Natural Gas Stalls as Winter Ends

Consensus Report: March 30, 2006

Natual Gas and Oil Report

Energy Rally Continues on Technical Strength, Iranian Tension, and Refining Challenges for Unleaded, while Natural Gas Stalls as Winter Ends.

Natural Gas and Oil

Technical Outlook: last week we stated that the technical advance will likely continue to test our upside targeted at $7.40 --$7.65 basis spot. April futures then hit a peak of $7.37 on expiration date, the 29th, before settling back at $7.23. This has positioned the new spot May futures within our targeted resistance band between $7.40- $7.65 with today's settlement at $7.487. While our upper range resistance level at $7.65 is still within reach, we see the market showing suspension fatigue with chances for further advance diminishing rapidly. It is our opinion that if prices fail to reach and hold the $7.60 level basis spot over the next three sessions, a full retreat back to test $7.10 is highly probable, with a further washout down to test $6.93 -- $6.95 to quickly follow. A subsequent close below $6.93 would confirm the overbought condition and set the stage for a probe below $6.80 for an eventual test of key lows at $6.50 -- $6.45, which we feel the market is still on track to test and is likely to materialize over the next two weeks. Only a further extension of the recent short covering resulting in a short term close above $7.65, could delay our bearish scenario temporarily, for an exhaustive thrust to test $7.80 and a potential near-term top. However, we feel due to several current indicators such as relative strength, stochastics, moving oscillators as well as momentum suggest fatigue and topping action, that this will only delay the collapse momentarily and likely only serve to attract stronger short interest which will then ignite a sharper and more dramatic sell-off to follow.

Fundamental Supply Update

Today the EIA announced a somewhat bullish weekly supply withdrawal of 104bcfs which was comfortably above both average supply estimates by Bloomberg and Dow Jones of 86 and 83 bcfs respectively, yet it was much closer to the popular ICAP call for a drawdown of 97. However despite this seemingly short term bullish update the market only managed to scratch out a meager gain of three cents to close at $7.48 after failing to sustain intraday highs at $7.56 as it soon became obvious that the late triple digit reduction failed to prevent the inevitable closeout to the Winter withdrawal season with an unprecedented record supply that is currently 61.8% above the five-year average of 1054 bcfs, now standing at 1705 bcfs, and 459 higher than last year. We feel, to reiterate our premise from last week, that prices are vulnerable to further weakness encouraging long liquidation as Winter now ends and the softer demand cycle in April begins, only serving to further expose how ominous a solid two months cushion of extra storage gas is. We expect as bearish fundamentals begin to coincide with a short term overbought technical condition that a rather sharp decline will soon transpire unless something in the form of a wildcard were to blindside the market which at this time seems unlikely. Both the demand side of the equation from summer heat and a potential threat to supply from hurricane season, do not become a real market impact for at least another 30 to 45 days. So, with an unprecedented overage in supply combined with the highest post Winter price level in the market's history, it is our opinion that the market will soon be forced to finally forget how far the market has dropped since its artificial all-time peak of $15 .78 posted early December based on a Winter threat that never materialized, and soon begin to digest the reality of how much more prices could soon drop as the reality of record storage in the face of pending softer demand, sets in.

Concerning crude oil an almost opposite scenario has permeated the petroleum complex as the tension from geopolitical concerns heats up, especially with regards to Iran, as today they officially ignored the first unanimously agreed warning from the UN Security Council, asking for complete suspension to further uranium enrichment and only giving them 30 days within which to comply to avoid the initiation of economic sanctions. Energy prices also advanced this week to multi -- month highs on a bullish EIA weekly inventory update whereby gasoline dropped in supply by twice what was expected, and by 5.4 million barrels to total 216.2 million barrels and the largest decline since August 2003, yet supply still remains above last year. A larger than expected drawdown of 2.5 million barrels in distillates was also supportive to the petroleum complex. This more than overshadowed the slight increase of 2.1 million barrels to crude stocks, leaving 340.7 million barrels to the total and well above historic averages. What was also noticeably bullish was the drawdown to gasoline inventories despite increased production last week averaging nearly 8.3 million barrels and again showing the effects of strong implied demand of 9.1 million barrels per day which is 1.3% above the same four weeks last year. Refineries operated at 87% of their operable capacity and still under the restraints of extended maintenance. But what is mainly driving crude oil higher currently is what we clearly stated last week, is the leadership of the unleaded gasoline market and the perception and uncertainty over potential regional shortages created from the timely transition to phase out methyl tertiary butyl ether(MTBE) an additive linked to water pollution, and the EPA requirement to replace it with gasoline blended with ethanol, an imposed mandate that refiners need to comply with by May 31. The current perception by traders is that refineries will not be able to build up enough inventory of summer blend gasoline in time for peak driving season this summer. Because of the new EPA restrictions, and the lack of stability and preparedness for the transition, price spikes have been warned as a likely regional phenomenon this season. Let's now take a brief look at the weather as it only has minor implications on pricing as Winter's impact diminishes.

Weather Update

This week conditions will be more seasonal across the country with warmer temperatures across the South and cooler through the northern tier. A storm will depart the Northeast on Saturday with another coming in the Central states on Sunday. While the largest variation in range of seasonal highs to lows will be felt in the northern and Upper Midwest next week, the cold will be less severe than last week, and overall temperatures will gradually rise across the country as Winter dissolves. Overnight lows in the Chicago area will rarely enter the upper thirties while the lows experienced in New York will barely dip in the forties for overnight lows.

Conclusion

Natural gas is approaching an overbought condition as technicals are suggesting topping behavior just as Winter conditions dissipate soon to be replaced with subdued demand during the shoulder month of April as record heavy supplies become more ominous. This should serve to be more than a match for even the bravest of bulls who can only hope to carry the existing short-term rally further on fear and perception of coming demand and potential threats to supply from summer and a storm season that is not even yet visible on the horizon. Currently Baker Hughes is reporting 1314 rigs pumping gas, up 19 from the previous week which should prove to be more than enough production under the approaching softer demand, and more than adequate to the task of adding to a record storage that will begin injection season somewhere near 1700bcfs. Until the heavier storm frequency of hurricane season that typically falls in late August, the current 1.393bcfpd or 13.93% of daily gas output that remains shut-in in the Gulf of Mexico according to the MMS as of March 22, will hardly be noticed because of the over two-month buffer of added supply the market currently enjoys, unless June and July provide a searing and record heat factor that actually proposes a sizable dent to the existing overage. Until then we expect a noticeable decline in the existing record premium for a post Winter price. Look for resistance to be stiff scaled up from $7.40 to $7.65, with a more critical challenge if attained at $7.80. We expect a failure anywhere between current levels and these short attractive barriers to precede a sharp and powerful decline first to support at $7.10 quickly followed by $6.93 -- $6.95 for an eventual return to $6.80 and below.

Concerning crude oil, the market continues to be carried by serious geopolitical tension over the Iran nuclear standoff, along with ongoing supply disruptions in Nigeria that are still responsible for over 26% of the country's daily crude output remaining off-line. Unleaded gasoline will continue to lead the complex as today's intraday high of two dollars per gallon confirmed our upside forecast target for the same, exactly, from last week's report, as did our call for oil to follow by testing resistance at $67 -- $67.50 which was confirmed with today's close at $67.15 per barrel and a two-month high. Also confirming our analysis that gasoline would lead the complex higher was the fact that today's close at $1.99 per gallon was a five-month high. Crude oil is also being empowered by a constructive and bullish technical outlook with prices recently breaking out to the upside from a multiweek trading range that was predominantly contained by support below at the $60 benchmark, and a level that was tested several times, and a resistance level above at the $64 benchmark, that had also contained the markets upside for several weeks. The decisive break out from this range along with the bullish fundamental backdrop that is currently making conditions quite uncomfortable for the Bears certainly suggests recent highs back in February of $69 per barrel are within reach. This is also more likely to take place according to our technical perception following a modest pullback to support at $66.50 scaled-down to $65.80 giving the bulls a well-deserved rest and thus a staging grounds to regroup and gather strength for another assault at the highs. However, we do feel as has been the habit of this market, that unless there is a new development in the Iran standoff outside of what is already known and factored in concerning the 30 day deadline to comply to the IAEA, prices will have a hard time exceeding the $69 benchmark on the existing fundamentals. Obviously due to the current sensitivity to ongoing bullish concerns, anyone of the existing hotspots suddenly accelerating such as further impedance to oil production in Nigeria from renewed militant activity, or another attempt to sabotage oil infrastructure in Saudi Arabia such as the recent suicide bombing attempt at the Abqaiq refinery a few weeks ago, or even another large drawdown to the US gasoline inventories next week, could ignite petroleum prices to test recent highs. As the bulls would comfortably refer to today's oil situation as a “target rich environment", it's as commensurately uncomfortable for the Bears who consistently find themselves holding nervous short positions that they must be ready to quickly abandon as anyone of these volatile world conditions could ignite an explosive panic buying spree that propels prices upward, quickly erasing all thoughts of what are in actuality quite adequate domestic supplies of US crude oil, by historic standards.

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

March 30, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744