Petroleum Holds Support after recent Correction

Consensus Report: May 10, 2007

Petroleum Holds Support after recent Correction, as Concerns over Unleaded Supplies Continue to Push Prices Higher, While Natural Gas Remains Range Bound on Supply, Summer and Storm Fears.

Natural Gas and Oil

Technical Outlook: last week we said, looking ahead, and following the bullish key reversal from the intraday low of $7.52, representing a two week low and then closing on a three-week high, that it certainly set the stage for a test of our longer term resistance point at $8.10 with scaled up resistance following this level up to $8.25 before we expected the return of more substantial short interest. What transpired confirmed our Outlook as the market quickly challenged our upside resistance point by topping out at exactly $8.11 per million BTU this past Friday before aggressive short interest stepped in and forced values to return and test support, however, since the retreat prices have failed to close below key support at $7.60 per million BTU. Looking ahead, Technical indicators are now mixed in midrange as the Bowlinger bands and the parabolic indicate a negative posture whereby there is more room evident for further downside action, while relative strength and accumulation indicators reveal the undercurrent of the up trend. Still other indicators over the short term such as stochastics, relative strength, and momentum are in a more neutral position, and thus do not give a clear direction in our opinion which raises a red flag of caution to traders before making a serious commitment to trade. We rather advocate remaining on the sidelines until more information is revealed from the established Range. We anticipate if the current upward momentum begins to stall a potential rapid return to test support first at $7.65 minor, however, with the current bull wedge firmly in position we see the potential for immediate test of the more critical support at $7.52 if the market manages to weaken to the point of a breaking close back below $7.60 basis the June spot which would break the up trend wedge in our opinion, and thus could lead to a more significant decline resulting in a test of longer-term support down at $7.40 with a potential washout even lower to test $7.25. As for the upside, if the up trend remains intact then look for a test near term of minor resistance at $7.92 with a more formidable overhead resistance that still stands at $8.10 basis spot.

Fundamental Supply Update

This week's EIA report showed an expected injection into storage of 96 bcfs that was right in line yet slightly more than both estimates anticipated in the Dow Jones and Bloomberg surveys of 94+ and below. Storage now stands at 1747 which is still 230 bcfs less than last year at this time and yet 297 or 20.5% above the five-year average of 1450 bcf. The market reaction ended with prices virtually unchanged basis the spot GN settling at $7.72 per million British thermal units after the knee-jerk decline all the way down to $7.65 earlier in the session. Overall the fact that supplies are still well above five-year averages holding a cushion of now 20 plus percent would normally be construed as negative and probably the only reason prices sustained current levels at the close was in sympathy with higher crude values because of the explosive gasoline market. Looking ahead fundamental still suggests a potential softening of values as the shoulder months continue with higher injections anticipated from the mild weather forecasts. However with the official kickoff to hurricane season only 21 days away, and a surprise arrival of subtropical depression Andrea which was just swirling along the Southeast coast of US yesterday, will continue to keep the short interest on edge with serious reservations of committing any substantial resources to selling this market aggressively ahead of storm season. Based on this early value trend buyers will be quick to buy on pullbacks and thus we feel this market will be well supported from the lower levels previously mentioned in our technical update. Also worth mentioning is the sensitivity to sympathy trade will also be ongoing and the current up trend in petroleum has been firmly established in our opinion by the critical tightness in supply of unleaded gasoline which we will discuss in more detail in the next section.

Concerning crude oil, the market managed to close with a modest gain of $.26 to settle at 61.81 after a prompt rejection from resistance at the intraday high at $62.50 per barrel while judging from a purely supply demand scenario, if one isolates the crude oil stocks from the surplus side you could reach a bearish conclusion. However, the situation is slightly more complicated as crude oils Main importance now is to provide for the refinement of gasoline as we should approach the kickoff to peak driving season at the end of this month when more consumers all over the nation hit the road for business vacation and every other reason, and with supplies traditionally lower than both the five-year average and historical averages going back over 10 years, we feel the product led rally will continue to support and Cary crude values higher. When you look at the overall picture for petroleum worldwide with the ongoing quagmire in Iraq continuing to destabilize their oil exports, growing tension between Iran and the United States over both the nuclear issue and implications of direct Iranian involvement in many of the suicide bomb attempts as well as executions on both Iraqi civilians as well as US military personnel, and then in the more immediate spotlight the ongoing civil unrest in Nigeria, and you have a virtual cooking pot of bullish elements primed to boil over that when you add this year's hurricane season to the mix could escalate gasoline prices and thus rocket crude oil values well above the $70 benchmark this summer! More specifically when you isolate gasoline supplies over the last 13 consecutive weeks declining by about 34 million barrels, which is almost unprecedented and liens supplies 7% below year ago levels, however reformulated gasoline supplies in particular stand at 2.3 million barrels and are down 52.1% from a year ago according to the government data. This puts gasoline supplies as we head into peak driving season at a critically vulnerable level whereby just as I stated in this morning's Bloomberg radio interview with very little room for error, and if the United States just suffers one more major refinery mishap or break down or from the sudden interruption of another supply disruption oversees such as in Nigeria, and we could see a very uncomfortable escalation to fuel prices this summer. Gasoline prices virtually broke out today with the spot contract accelerating nine cents higher to settle at $2.32 basis the spot June futures and we now expect that contract to soon challenge the peak price reached by its predecessor of $2.45 over the near term which could easily drag crude oil with it to challenge its recent peak range above $66 per barrel

W. S. I Weather 6-10/11-15Day Outlooks

While warmer than normal temperatures are forecast to continue over most of central and eastern U.S. early next week, a deepening eastern trough and a series of cold fronts are expected to bring a general cooling trend to most of the eastern two-thirds of country during the 6-10 day period. As a result, at least brief period of near and below normal temperatures is forecast to overspread most of the central and eastern U.S. in the late 6-10 and early 11-15 day periods. In response, near and below normal temperatures are forecast over most of the eastern and south-central U.S. for the balance of the 6-10 day forecast period. Meanwhile, persistent ridging in the West is expected to bring widespread above normal temperatures to the western U.S. most of next week. In response, above and much above normal temperatures are forecast over most of the western third of the nation for the balance of the 6-10 day period. As a result of the cool weather expected to arrive near the middle of next week, widespread highs 70s and low 80s over the northcentral U.S. and Midwest are forecast to fall back into the 60s and 70s during the 6-10 day period. Highs generally in the 80s over the south-central and southeastern U.S. are expected to fall back into the 70s and low 80s. The coolest temperatures for the balance of the 6-10 day period are anticipated in the Northeast, where once the cool weather arrives this weekend it is expected to continue most of next week. As a result, highs generally in the 60s and low 70s are forecast to be the rule for the northeastern U.S. most of next week. Meanwhile, the warmest temperatures and the most persistent warmth are anticipated over the western third of the nation. Highs mainly in the 90s and low 100s are expected to be the rule for the southwestern U.S. most of next week. Highs in the 70s and 80s forecast over California and the Mountain West. Even the Pacific Northwest is expected to see at least a brief window of warm and dry weather, when highs are forecast to climb into the 60s and low 70s on the warmest days.

Conclusion

Natural gas despite making an attempt to challenge support recently held minor support on the pullback at $7.52 basis the new spot June futures, displaying the Bulls stubborn refusal to give up any ground to the shorts as they tout the coming summer heat and of course the potential threat of an active hurricane season. The market seems to be preoccupied with the future fears of an overheated summer approaching which could threaten the existing surplus of over 20% in storage over the five-year average. Technical resistance now stands to be challenged above at $8.10 scaled up to $8.25 per million BTU basis spot. Look for the market to be well supported on pullbacks and profit-taking corrections first at $7.65 and then scaled down to the critical support now established at $7.52. The main reasons to buy will continue to be the approaching summer, the vulnerability of ongoing production, and the longer-term threat to interrupt production from a very active hurricane season due to impact the market Midsummer.

Concerning the petroleum complex, this week's EIA numbers were still obviously bullish overall as gasoline supplies despite a modest gain of 400,000 barrels did not increase by as much as many had thought our hoped for and still remain well below the five-year average for supply. Crude stocks on the other hand experienced a sizable increase of 5.6 million barrels leaving stocks at 341.2 million yet still below last year's level and remain just below the upper end of the average range for this time of year distillate fuel inventories rose last week by 1.7 million barrels per day and yet remain at the upper end of the average range for this time of year. However in plied demand figures continue to Shell gasoline running between one and 2% above the same periods last year and yet distillate fuel demand continues to run strong averaging between four and 5% over the same period last year. Refinery operating capacity continues to be hampered in our opinion having just reached 89% this week and managing to increase gasoline production marginally over the previous week to 8.9 million barrels per day, however with gasoline consumption running nearly 9.3 million barrels per day and thus keeping the US very dependent on foreign imports, especially to meet the expected increase demand over peak driving season this summer. And that's what makes the ongoing violence in Nigeria a paramount issue when looking at prices and their expected behavior this summer. Just yesterday it was reported by the BBC that Nigerian militants kidnapped for more US oil workers in the Niger Delta. These ongoing militant operations have cut off almost a third of the world's eighth largest exporter of oil, and producer of the desirable Bonny light sweet crude that the US likes to refine which will continue to exert an upward influence over fuel prices. Looking ahead we anticipate crude values to be well purchased at the current support range between $60.70 and $61.50, with the product led rally in gasoline combined with international tensions overseas easily igniting crude values back up to test recent resistance at $64 with a close above this minor resistance level easily joined by follow-through fund buying to ultimately challenge the thus $66 benchmark again over the near term. Overseas terror strikes in Saudi Arabia as well as a sudden igniting of tensions with Iran as well as an Atlantic hurricane making a direct path for the critical areas of production in the Gulf of Mexico will remain as the wild-card threat to supplies in the escalation of prices over the next three months. However, with only the gradual revelation of a possible recession here in the United States, as certain sectors of the economy continue to show noticeable slowdown such as from April's deplorable retail sales figures, as the potential “lone Wolf” threat to rising oil prices, we feel the Bears will continue to feel the brunt of commitment anxiety which will keep the uptrend in petroleum values intact over the next three months in our opinion.

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

May 05 , 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744