Natural uncovers new lows as winter winds down.

Consensus Report: March 02, 2006

Natual Gas and Oil Report

Natural Uncovers New Lows as Winter winds down, while Geopolitical Tension Ignites Petroleum

Technical Outlook: last week, we said technicals were weak, and despite the positive bounce up to the $7.80 resistance level that we predicted, to expect a test of new lows at $6.80, and that a likely washout down to test $6.50 was still in progress. We also said rebound attempts were likely to be contained below $7.40 intermediate resistance. This week confirmed our Outlook as prices, despite a brief rally above $7.60, failed to yield a close above $7.40, and then fell sharply this week through our initial target of $6.80, and then hit $6.54 today at the session low, only four cents from our $6.50 washout target, before short covering back over $6.76 on close. Looking ahead, while we see a likely retest of lows at $6.50, with a possible press to new lows, bearish efforts are likely to be contained at $6.25 as the short interest grows nervous over diminishing room for profits, in our opinion. This of course, is short-term and is likely to yield range trade over the next week and a half, that is likely to be further subdued by a rather lackluster pattern to be contained on the upside by $7.25, up to $7.40 intermediate resistance, or until something more eventful impacts the fundamental landscape. The technical signals are still bearish overall, yet grossly oversold. These conflicting signals usually yield a narrowing more sedated trading pattern.

Fundamental Supply Update.

The fundamental picture for natural gas is quite simple, in that storage now stands at record levels of 1972 bcfs, which is 48.2% or 641bcfs above the five-year average of 1331bcfs. It’s also 344bcfs above last year’s hefty supply at this time. This followed the largest draw down of the year of 171 bcfs that was about 20 higher than most average estimates by Bloomberg and DowJones. Prices hardly reacted only managing a meager gain after falling to new 1 year lows at $6.54 and only 0.4 cents from our forecast target at $6.50 before short covering to $6.76 on the close due to existing record supplies. This supply overhang is obviously due to one of the country’s warmest winters on record. This combined with the fact that winter is now coming to a gradual, yet foreseeable end and taking elevated demand with it, which will make buying labored at best. This is due to the lag period of about a month and a half before any real heat normally develops in the Midwest and Northeast as an impetus for stronger demand to facilitate cooling needs in the second-largest demand cycle of the industry, for Summer’s air-conditioning requirements. This obvious softer period for demand could give way to a further slide in prices that are currently still considered quite expensive, in relation to existing supply, and the time of year.

Concerning crude oil, there is quite a different picture, while some similarity exists in actual supply ratios to last year, currently a virtual plethora of potential threats to oil supply flows and production infrastructure are pending, amidst a backdrop of demand that looks fairly robust in the coming year, more so overseas than here in the US. As indicated earlier, the EIA reported this week that crude stocks showed another gain of 1.6 million barrels leaving 328.3 million, which is well above averages and over 9% above last year. Total motor gasoline stocks also gained but by a less than expected 0.3 million barrels, leaving them just above averages, while distillates only, declined by 1.5 million barrels, yet also remain well above average for this time of year. Refinery capacity dropped slightly to 85.2% as more facilities no doubt shut operations for maintenance that was long overdue, because of last year’s delays from hurricanes Katrina and Rita. This resulted in a slight decline in gasoline production to near 8.4 million barrels per day, while distillate fuel output increased slightly averaging 3.8 million barrels per day. This moderately bearish report, under normal conditions was quickly ignored as traders turned their attention to the increasing gasoline demand of 2.5% over the same period last year, as their anxiety over the approaching driving season that will no doubt increase consumption rates from the current subdued winter cycle, materialized into a buying fever that launched gasoline prices, and thus boosted crude oil. This was further enhanced by the increased tension over the approach of the decision by the United Nations as to whether to refer Iran’s nuclear dilemma over to the Security Council for likely further political and economic pressure through sanctions to be imposed. Adding further support to the buying anxiety is the rhetoric surrounding the upcoming OPEC meeting in Vienna March eight, two days later, after the pivotal UN decision, whereby some OPEC members such as Venezuelan energy minister. Rafael Ramirez, already suggest a production cut of 500,000 barrels per day. Further comments such as from Edmund Daukora, the Nigerian Oil minister, who is also the current president of OPEC , suggesting that $60 per barrel is a fair level for oil prices, and that the market won’t be alarmed unless prices hit $70 per barrel, are far from comforting as recently this past week, Nigerian militants overran Shell oil facilities, kidnaped nine oil workers and interrupted the flow of some 455,000 barrels per day, or almost 20% of Nigeria’s total output. This is also, in addition to the attempted assault on the Saudi Arabian refinery at Abqaiq last week. With news today of a bombing in Pakistan, while not in direct threat to oil supplies, the blast in Karachi, nevertheless took place, two days before President Bush is set to visit the country and killed at least four people including a US diplomat, and seemed to be the icing on the cake of panic that resulted in a buying fever, igniting gasoline prices to a seven cent rally to threaten $1.70 per gallon and boosting crude values by $1.39 to close comfortably above $63 per barrel, the highest level since February 7! As we have stated in earlier reports, while actual current supply levels here in the United States certainly would suggest lower prices at first glance, the overwhelming and numerous rising threats to future supply from overseas geopolitical tensions makes the short
interest too uncomfortable to gain any momentum under the present situation, in our opinion. Let’s now take a closer look at the current weather with WS I.

W. S. I EnergyCast March 6-12

The focus on the unseasonably warm weather that is expected to encompass the Mountain West and central US the next 4-5 days, will shift eastward during the 6-10 day period. In response, widespread above and much above normal temperatures are forecast to overspread most locations east of the front Range for the balance of the 6-10 day period. The Northeast will see the most changeable conditions as the widespread cold weather is expected to persist through the middle of the next week. However, by the end of next weekend, widespread highs in the fifties and sixties are expected to arrive in the Northeast. The most persistent warmth will be found over the Mississippi Valley, Midwest, and Ohio Valley during the 6-10 day period as a 2-4 day period of above and much above normal
temperatures is expected. Widespread highs will climb into the fifties and sixties as the warm West pattern becomes established. Highs in the seventies are possible as far north as St. Louis in the Ohio Valley on the warmest days. For the balance of the six Dennis 10 day period, anomalies between 2-8 degrees above normal are forecast to encompass most locations east of the front Range. Below and much below normal temperatures are forecast to overspread most locations west of the front Range for the 6-10 day period as deep troughing settle into the region. The strongest signals for cold-weather exists over California and the southwestern US, where highs are only forecast to climb into the fifties and sixties on the coldest days. Even portions of the desert Southwest may struggle to climb out of the upper fifties on the coldest days.

Conclusion.

Natural gas is continuing to feel the weight of record storage and a close to its peak, winter demand cycle, along with the resulting subdued technical pattern. We feel this combination will continue to yield a rather subdued and somewhat constrained trading range of lower volatility and lackluster price movement until the next important demand cycle imposed by this summer, draws closer. As a result, looking ahead, we see a likely continuance of selling rallies whereby resistance should remain firm above at $7.25 scaled up to $7.40 likely to cause rapid and choppy declines pressing new lows below $6.50, and possibly $6.25 before short covering is expected to emerge and halt the decline. This pattern will persist in our opinion , until a further threat of enhanced demand appears on the horizon that will make the current production that is still off-line in the Gulf of Mexico of 1.504bcfs or 15.04% more significant.

Concerning crude oil, we feel the current intensity of the geopolitical unrest that exists in the major oil-producing hot-spots that we mentioned earlier, in our fundamental section, continues to suggests an override priority compared to the issue of current adequate US supplies, that further supports the rally in progress. Price movement this week, has confirmed our outlook from last week’s report hitting and exceeding both our initial upside objectives of $61.80 and the break out pivot price at $62.50, putting our upside target at $65 per barrel within reach. Unless there is a sudden breakthrough to more peaceful and agreeable terms reached between Iran and the members of the UN Security Council that would at least allay their fears of such a rogue nation attaining nuclear weapons and the obvious threat that imposes to both Israel, and the free world, we don’t see much relief in the near-term to elevated crude prices. Right now we see a convergence of bullish geopolitical fundamentals and a positive technical pattern as the market has quickly resumed the up trend after a healthy correction to recent support at $58.10 and more critically, just below that at $57.50 , which held on close. In fact, when one look’s closer and weighs in the implications of the way the products are reacting and mainly gasoline with peak driving season still well ahead of us, and the possible squeeze on refinery capacity during the current maintenance cycle, just prior to this vital
demand sequence , and certainly conditions could accelerate crude values
to test $67.50 quickly followed by another thrust to recent February 1st highs at $69 per barrel. Remember, the latest MMS update declares that some 24% of crude oil production in the Gulf is still off-line from last years storms, which could become more significant during peak refinery demand during the driving season. The fact that Al qaeda recently directly threatened oil infrastructure as an obvious means to both promote terrorism, while simultaneously increasing the revenues of their sponsors, makes the eventual break to new highs above $71 per barrel more a future
reality versus an idle threat. Last week’s suicide bombing attempt on the Saudi Arabian oil processing facility is a graphic example of their resolve. The fact that we recently learned that this administration was fully prepared to sellout the oversight in management of six of our major US ports to the UAE(United Arab Emirates), an Arab nation whose history is one of mixed signals; with ongoing recent cooperation in anti-terror efforts with the US, while securing past secret transfer of nuclear components to known rogue nations, as well as providing basic funding and two of the actual terrorists that executed the 911 atrocities, hardly evokes trust and a basis for entering a commerce relationship exposing the security of our vital shipping ports. In this day of heightened awareness of the constant threat of terrorism post 911, after which this administration reacted with a major blunder in attacking a Muslim nation on false pretenses that had no apparent direct connection to 911, has now made the US the favorite target of every Moslem extremists group out there. So with today’s atmosphere of anti-American sentiment so clearly and graphically demonstrated by Muslim extremists all over the world, making the possibility of an open window for a potential direct terror
strike within the US, a reality, through the conclusion of the Dubai Ports World deal, that is now undeniable, should immediately serve to expose both the ignorance, and thus negligence of this administration when it comes to National Security. It should also go along way to reveal an emerging pattern of negligence and lack of insight and planning when it comes to a crisis, such as in Katrina or in the mismanagement of the Iraqi insurgents’ challenge, post Saddam. This issue of the Dubai ports deal, however, suggests something more sinister and purposeful is at work here whereby the financial gains of the shortsighted are clearly being put ahead of the immediate and longer-term interests of our National Security. We must consider, and I believe it is becoming painfully obvious to this administration that the majority of Americans agree, that if the execution of allowing an Arab nation to have any jurisdiction over any US ports of entry with obvious ties to security, could grant an opening opportunity of vulnerability fora planned strike by an enemy that we already know has intent to kill, that would otherwise not exist, could result in a tragedy the cost of which would far outweigh the potential economic gain from this deal. We can no longer afford in today’s climate of intense animosity against this administration from armed extremist groups that we know have ties and ongoing relationships with the UAE to gamble by increasing our exposure, no matter how small the percentage may seem, to penetrate our already precarious security. Remember, from 911, the enemy only needs to get it right once when it comes to a nuclear device or dirty bomb or even a chemical or biological strike. Because the economic fallout and the sheer disruption from the fear induced upheaval of the freedom and Liberty we enjoy as Americans would be too great a cost to bear for the shortsightedness of greed for a financial arrangement that we all may one day, deeply Regret!

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

March 02, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744