weekend. For the balance of the 6-10 day period, anomalies are expected to average between 3-10 degrees above normal over most locations east of the Front Range. In The strongest signals for cool weather exist over California and the southwestern U.S. However, any unseasonably cold weather is not expected at this time as the still progressive northern branch of the stream will prevent Arctic air from penetrating the western trough. Therefore, anomalies are only expected to average between 1-3 degrees below normal over California and the southwestern U.S. for the balance of the 6-10 day period.

Conclusion

Natural gas is obviously in a weak, technically oversold condition and is still being dominated by an unusually mild temperature influence that has persisted deep into what is normally the coldest four-week period of the year, between mid-January and mid-February. This continuance of domination by fundamentals over technical concerns will continue in our opinion until the weather shows signs of a definitive change. Until then , the convergence of bearish technical the indicators , and benign weather demand will bring lower prices . The downward momentum of which may soon come to an end , as July pricing may soon collide with a late winter cold that some forecasters have warned may impact the market in early February. However , we still feel the market is on track to test our downside target at the $8.60 breakout level mentioned first in last week’s report. Today’s close under $9.0 for the first time since late July only further supports our Outlook. Should the market , achieve this objective, which could materialize tomorrow, we feel fair value may be attained at least as far as factoring in the known weather up to almost the end of January. This leaves the market vulnerable, should it reach near the mid-$8.0 level, to a sharp bull reversal , resulting in a rebound from grossly oversold levels ignited by short covering and late winter value buyers. This event would be signified by a sharp and violent recovery back above the first resistance point at $9.40, and then quickly followed by a breakout over $9.64, but still needs an indication of a shift to colder weather in the eastern consuming US by prominent weather forecasters, in our opinion. Obviously , the current MMS update of 18.05% . gas still shut-in in the Gulf of Mexico has been a non-factor over recent weeks.

Concerning crude oil, today confirmed our upside objective, of attaining the $65 benchmark that we called for in last week’s report. The focus of the short-term uptrend has quickly shifted away from strong implied product demand , mainly from the gasoline market, to one that is fear driven by threats to future supply in mainly Iran, Nigeria, and Russia, and in that order, currently. These geopolitical tensions that potentially could erupt into more substantial and critical international supply disruptions were obviously more than enough to overshadow the short-term negative supply adjustments announced in this week’s EIA update. This week’s MMS update of 26.45% of oil production still shut-in from the Gulf of Mexico, only provided a minor and insignificant point of support in the background of the Mideast dilemma that has now taken center stage. Looking ahead, we anticipate good support of buying on pullbacks first at $63.80 and then $63.10, with more pivotal support at the critical $62.0 – $62.50 breakout base price. Resistance is now firm at the $65 benchmark, however , a close above this key level could bring a rapid challenge to $67.0, but would need a significant escalation to tension between Iran and the US to facilitate such a move in our opinion, especially under the short-term conditions of adequate supplies and mild weather that exists here in the US.

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