Petroleum Breaks Through Upper End of Range.

Consensus Report: February 1st, 2007

Petroleum Breaks Through Upper End of Range following Saudi Output news and Returning Cold, while Natural Gas also hit new highs in Reaction to Weather.

Natural Gas and Oil

Technical Outlook: Last week we said, looking ahead, the technical picture is now giving mixed signals, whereby longer-term indicators such as the parabolic, MACD, linear oscillator, and others were showing constructive resilience to the upside, however, stochastics, momentum, relative strength and other short-term indicators also suggested follow through weakness vulnerability. Under these circumstances we said to look for certain price pivot points to indicate further substantial movement, and to confirm near-term direction in our opinion. We acknowledged the next important challenge to support lied just below the current market price at $6.80, whereby we felt the market would invite further selling participation should this level be penetrated on close. We said this scenario should invite enough selling pressure to return values to the $6.20 -- $6.25 level rather quickly. However, we said due to the current mixed signals the technical picture revealed, we also saw the potential for a rebound from the critical $6.80 level, which if held above it on a closing basis over the next two to three sessions, we saw it preceding a challenge to the bull-pivot price at $7.25, which suggests a renewed swing challenge back up to resistance at $7.70 to $7.80 with a remote chance for an exhaustive thrust to new highs at the $8.0 benchmark. We also stated the current weather forecast suggest a backdrop of support for the latter scenario which is exactly what transpired as this week prices advanced almost vertically since last week’s report as prices hit a new high of $7.96, only .04 cents from our exhaust high target, before falling back in the range. Now looking ahead, while the technical pattern is in a short term up- trend we see some clear indications of bullish fatigue setting in on market forces, whereby we believe if the market fails to break above key resistance at $7.80 and sustain a close above this barrier into new higher ground over the next 2-3 sessions, we feel prices will be vulnerable to a sharp and more formidable decline than the last pullback. There also exists a second scenario whereby the current advance extends further resulting in a break out above the current highs at $7.96 bringing challenge to continuation resistance above this at between $8.10 and $8.25 that may prove to be an exhaust or” blow off top", that ends up preceding a dramatic bearish reversal culminating in a steep decline. It is our view that as several technical indicators begin to reveal an overbought posture, the short interest will accumulate with reinforcements poised and waiting, that if this more attractive peak is reached, the convergence of such selling power from the higher rejection point could naturally unleash a more committed liquidation. In either case, a rapid return to test minor support at $7.06, quickly followed by intermediate support at $6.92 and then eventually the critical level at $6.80 is a very plausible probability. The current weather pattern, according to the immediate forecast, may also complement this Outlook which we will discuss in the next section.

Fundamental Supply Update

Last week's EIA report showed a drawdown of 186 bcfs and so far the largest drawdown of the year, yet it fell short by a discernible margin below both previous estimates by DowJones and Bloomberg that were well above 200bcfs respectively, as well as being larger by about 30bcfs than the 5 year average. Storage now stands after the last EIA update at 2571 bcfs which is 152higher than last year and 454 or a full 21.4% above the five-year average of 2117 bcfs. While prices initially sold off on the news of the smaller than expected withdrawal, values quickly recovered on the close limiting the loss to only $.13 as the spot price settled at $7.53 for March delivery as Traders quickly focused on the sustained colder than normal temperatures expected to extend deep into next week up until about the 10th of February. These conditions are expected to produce an even larger withdrawal from storage to be announced next Thursday that is already anticipated by analysts to exceed the 200bcf reduction level. And just as we warned last week that the Bulls may not be ready to totally throw in the towel yet, given that estimates were running for an anticipated larger draw on storage for this week, the same potential situation exists as we head into next week whereby the Bulls seem to have just enough cold weather to keep the shorts on edge and fearful enough to prevent entering the market yet with any showing of real force as they obviously wait for higher prices and a more advantageous position to sell from. This seems to put the market on track for potential showdown with what could be considered peak winter draw as the forecast begins to focus on the middle of February and the possible turning point to precede moderating temperatures and winter's inevitable demise. Because of the existing supply overhang which now stands at over 21%, and despite the fact that next week's anticipated larger than average drawdown will narrow this percentage noticeably, traders cannot help but brace them selves for the likely acceptance of the inevitable declining demand once winter conditions begin to moderate and the resulting price collapse that is likely to follow. Soon, outside of the possibility of a late winter anomaly, the market faces the likely convergence of multiple selling sources initiated by both opportunistic shorts entering the fray in the interest of capitalizing on winter's exit, simultaneously, as timely commodity hedge fund managers scramble to liquidate for the same reason. Remember, no one wants to be the last participant to exit the market once the season is deemed over.

Concerning crude oil, prices have recently rebounded considerably from the sell-off down to our targeted price level at the $50benchmark confirming our bullish trade scenario outlined in last week's conclusion whereby we said if prices managed to surpass the key resistance point at $56 it would signal to some of the major hedge funds that possibly some of the fear premium was returning to the market and would bring a rapid challenge to our bull pivot level at $58.10 which was confirmed with yesterday's close at $58.10 basis spot. Today's rejection from just below the $59 benchmark resulting in an 84 cent decline to settle at $57.30 a barrel also complemented our Outlook from last week that the market's attempts to reach the $60 benchmark would require something more substantial from the fundamental side of the picture in order to sustain this level. While the surprise announcement by President Bush of intentions to enact doubling the size of the Strategic Petroleum Reserve to 1.5 billion barrels, which would require an approximate increase to US purchasing by 100,000 barrels a day, still contributes to the recent constructive undertone of support for the short term up trend, we feel prices have more than priced in a commensurate reaction to this as well as the OPEC production cuts that are being implemented from the recent rally of almost nine dollars per barrel in less than two weeks. This week's rally was also based on a combination of cold weather finally impacting supply with the first decline in heating oil stocks in seven weeks, the nervousness over OPEC's announced output cuts and the recent larger than expected reduction in Saudi output, along with increased anxiety over escalating tension in the Middle East, rather than a true reflection of sound supply demand evaluation. This past week's EIA announcement concerning the petroleum complex was hardly bullish despite the 2.6 million barrel drop in distillates as they remain above the upper end of the average range, as does the more important economic staple of gasoline inventories which jumped by a more than expected 3.8 million barrels last week and also remain above the upper end of averages. Crude oil itself also increased by 2.7 million barrels from the previous week leading stocks at 324.9 million barrels and also well above the upper end of the average range. While today's Federal Reserve comments and decision to leave key interest rates unchanged along with the anticipated policy statement that provided an upbeat economic growth with contain inflation outlook, provided some support from the implications of a stronger economy, only time will tell if this materializes and is enough to combat than negative implications of the strong recessionary forces that are likely to emerge from the US housing decline and its debilitating effects on the consumer which are yet to be fully revealed.

W. S. I Weather 6-10 Day Outlook

While below and much below normal temperatures are still forecast over the north-central and northeastern U.S. for the balance of the 6-10 day period, the intensity of the cold weather forecast to grip these this weekend and early next week is expected to wane. In response, widespread high temperatures in the single numbers and teens over the north-central U.S. this weekend and early next week are expected to climb back into the teens and 20s during the latter half of the week. Highs in the teens and 20s in the Northeast are forecast to climb back into the 20s and 30s. While the intensity of the cold over the northern tier of the country is expected to wane late next week, anomalies between 7-13 degrees below normal are still forecast over the north-central and northeastern U.S. for the balance of the 6-10 day period. Though they are in the best agreement they have been all week, medium range models still display notable technical differences as to just how much moderation from the cold weather occurs over the southern tier of the country. Either way, European, Canadian, and American models all advertise a 2-3 day period of seasonable to seasonable warm readings will become sandwiched in between periods of cold weather early and late next week. Highs in the 30s and 40s are forecast over most of the south-central and southeastern U.S. on the coldest days. Highs in the 40s and 50s are anticipated on the warmest days. Finally, seasonable to seasonably warm temperatures are expected to encompass California and the southwestern U.S. for the balance of the 6-10 day period. Widespread highs in the 60s and low 70s are expected to be the rule for California. Highs as warm and the middle and upper 70s are possible over the southwestern on the warmest days.

Conclusion

Natural gas continued its rally and assault on the upside resistance with this week's challenge $7.96 per million BTU falling just $.04 from last week's exhaust peak target of the $8 benchmark that we predicted in last week's report. Looking ahead as we enter the forecast period that takes us into mid February, we anticipate volatility to increase as the stakes go up as the temperatures will have to drop further to sustain the same price levels in our opinion. As winter diminishes the existing heavy supply will become more ominous as time passes. Unless March comes in behind what some long-range forecasters predict to be a milder second-half to February, with a bitter cold below normal anomaly, the market could be on a critical collision course with the key technical price barrier of resistance from $8.25 scaled up to a more critical level at $8.60 whereby rejection selling forces could be intense. This makes the next forecast that takes into consideration the second half of February a critical factor to the near-term price outlook for natural gas and the possible price peak reached for the winter season. In the short-term outlook over the next five sessions we see the potential for current weather demand along with the technical picture to impulse the market to new highs just above the $8.0 benchmark for potential challenge to resistance between $8.10 and $8.25 before more aggressive selling emerges. However, we warn against aggressive buying into this short term up trend as we anticipate a rapid exit that could result in a dramatic long liquidation decline on the first sign of moderating temperatures in the recent abnormal conditions the eastern half of the country has been experiencing. Traders will quickly as a more firm and intermediate support level. Probably the most notable and unexpected of these being the surprise announcement by the president in his State of the Union address to double over the next 20 years, the amount of oil to be stored in the Strategic Petroleum Reserve. This nuance must be tabulated into the petroleum equation to properly assess future valuations in our opinion. Quickly following return their focus upon record heavy supplies as soon as the abnormal demand from the Arctic intrusions of the North dissipate.

Concerning the petroleum complex, and despite this week's EIA numbers again, being overall bearish, the market is still feeling the recent convergence of somewhat moderately bullish factors that we mentioned last week that have temporarily established support at the $50 benchmark. Just as we mentioned in strong detail in last week's conclusion that various conditions from renewed strength in the US economy, an extension to the recent abnormal cold in the eastern half of the country, OPEC's attempts to further cut production, and of course the constant threat posed from instability amongst major international oil producers such as Nigeria and more importantly in the Middle East, chiefly from Iraq and Iran, could continue to support the short term up trend in Crude oil prices, however, the fact that up to now the proposition of threat suggested by these conditions has failed to prevent the more than adequate buildup to supplies here in the number one consuming US, is a situation traders are likely to re-embrace. These conditions can very rapidly move back to Center stage upon the first sign of easing Middle Eastern tension, which is an obvious tall order, however, the same bearish result can materialize if enough time passes and the Middle Eastern threat fails to interrupt oil flow. Considering these conditions, we find after this week's price action that crude oil is still within the established definitive trading range. Since last week's report prices confirmed our bullish outlook whereby we clearly stated that resistance lies first above at $55.90 -- $56, and with a potential close above this key level, short covering and bullish hedge funds could bring an immediate challenge to swing resistance at $58.10 which transpired yesterday. We also stated however, that if this level is breached on close it could ignite more technical buying and bring a challenge to the $60 benchmark, however, that while this level is certainly attainable in the short term it would take something much more substantial in the way of a realized threat to supply in order to sustain. We still feel this condition prevails however, on the technical side a similar situation exists as in the natural gas market whereby certain technical indicators suggest a noticeable overbought posture is taking form revealing signs of price fatigue setting in. This could become more pronounced if the next rally fails to break the existing highs at $58.85 basis spot, and is likely to precede a larger decline whereby values could rapidly fallback to test key support at the $56 benchmark, especially if temperatures in the Northeast subside or moderate enough in late February to curtail heating oil demand as we see little support from gasoline fundamentals as production this past week declined as refinery capacity pulled back to 87.1%, yet inventory still increased by 3.8 million which is hardly supportive. If the $56 support breaks, Crude prices could easily fall back to $54 and within the next session under the current fundamentals. We also expect volatility to remain high as not only the specter of winter reaching its peak will no doubt impact prices soon, but also the collision of the Democratic controlled Congress and the unpopular President Bush, who seems insistent and against all odds, determined to carry out his failing campaign in Iraq. The implications and the gravity of the final decision that emerges from this pending confrontation looms large in its long-term influence over both the balance of power and supply and demand of petroleum in the Middle East. And as always should the sponsors of terrorism decide to play that card and suddenly through an unexpected strike, interrupt the flow of oil from a major producer, of course in this wildcard scenario the $60 benchmark could easily be surpassed. Otherwise, to reiterate our sentiment from last week's report, we feel it will take a lot more than some temporary cold weather in the Northeast and some optimistic economic outlook that somehow ignores the plight of an ailing housing disease in the United States that took years to contract, for oil to reach and sustain the $60 level.

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

February 1st, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744