Petroleum Holds Support after recent Correction

Consensus Report: May 17, 2007

Petroleum Reaches New Multi-Week Highs on Gasoline Rally, While Natural Gas Breaks $8 on Technical Strength and Sympathy Trade.

Natural Gas and Oil

Technical Outlook: last week we said, looking ahead, technical indicators were now mixed in midrange as the Bowlinger bands and the parabolic indicated 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. We also said other indicators over the short term such as stochastics, relative strength, and momentum were in a more neutral position, and thus did not give a clear direction in our opinion which raised a red flag of caution to traders before making a serious commitment to trade. We rather advocated remaining on the sidelines until more information is revealed from the established Range. And while we warned of a possible breach of support that could have led to a washout all the way down to $7.25 per million BTU, he was predicated upon a breaking close below $7.60 which was tested this past Friday however never transpired. Following this strong showing of technical support and the subsequent close above $7.65, it set the stage for the bullish rebound and the inevitable upside challenge to resistance at $8.10 which transpired today confirming the end of our technical forecast last week. Today's strong close above the $8 benchmark now sets the stage for follow-through buying and ultimate challenge of $8.25 basis the spot June contract. We anticipate some short interest to develop on the first attempt to achieve this level, however shorting this market when breaking to new highs can be very costly and thus short covering could easily accelerate the advance all the way up to minor resistance at $8.40 for a potential exhaust thrust upward to continuation contract resistance at $8.60 per million BTU. However if the market manages to achieve this level we feel at this point it would be somewhat overbought considering existing technical and fundamental conditions.

Fundamental Supply Update

This week's EIA report showed an expected injection into storage of 95 bcfs that was right in line yet slightly less than both estimates anticipated in the Dow Jones and Bloomberg surveys of 97+. Storage now stands at 1842 which is still 225 bcfs less than last year at this time and yet 315 or 20.6% above the five-year average of 1527 bcf. The market reaction ended with prices advancing sharply on a combination of follow-through technical strength after the market had held key technical support earlier in the week above $7.65 per million BTU and then also on sympathy with an extremely bullish petroleum rally today. Longer-term the market will be strongly influenced by signs of early summer heat indicating cooling demand only to be quickly followed by the focus on fear based trading from what has been hyped already is a very active hurricane season approaching next month! These two major fundamental considerations should continue to keep bearish short interest on edge as bullish fever continues to be stoked from the fires of a runaway petroleum market led by unleaded gasoline which is in short supply. With this bullish fundamental backdrop the market could easily challenge continuation chart resistance at $8.60 per million BTU over the near term.

Concerning crude oil, the market managed to close at the highest level of the month after a 3.7% acceleration of $2.31 per barrel to close at $64.86 a barrel on the Nymex following the break to new highs in gasoline basis the June delivery. The spot June reformulated contract gained 9.9 six cents or 4.3% to close at $2.43 a gallon in a new record high settlement for the June contract on the exchange. This is also a strong follow-up in pursuit of its predecessor, the May futures, which hit an intraday high of $2.45 upon expiration April 30. The petroleum rally is clearly being led by the unleaded contract in reaction to an unprecedented series of refinery mishaps over the past several months that seem to only continue this week. Sunoco Inc. closed a 36,000 barrel at a gasoline pipeline connecting to Buffalo New York and then Conoco Phillips, BP PLC and Murphy Oil Corp. also reported closing units for repairs. These continuing refinery challenges served to more than circumvent the small reprieve announced by the DOE this week of a second increase to the weekly supplies of gasoline albeit by only a modest 1.7 million barrels leaving US gasoline inventories still 7.5% below the 5-year average as of May 16 and still well below the lower end of the average range for this time of year just prior to peak driving season which kicks off this Memorial Day weekend at the end of the month. Crude stocks also managed a modest 1.0 million barrel increase and yet remain just below the upper end of the average range for supply for this time of year. With gasoline supplies still almost 7% below year ago levels and reformulated gasoline down 48.9% from a year ago, upward pressure on gasoline prices will be difficult to contain unless something more substantial breaks in the way of refining supply or from some sudden peaceful break out in the relations between the government and the militants in the Niger Delta, neither of which seems a likely scenario over the near term. Prices today came within one cent of hitting our target for gasoline from last week's fundamental outlook of $2.45, and prices seem poised for crude oil to also target our forecast price level of above $66 per barrel, to ultimately challenge recent resistant highs at $66.40 per barrel.

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

6 – 10 Headlines

Warmer than normal temperatures are expected to encompass both of the eastern and western thirds of the nation. The warmest readings are forecast over Interior California and the Great Basin, where anomalies between 7-12 degrees above normal are anticipated.
Today's forecast is warmer over most of the eastern U.S. than previously forecast.
Confidence remains higher for the western two-thirds of the nation than it is for the eastern U.S.
Temperatures may not be quite as warm as over the eastern U.S. as currently forecast if American models come to fruition. American models remain the deepest with the redeveloping eastern trough late next week and are still the coldest of all the medium range models over the eastern two-thirds of the country.

11 – 15 Day Headlines

With the exception of the southwestern U.S., warmer than normal temperatures are expected to encompass most locations west of the Appalachian Mountains. More seasonable readings are anticipated over the eastern third of the nation.
No major changes can be expected from previous forecasts.
Confidence in the forecast remains below average as notable differences still exist between the medium range models.
Though they are not as cold as previous morning's this week, temperatures may still trend colder over the Mississippi Valley and most of the eastern U.S. than currently forecast if American models come to fruition. American models depict the strongest blocking ridge in the North Atlantic (negative AO/NAO) and remain the deepest with upstream troughing in the eastern U.S.

Conclusion

Natural gas despite making an attempt to challenge support last Friday, recently held minor support on the pullback at $7.65 on the closing basis, which the market construed is extremely bullish, setting the stage for today's monthly high close at $8.07 per million BTU and an inevitable break of recent resistance of contract highs at $8.11 that in our opinion will be reached tomorrow. As stated earlier between the immediate approach of hotter summer weather soon to challenge the culpability of a precarious production that many remember last two weeks in July early August of 2006 failed to compensate extreme cooling demand resulting in a two-week decline in the first during an injection season which coincidentally resulted in a spike to $8.60 per million BTU and a level the market seems ahead of schedule to challenge! Quickly following this headline issue will be the dangerous implications of an active hurricane season upon the critical production areas of the Gulf of Mexico, and then as a bullish backdrop to these two fundamental catalysts is a raging Bull petroleum market led by gasoline under the pressure of a multiyear shortage in supply. None of these conditions, including a strong technical posture to the chart pattern will provide much comfort to the Bears cause and those looking to short to gas market. We see all of the earmarks in place for this market to exaggerate upward accelerations that will surprise many this summer season.

Concerning the petroleum complex, this week's EIA numbers were, despite being construed by some as slightly bearish as it was the first full spectrum increased to supplies in all three categories, ultimately interpreted as too little too late as far as supply increases ago when traders look ahead to expected sharp increase in demand as US drivers increase travel noticeably this season amidst a backdrop of ongoing refinery mishaps and forced maintenance shutdowns that explain clearly why operating capacity has been stubbornly contained below the 90% capacity level, currently just managing to crawl up to the 89.5% level with an output for gasoline of nearly 9.1 million barrels per day and yet still well below implied demand figure of 9.3 million barrels per day which continues to run at between one to 2% above the same consumption rate for the previous year. Distillate fuel demand on the other hand, although supply is currently at a much higher comfort zone, continues to run in a more robust consumption rate averaging closer to between three and 4% higher than the same period last year. These demand rates continue to keep the country heavily reliant upon crude oil and fuel imports to meet the ongoing demand, which in turn continues to magnify the threat implications of Nigeria is ongoing production shortfall that has currently reached a peak of over 30% due to increased kidnappings and militant takeovers of production infrastructure mainly in the keep producing area of the Niger Delta and a major interruption to Royal Dutch Shell's ongoing operations in the region. This major amount of loss to oil production from the eighth largest world producer is just another example of the exacerbation of the overseas threat to world producer's, and only serves as an unhealthy reminder of the ongoing challenges to other key world producer's in the Middle East. As stated last week when looking ahead we anticipate crude values to be well purchased at the current support range, which has quickly moved up to now between $$62.50 and $63.50, after the market today confirmed our target from last week of reaching the $64 benchmark and is now poised for follow-through buying to challenge existing resistance at between $66 and $66.50 per barrel. With financial gurus such as Ben Bernanke, the fed chairman, downplaying the potential threat to the US economy posed from the ongoing housing crunch and the implosion of the subprime mortgage industry, we see the effects of what appears to be the only legitimate threat to higher oil prices, that being economic slowdown in the world's largest consumer, kept quiet and somewhat contained by these efforts as well as a sympathetic media that will continue to support a bullish undertone to Wall Street, which has indirectly benefited from the housing threat remaining in the background. However, we feel that it is strongly advisable to keep a close eye on ongoing economic data for more definitive signs of slowdown as these could become excuses for profit-taking, especially after the energy complex reaches more lofty levels.

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

May 17, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744