Energies: Natural gas falls to a new seventh month low.

Consensus Report: January 26, 2006

Natual Gas and Oil Report

Natural Gas Falls to New 7 Month lows on Continued Mild Weather in the Heart of Winter, while Petroleum holds Support after Correction.

Technical Outlook: last week we reconfirmed the domination mild weather fundamentals could exert over the market, forcing the technical signals to remain as a following indicator. This week showed little change, and only reiterated our Outlook after the technical bounce from our support objective price at $8.60 failed to reach and hold above resistance at $9.40. Failure to attain this key bull objective resulted in a full retreat from Friday’s close at $9.28 in a price washout down through initial support at $8.60, and then $8.46 , followed by a subsequent crash through our support band objective at $8.10- $8.25, with a free fall, all the way down to key support at $7.75- $7.80, before short covering lifted values to settle at $8.229 today and right between our downside target band. Looking ahead, we see the market is still grossly oversold technically, and yet still confined within the grips of persistent mild weather, which we will discuss in more detail in the next section. Because of the persistent, bearish conditions, we expect further subdued range bound trading with rally attempts likely to be contained first at pivotal resistance above at $8.60, with increased selling pressure scaled all the way up to the psychological barrier between $8.98 –$9.10. Only a close back above existing resistance at $9.28 , could neutralize bear forces yielding to a short-term bullish counter-trend advance. Prior to this, which at this point , would require a fundamental shift in our opinion, we see the likelihood of a secondary failure above, somewhere between $8.60 and $8.85, to yield another downward assault bringing another test to key support at $7.75 , leading to a potential, deeper probe at $7.60 and once again , testing the Bears oversold resolve.

Fundamental Supply Update

Today, the EIA reported a withdrawal of 81bcfs that was moderately higher than both estimates by Bloomberg and Dow Jones of 72 and 71bcfs , respectively. It was also well above our company call for a draw down of 62-67bcfs. However , the market basically ignored the slightly higher draw in supply than expectations, and quickly returned their attention to the persistent mild weather that still permeates the Midwest and Northeast, taking prices down to session lows at $7.75 before short covering emerged to stem losses. This no doubt took place in recognition of how shallow the draw on supply was in historic terms and also in accepting the fact that an aggressive 129+bcf weekly draw is now necessary over the remaining 10 weeks , just to end with an adequate 1200bcfs in storage. While this remains as a potential remote longshot, if some rather sobering and extremely colder than normal, real Winter, conditions were to reappear in February, the market seems to be posturing itself for a more likely continuance of subdued demand due to mild conditions, whereby a record storage above 1500bcfs could materialize in April. We have already noticed an important psychological shift , whereby the dominating funds , influencing price direction are seeking rally points to short from versus dips to buy on. Certainly , if some significantly colder weather does not materialize in the eastern half of the nation in the forecast, within the critical next four weeks, current prices near $8.0 , could still appear expensive, and despite elevated petroleum prices. Storage now stands at 2494bcfs , which is 191 higher than last year and a hefty 445bcfs above the five-year average of 2049bcfs.
Concerning crude oil prices quickly retreated after failing to hold resistance at $69 per barrel after inventory reports showed sizable increases to the products along with some tempering of fears of the Iranian nuclear dilemma as the Russians offered a possible compromise by proposing enrichment processing of uranium and then selling safe consumer related nuclear energy to Iran. Obviously doubting the sincerity of Iran’s nuclear intentions, the situation is far from being settled as the UK, France, Germany and the US continue to favor taking the matter before the UN Security Council , which would lead to economic sanctions against Iran. Meanwhile , both Russia and China, due to ongoing economic relations with Iran, favor and more diplomatic approach to possible resolution. However , experts familiar with the matter warned that an embargo or any solution that potentially could result in the suspension of Iran’s output of almost 4 million barrels per day, and the second-largest in OPEC, could backfire, launching prices of crude to almost $100 per barrel , and thus hardly an acceptable solution! Prices this week , fell back briefly to test our intermediate support level at $65.10 and even broke below this level intraday, however still managed to close back comfortably higher above this at $65.85 yesterday, and then continued their bounce from support with today’s $.41 advanced to settle at $66.26. The market quickly gave back over $3.0 from the brief intraday peak north of $69 as traders obviously took profit as the temporary hysteria over the combination of the of Usama tape, Iran’s nuclear threat, and the Nigerian output cut, became more factored in. We feel some of the decline came as a result of a return to sanity , temporarily in digesting the EIA update showing marked increases in both products over the past week. While crude oil experienced a surprising decline of 2.3 million barrels, leaving 319.1mbs and well above the average range, total motor gasoline stocks rose by an unexpected 3.2 million barrels, putting them in the upper half of the average range, and distillate fuel inventories increased by 1.8 million barrels last week and are also above the upper and of the average range for this time of year. While motor gasoline demand has averaged 9.0 million barrels per day or 0.9% above the same period last year, distillate fuel demand on the other hand , has averaged 4.1 million barrels per day, over the last four weeks , which is a decline of 2.4% from the same period last year. Refineries operated at 86.2% of operating capacity last week, and yet had a slight production increase over the previous week , averaging nearly 8.7 million barrels per day for gasoline , and over 3.9 million for distillate. This more than adequate level of supply within the world’s largest consumer will come back to haunt the Bull’s position upon any easing of the existing geopolitical tension in these various hotspots overseas. Especially as production lost to Katrina and Rita are gradually restored in the Gulf of Mexico. As of the last report by the MMS, a total of 373,407bopd or 24.89% of daily oil production is still shut-in in the GOM. When you add the current overbought situation that appears on the daily oil chart , and one could make a good case for a price decline back to the breakout and key support level at $62.50. Let’s now take a closer look at weather over the next 6-10 days as the persistent mild conditions are not only bearish for the heating fuels, especially natural gas, but also indirectly for crude oil.

W. S. I. Energycast January 30 – February 5

With the exception of the Pacific Northwest and Florida, above and much above normal temperatures are once again forecast over most of the continental US for the balance of the 6-10 day period. The warmest anomalies will settle into the north – Central and Northeastern US, and are expected to average between 7-12 degrees above normal. Daytime highs will generally climb into the thirties and forties most of next week . Highs as warm as the fifties are possible as far north as the Midwest, Ohio Valley, and mid Atlantic states on the warmest days. Most of the western, south-central, and southeastern US will be above normal for the 6-10 day period. Anomalies are expected to average between 2-7 degrees above normal in these locations. Most locations will also see brief periods of cooler weather at times. However, the pattern is expected to remain to progressive to allow any prolonged periods of cool weather to develop anywhere across the country. Late next week, the focus of the warm weather will begin to shift back into the western US as all models depict a building PNA ridge along the West Coast. The most significant result of the PNA ridge, at least during the 6-10 day period, is that it will begin to shift the storm track northward into southern Canada. As a result, warm , but dry conditions may develop in the Pacific Northwest as early as late next week.

Conclusion.

In the natural gas market, the existing mild conditions that continue to dominate most of the consuming regions of the US will also continue to dominate the price action. This condition continues to contain the market to a subdued, bearish trading range. While conditions after today’s new low close and brief temporary probe below the $8.0 benchmark, have extended , an already grossly oversold technical market, we don’t see the bears releasing their control over prices until fundamentally the forecast indicates a shift in the weather. In our opinion , the battle lines ahead are clearly drawn, with resistance above first at $8.60 scaled up to $8.98 – $9.10 , with a close above $9.28 needed to reduce short interest, while support is key at $8.10, attracting shorts to challenge key support at $7.75- $7.80 for a possible and deeper probe to $7.60. The market will continue to rely on the weather for direction and continue to show little regard for values in the petroleum complex , except for a possible negative reaction to a more extended decline in crude prices during a correction , which is quite possible in the near-term. Cash prices also continue to drag on the futures as Transco zone 6 is now below $9.0 and the Henry hub is below $8.0 with today’s settlement at $7.86. The remaining gas shut-in due to storms’ Katrina and Rita of 16.56% according to the latest MMS update continues to have little or no influence over prices in either the futures or cash market recently.

Concerning crude oil our price objectives from last week were nearly taken out above as an increase in the volatility brought us within a dollar of our psychological $70 benchmark target, and below, as only two sessions later prices fell sharply to take out our downside support target at $65.10 per barrel. Technically , the crude oil market is now quite overbought, and due to the recent stare step vertical climb quickly followed by an equal decline, has now formed a classic head and shoulders pattern on the daily chart, and that suggests a potential deeper drop in prices lies ahead. This would coincide with our forecast for a potential pullback to the key breakout price at $62.50, which is also a key support. However, one caveat to this potential technical scenario is a reminder that the market is still sensitive and predominantly driven by the fundamentals, first and foremost, in our opinion. To this conclusion , we recommend extreme caution to those traders that tend to rely strictly on chart patterns to govern their decisions, as the recent abrupt rally over the last week and a half in response to Iran’s nuclear ambitions and Nigeria’s production woes would argue otherwise. When looking ahead to establish a vantage point from which to trade , we recommend looking for signs of further quieting in the overseas tensions to complement the bearishness of the chart signals as a better confirmation before taking an aggressive short position , which is obviously countertrend, long-term, in our opinion. Any inflammation of any one of the aforementioned geopolitical hotspots posing a potential threat or interruption to the supply of oil from any one of these key producers, and a sharp vertical acceleration quickly taking the market back up to challenge the key $70 benchmark , would materialize in our opinion , and is likely to take place anyways, sooner rather than later, due to the convergence of existing world conflicts.

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

January 26, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744