Winter winds down taking natural gas down, while petroleum retreats on supply.

Consensus Report: March 09, 2006

Natual Gas and Oil Report

Winter Winds Down taking Natural Gas with it, while Petroleum Retreats on Supply Addition and OPEC Status Quo.

Natural Gas and Oil

Technical Outlook: in last week’s report, we forecasted that Natural Gas was caught up in a tug-of-war between bearish technical indicators and being grossly oversold, and that was likely to produce a boring, lackluster, and subdued trading pattern characterized by a narrowing range. We also said to expect the market to quickly retreat from resistance back to test support with a strong potential to reveal new lows below $6.50 with a possible further drop to $6.25 before nervous shorts moved to cover values back up into the middle of the range. This week’s price behavior confirmed our Outlook as prices were contained below $6.80 this week, and new lows were revealed below $6.50, but only managed to fall to $6.45 before short covering emerged. Looking ahead, technical signals are still mixed with most indicators still bearish yet grossly oversold, suggesting a continuance of the subdued, and rather narrow trading range. This past week, values were pretty much restrained within a 25-30 cents range between $6.50 on the downside and $6.75 on the upside, graphically confirming our prediction with the narrowest trading range over a week in the past six months! We still feel the target at $6.25 is in progress with the upside likely to be contained by $6.80, and a widening of the trading range likely to be extended at the lower end with a possible push below $6.25 for a washout down to $6.10 as the Bears get more confidence as the last of Winter diminishes. Only a surprising break from short covering producing a close back up over $6.80, could neutralize bear forces temporarily for a test of $7.0-$7.10.

Fundamental Supply Update

Today, the EIA reported a smaller injection of 85bcfs that was about 20 lower than both estimates by Bloomberg and Dow Jones of 103 and 105bcfs , respectively. It was also 9bcfs below the closely watched ICAP estimate of 94bcfs and also comfortably below our own company call for a range of 97-102bcfs. The market reacted by quickly falling to session lows at $6.48, just three cents shy of the year’s low before short covering back up to $6.60 on close after a listless and uneventful trading session. Looking ahead, the fundamental picture offers little of substance to ignite volatility as the now 54% record storage above the five-year average is well-known to all market participants while the remaining Winter weather in March, even if occasionally produces below normal temperatures, offers little threat to what will be a record post Winter surplus. Storage now stands at a very heavy 1887bcfs, which is 393 higher than last year and 664 above the five-year average of 1223 bcfs. Today’s storage numbers only served to further confirm our Outlook target for ending storage above 1700bcfs stated weeks ago. The market is very vulnerable over the next two to three weeks to a precipitous liquidating washout that could surprise many in the industry as there will be very little demand offered in April, before any discernible heat develops in May to kick off an early cooling demand season. Some are expecting longer-term hedgers anticipating the threat of summer heat, and thus electrical generation demand along with the threat of hurricane season, upon already storm battered production facilities in the Gulf of Mexico, to step in and buy. However, we feel late March and early April are too early to feel any sense of sudden urgency , prompting one to suddenly rush in and buy. We also feel with spot month values still comfortably above $6.0, that in relation to record heavy existing supply converging with the end of peak Winter demand now about to embark on several weeks of softer demand, makes the $6.0 benchmark still seem expensive by not only historic, but also current standards.

Concerning crude oil, prices quickly came off a recent threat to the $64 benchmark made Friday as little in the way of a real bona fide threat emerged, especially in comparison to last week’s convergence of Nigeria’s interruption to supply, the suicide bomb threat in Saudi Arabia, and the ongoing saga of Iran’s nuclear enrichment program. Instead, the Bulls feverish thirst for a new leading headline was tempered by a rather bearish headline announced by the EIA of the largest weekly increase to stocks in months of 6.8 million barrels, leaving 335.1 million barrels in supply and the largest level since May of 1999. Bullish traders also found little to run on after the OPEC meeting in Vienna left output levels, unchanged at 28 million per day. Had it not been for the 1.1 million decline in motor gasoline inventories and crude prices may have remained under the $60 benchmark , where they temporarily traded both yesterday and today with intraday values falling all the way down to $59.25 Wednesday, before nervous shorts covered their positions. The main fundamental issue and Paramount threat remains with Iran now being referred to the UN Security Council, which will no doubt result in economic pressure through sanctions to which they have already anticipated and thus retaliated verbally with rather harsh yet undefined threats of pain, and yet in a seeming manner of inviting the challenge said to the US if that is what they wish” then let the ball roll”. Let’s take a brief look at the weather over the next 6 to 10 days as it has a very minor impact on energy prices as Winter diminishes this month.

Weather Summary

Outside of some spotty and brief variations below normal occasionally in the Upper Midwest and the Chicago area, with temperatures dipping into the upper twenties for lows overnight at times, Winter’s end looks to be fairly seasonable with temperatures predominantly ranging in the thirties and forties on the cold end with daytime highs ranging up to the fifties and sixties , which is normal for this time of year. In the Northeast and mainly New York area temperatures look to be more seasonable with predominantly thirties and forties for overnight lows with daytime highs ranging up in the sixties, and again rather ordinary for this time of year. A jetstream surge will bring some rather noticeably cooler than normal airflow from the Pacific into the western coastline of the nation flooding the West from British Columbia , all the way down to lower Arizona.

Conclusion .

Natural gas will continue to feel the compelling pressure of record heavy storage, combined with bearish technical indicators. So far, the only real deterrent to a more dramatic sell-off from further end of season liquidation is the nervousness of shorts who are preoccupied with their cognizance of the recent sharp and unprecedented price drop from all-time highs posted in early December at $15.78. Another words, traders seem to be too concerned about looking back at how far we’ve fallen versus looking ahead to how much more we can drop. It is our opinion, that as soon as market players realize there is little to pressure the shorts to relinquish their grip on prices, and that all there is to look forward to is record storage with even lower demand than the market has experienced recently, and the Bulls will capitulate, and values could free-fall easily down through the $6.0 benchmark, resulting in a washout down to $5.75- $5.80 before selling diminishes. Only a weather anomaly or wild-card pipeline burst or terrorist strike to North American gas production facilities could reverse values back to the upside in our opinion. As stated earlier, before this potential and likely washout to threaten the $6.0 benchmark, we expect the trading range this coming week to be contained between the resistance level above at $7.10 and $6.25 below.

Concerning crude oil, Iran has now returned to Center stage as the showdown between the UN Security Council and their nuclear ambitions loom large. Nigeria’s militants recently took more British oil workers hostage and attempted an assault on the tanker MV SPIRIT in the Niger Delta, showing they are getting more aggressive and thus are a close second on the current list of priorities as to supply threats, feeding the bull trend, with terror strikes against Saudi Arabia remaining as a legitimate third and the wild card. With Nigeria, being the fifth largest supplier to the US, and providing the much desired Bonny light sweet crude that is easier to refine as the all-important driving season approaches, could make these militant uprisings that have already interrupted 20% of the nation’s output, a much more significant influence to price elevation than people realize right now. Remember, refining capacity dropped again by two points to 83% of what is operable due to much-needed maintenance, just prior to the peak driving demand season. What is also a legitimate concern is the potential delays to production output as refiners retool in preparation to switch to ethanol based fuel as the environmentally inferior MTBE is phased out. When you combine the challenges facing refiners still suffering from outages from last year’s storms, the ongoing threats to oil infrastructure overseas, and this year’s likely prolific hurricane season about to begin in June, it is hard to find a scenario whereby crude values could sustain a further decline below existing key support at $57.50 and gasoline for that matter is even less likely to decline below existing lows at $1.36, given the current supply demand imbalances. We expect, looking ahead for crude values to find good support at our pivot price of $58.10, keeping the time window for trading below the $60 benchmark brief if at all, with a close above recent resistance at 63.80 likely to bring a rapid challenge to our upside target of $65 per barrel from last week’s report, which we believe is still in progress. It is our opinion, that unless there is a sudden, unexpected, and uneventful settlement to the Iran nuclear challenge, which although unlikely is certainly possible, or at least a temporary compromise arrangement to the issue is achieved, which would bring the heavy existing US supply back to the forefront of traders minds, it will be difficult to sustain or extend a deeper decline to prices.

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

March 09, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744