Consensus Report: May 22, 2008

Petroleum Recoils sharply back to test $130 after Reaching Breath taking heights above $135 after another $6 range yesterday, as the market scrambles for Sanity and seeks Justification for clearly out-running fundamentals as momentum peaks short term, while Natural Gas Hits new highs following technical correction after supply comes in as expected.

Natural Gas and Oil

Technical Outlook: Since our last report we said in looking ahead now that the market had reestablished its trading range above the $11 benchmark that technical signals were looking more bearish with stochastics, momentum, relative strength, and various oscillators suggesting extreme overbought conditions now plague the market and suggest further selling ahead. However, we said the longer term bullish chart pattern was still firmly in place and so the near term range may hold over the next week considering Thursday’s sharp recovery of almost 20 cents into the close. We said if today’s lower price support gives out, looks like prices will be hard pressed to drop much lower than $10.80 based on the strength of the longer term chart and bullish sentiment. This forecast turned out to be on point as the market did break down below our previous support at $11.10 to challenge $10.80, and just as we predicted held above this critical level by rebounding from a higher low at $10.85 and then staged a massive resurgence that ultimately took out the previous high. Now looking ahead natural gas has become short-term overbought, however, some of the intermediate technical indicators are still firmly bullish and suggest a penetration of overhead resistance to establish new highs is extremely probable. From this analysis we anticipate a potential breakthrough and followed close above the $12 benchmark for the first time this year within the next 3-5 sessions. Look for support to hold on pullbacks at $11.50 scaled of all the way back to $11.25 with the unlikely break of this intermediate support leading to a retest of the recent lows. Should the market adhere to reaching our upside objective of attaining a close above the $12 benchmark, we anticipate strong buying support to then propel values much higher with an overhead target initially of $12.60 over the near-term.

Fundamental Supply Update

This week's EIA report revealed another consecutive injection, however by an expected 85 bcfs, which was right in line with both estimates that were also at 85 bcfs forecast in the surveys by DowJones and Bloomberg respectively. Storage now stands at 1614 bcfs which is 302 bcfs below last year’s record and now 3bcfs or -.2% below the five year average of 1617bcfs. This report seemed to add to the upward momentum that was created earlier in the week as prices continued to rebound from the key pivotal low at $10.85 posted Monday, just $.5 cents above our targeted support at $10.80. While we do not expect much in the way of unusual weather to impact the market over the remainder of this month, we continue to anticipate strong volatility to play on the market as it seems to have its hands full between sympathy trading with crude oil, technical concerns, and an obvious injection of fear based premium that has begun to reflect the anticipation of higher than normal cooling demand this summer quickly followed by an active hurricane season to threaten critical production facilities in the Gulf. With these ongoing considerations it was obvious this past Monday that traders were reluctant to hold short positions ahead of these concerns and also very evident that longer-term buyers exercised little patience and immediately reacted to the first and yet short-lived opportunity to buy any sudden price correction. In looking ahead fundamentally the price action this week has reconfirmed my declared feeling in last week’s report that values will be hard-pressed to trade below the now critical support at $10.80 per million BTU unless the current mild weather conditions persist and happened to overlap as crude oil possibly sustains a well-deserved and possibly more dramatic selling correction than the brief pullback from market experienced today.

Concerning crude oil, today proved to be a rather somber surprise to many as values fell back for the first loss of the week after briefly trading above an unprecedented $135 per barrel and eclipsed a gain in the last four sessions of 7% as petroleum values recently seem to not only defy gravity but also to exceed even the most bullish of expectations. The spot price for July delivery lost $2.36 to close at $130.81 per barrel.Technical concerns may have begun to weigh in on values as many indicators such as stochastic, momentum, the MACD, relative strength, and moving averages, as well as other oscillators begin to exhibit price fatigue as the market is short-term extremely overbought. However, the longer-term bullish trend is not only firmly in place but extremely dynamic and impressive to say the least. While many claim the same repetitive contributing factors to the uptrend resurfaced to support the recent upward surge earlier this week such as the weaker US dollar I feel they have become somewhat irrelevant as the evidence doesn’t necessarily substantiate such claims. Oil is now much higher than when the US dollar index was at its recent lows which correlated to the euro hitting 160 usd, and yet when the dollar strengthened an the euro fell back to 153 usd, Oil ignored the short term rebound in the greenback and then not only broke through overhead resistance at $120 per barrel but then put on an impressive extension to the rally culminating in this morning’s intraday peak in electronic trading at $135.09! The bullish sentiment has threatened exaggeration overload as traders note out reacted in maximum panic buying mode yesterday resulting in the highest close to date at $133.17 a barrel for gain of $4.19 or 3.3% on the session in obvious unabated purchasing euphoria based on the EIA’s surprise announcement of a 5.4 million decline in crude stocks were as both products exhibited an anemic weekly change of only 0.8 million barrels declined in gasoline stocks were as distillate inventories inched up by a similar 0.7 million barrels. The refinery capacity moved up noticeably to 87.9% which in lieu of the product numbers should have been construed as minorly bearish. It seems almost as if traders were buying this market earlier in the week as if another announcement was about to break the headlines such as a major threat to supplies would suddenly emanate from anyone of a number of known hotspots such as Nigeria or in the Middle East and they were afraid to be outside the market and then miss out on the next leg up! This type of buying with reckless abandon based on a fear of a potential headline that has yet to materialize is setting the market up for a rather violent correction, especially if nothing unusual materialize as in the news concerning a legitimate threat to supply over the short term. Today’s price action may have been a precursor to such a reality. Another major relevant factor that we mentioned in last week’s report is the obvious popularity of the peak oil theory, and rumors that circulated this week supported by Thursday’s report in the Wall Street Journal that the IEA is attempting to assess the current conditions of the world’s top 400 oilfields and despite its conclusions will be delayed for release until November, certainly trader’s behavior reveals a four drawn bullish conclusion.

WSI Weather 6-10Day Outlook

The main story during the next week forecast periods is expected to be the early summer warmth all models advertise will overspread the northeastern U.S. and Mid-Atlantic States early next week. The two warmest days will likely be Monday and Tuesday, when widespread highs in the 80s to near 90 degrees are forecast as far north as Boston. The early summer warmth is short-lived though as a cold front dropping southward into the northern tier of the country is forecast to bring an end the early summer warmth by mid-week. Widespread highs in the 70s and low 80s are expected to become more common place over the northeastern U.S. and Mid- Atlantic States during the middle and latter half of next week. Meanwhile, the warmest temperatures over the southeastern U.S. are forecast during the 6-10 day period. As the cold front drops into northern tier of the country, winds over the southeastern U.S. will turn to the west and southwest. This will allow a warming trend to overspread the southeastern U.S. In response, widespread highs in the 80s and low 90s are expected to become the rule for the Southeast during the latter half of next week. The most persistent warmth next week is forecast over Texas and the south-central U.S., where little relief from the warm and humid weather that has developed over the region this week is anticipated. Daytime highs in the 80s and low 90s are expected to be rule for Texas most of next week. Overnight lows are only forecast to fall into the 60s and low 70s. The coldest temperatures and the most persistent cold weather next week are anticipated over California and the northern Plains. Seasonable to seasonably cool readings are expected to grip these regions for most of next week. Finally, the interior western U.S. and Southwest are looking warmer during the 6-10 day period as all models feature stronger ridging and suggest as warming trend will develop over these regions. In response, highs in the 70s and 80s are expected to become more widespread over the interior West during the latter half of next week. Highs in the 90s to near 100 degrees are forecast to overspread the southwestern U.S.

Conclusion

Natural gas, this week after rebounding from the intraday low at $10.85 Monday has confirmed our call for a short term low and after leaving that in place has recently taken out the upside previous high with today’s peak at $11.85. Looking ahead while technical conditions have reached short-term overbought territory the intermediate and longer-term trend is still extremely bullish and thus leads me to expect another short-term upward thrust to new highs. Unless over the short term crude oil goes into a well-deserved and rather dramatic price correction, I expect natural gas will hold near-term support on pullbacks between $11.40 scaled-back down to $11.25 in a recoiling posture only to prepare another assault at the recent highs. Fundamentally the market will continue to react to sympathy trade with petroleum, ongoing technical concerns, and then any relevant weather forecasts that yield any preview to this year’s cooling demand from the heat factor as well as any changes to the existing preliminary hurricane update which currently suggest from the NOAA report of a 60 to 70% chance for 12 to 16 named storms which includes six to nine hurricanes in between two and five major storms. And finally I expect natural gas will continue to ignore the gradual revelation of the permeation of the US recession into the economy with the same stubborn abstinence that we see exhibited by the petroleum market.

Concerning the petroleum complex, this week’s price action, is beginning to reveal some price fatigue may be setting in as some traders obviously have decided prudence dictates taking some profits off the table until more evidence is revealed as the recent escalation to the markets values has arguably exceeded even the most bullish of known potential supply threat scenarios! Meanwhile the consumer has been forced today to swallow even another, although marginal increase in retail gasoline as the national average inched higher by 2.3 cents to a fresh record of $3.83 a gallon according to AAAs daily fuel gauge report. This is no doubt frustrating while OPEC proclaims there is sufficient oil in the world today and while total motor gasoline stocks are about 5% above last year’s supply here in the US simultaneously while MasterCard’s survey shows gasoline consumption is clearly lower than last year at this time and the rate of use is likely to drop off even further as the housing crisis in credit crunch is likely to victimize the consumer much more in the months to come. While the recent escalation in crude oil pricing has in the short-term exceeded many of our predictions, it may be setting the market up for violent collision with reality as prudence may cause hedge funds as well as many other investors to cautiously moved to the sidelines and take profits if not just to clear the air and see if the current fundamentals justifies the price once the fog clears. Because in my opinion recently the tale has begun to wag the dog, just like for example in the value of the US dollar which I believe has been dragged lower by the recent dramatic and explosive upward launch to the oil market instead of vice versa. There is also the Wall Street effect which basically is the revelation of the power that exists amongst the fund managers that are also Wall Street pundits who have already proven from the recent assault above 13,000 on the Dow Jones industrial average, their obvious ability to ignore the recession headlines and establish a noticeable disconnect between Main Street and Wall Street and the impetuous placement of large and ominous sums of money despite the clearly sick state of the US economy. Considering that Wall Street clearly dislikes the recent skyrocket to oil prices, and thus its ability to deter temporarily the injection of the vast sums of wealth that are now accumulating on the sidelines, it is my strong opinion that the aggressive risk-takers will soon yield to the will of the deeper more conservative pockets that wish to reenter the stock market under a less inflationary atmosphere. Should these influences converge at a time when recessionary conditions give birth to yet another strong revelation of a weakening consumer with the promise of even slower demand for all consumables including energy yet to come, and a correction could be fast and furious with intermediate resistance at $127 per barrel which is now support being tested rapidly with a potential and obviously more critical test at $125 per barrel following shortly thereafter. Looking ahead with always a potential for a bullish wildcard to emerge overseas from one of the various hotspots that could threaten supply and certainly one could build the case for short covering going into the long weekend, however after such a lofty price peak at $135 per barrel already being tested, there exists an equally strong argument for profit-taking and for values to subside ahead of the long weekend as a more cautious investor would be expected to lock in profits and sidestep the risk in favor of reassessing the challenges of price discovery from a safer vantage point outside the market to start next week. Tomorrow’s action will answer this short-term dilemma. My feelings are that on any strong rejection from lower highs tomorrow and especially if today’s lows near the $130 barrel support level breaks down and it is likely to attract a massive amount of profit-taking which could easily snowball into a much more substantial selloff with the previous support levels easily reached and even surpassed! I do not anticipate based on only what is already known and without the addition of a sudden bullish wildcard, that traders will be willing to push the market beyond today’s earlier highs and hang themselves out over the proverbial barrel before a long weekend that could suddenly find themselves Tuesday standing on a vacuum with no footing except a large void below their newly assumed position of risk.

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

May 22, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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