Natual Gas and Oil Report

Energies Retreat from near Record Highs on Surprise Inventory Increase, Apparent Softening Gasoline Demand, while Natural Gas gets a lift from lower Weekly Supply.

Technical Outlook: Last week we said the market was vulnerable to a price collapse from the overbought technical picture and to expect a further decline from the $6.80 level reached at the time of our last report, down to new lows at $6.50 -- $6.45 basis spot June futures, with the potential further washout down to $6.25 stated in our conclusion. What transpired confirmed our initial objective as the June spot did fall to exactly between our projected bracket at new lows for the contract this year under $6.50 with the intraday low posted at $6.49 this past Friday April the 28th. Looking ahead we see the technical picture is now mixed with longer-term indicators still showing a negative divergence exists, yet some indicators such as stochastics, momentum, and the rate of change suggest a price rebound may continue from the recent short-term oversold condition. We anticipate from the current pattern that this advance may be short-lived with overhead resistance first at $7.19 and then if attained a more formidable resistance point at $7.40 is more likely to attract strong selling pressure rather than encourage more buyers. Look for rejection sellers to quickly turn back market forces into resuming the decline to retest recent lows for a possible press to $6.25 support over the next 5-7 days. Only an extension to the recent short-term Bull reversal resulting in a strong close back above $7.40 would temporarily neutralize the bearish reinforcement and induce range trading between likely parameters at $6.90 and $7.65 over the near term.

Fundamental Supply Update

Today the EIA reported a net injection of 53 bcfs that was well below previous estimates from Bloomberg and DowJones of closer to 65. Storage now stands at 1904 bcfs as of Friday, April 28, which is 455 higher than last year at this time and 699 bcfs or 58% above the five-year average of 1205 bcfs. While causing an obvious bullish knee-jerk reaction to the unexpected lower addition to supply, the exaggerated $.30 bounce to prices should find follow-through buying labored and quick to evaporate considering the rather subdued immediate demand outlook amidst what are still record heavy and burdensome supplies. Instead the recent elevation to values now being between 60 -- $.75 above recent and more logical price lows, should provide an attraction and thus a magnet for vantage point conscious sellers. This short-term price rebound could create quite a dramatic reversal back to challenge recent lows as the fundamental basis for this advance is weak and precarious at best. Especially when one considers the demand quelling cooler weather that is expected to encompass most of the North and Central US late next week.     .

Baker Hughes currently reports 1353 rigs pumping gas, up 22 from the previous week, as of the week ending April 28th. And with the latest MMS update from the Gulf still declaring 1.295 bcfs of gas or   12.95% remains off-line, production could become a more critical supply issue soon as demand increases for summer's cooling needs, and with the convergence of the new hurricane season approaching.

  Concerning Crude Oil, and the petroleum complex in general, prices continued their decline from near record highs posted earlier this week as the surprising EIA inventory data provided the short-term impetus for change. The main catalyst was certainly an unexpected increase to gasoline supplies that added 2.1 million barrels to supply yet remain at the lower end of the average range. Crude stocks also increased by a more than expected 1.7 million barrels over the previous week and also remain conversely at the highest level since the week ending May 29, 1998, for a total of 346.7 mbs, and still remain obviously above the upper end of the average range for this time of year. Only distillate fuel decreased by 1.1 million barrels yet showed little impact as they remain above the upper end of the average range. The other point of interest that stood out in this week's DOE update was that refineries operated at an increased rate of 88.8% of their operable capacity which yielded a gasoline production increase while simultaneously implied demand for motor gasoline seemed to have leveled off at about equal to that of the same period last year, causing some obviously fatigued bears to quickly assume this is a result of recent high prices quelling demand. However, we warn against jumping to such conclusions so quickly as is often the case in wishful thinking as consumers choke on recent staggering price hikes reached at the pump, as one-week neither makes a trend, or end's a previous one. Certainly one can assume the sudden increase in gasoline inventories is a reflection that the movement to phase out MTBE as an additive by May the fifth is near completion and suggests that refiners are almost finished trimming supplies of the old formulation and are now ramping up production of the new summer grade gasoline. The other assumption concerning possible demand destruction in the face of higher retail prices for gasoline we believe is more of a stretch to declare this early in the game and cannot be depended upon with too much reliance based simply on one or two weeks of data. This will make next week's inventory update even more critical in our opinion as it will either indicate a potential new trend confirming these assumptions of softening demand and arise in gasoline production or in contrast could just as easily expose this to be a very costly and presumptuous incorrect theory. I believe that until we get deeper into the driving season it is too premature to make judgments as to real gasoline consumption rates and the true measure of demand, versus at what capacity the refiners will be able to meet that demand. We are far from being "out of the woods" concerning the effects on availability of supplies regionally after this transition to ethanol based additive and its impact on distribution. With regards to pricing, Crude Oil for June delivery fell $2.34 or 3.2% to $69.94 a barrel on the Nymex, the lowest close since April 13 and the first settlement below $70 a barrel since April 17and this not long after futures prices touched $75.35 per barrel on April 21 in the highest price since trading began in 1983. This represents a price level that is 40% higher than last year, and futures pricing has fallen 6.3% just in the last 2 days and represents the largest two-day drop since May of 2005. In our opinion the market is still being dominated by the same factors of gasoline leading the complex, the geopolitical tension overseas predominantly in Iran and then Nigeria, and in that order. This week's inventory surprise simply provided a short-term pressure release in a valve that was clamped down so tightly that the tank was about to blow between the economic growth implications especially in Asia from India and China as well as recent economic strength in the United States from such strong indicators as durable goods, retail sales, the ISM number for manufacturing, and even housing, which all yielded stronger economic growth than had been expected. These conditions only serving to further enhance the critical nature of ongoing threats to supply from militant activities in the Niger Delta to the longer-range and obviously more far-reaching implications of a potential interruption to critical oil exports from Iran, either resulting from sanctions or possible military options. The political dilemma facing the UN Security Council is far from uniform as the US, Great Britain, and France scramble to propose a resolution involving economic sanctions against Iran if they fail to halt their uranium enrichment development, a measure that is facing opposition from China and Russia who threaten to counter with a veto, while an important non-member, Germany, remains tentatively optimistic that the issue can be resolved. Remember price declines based on past short-term supply adjustments have been short-lived, and we can hardly regard a drop back to $69 -- $70 per barrel as much of a price relief or indication of trend weakness, or that the threat of petroleum inflation is now subdued.   The MMS announced 324,445 bopd shut in or 21.63% of daily oil output in the Gulf of Mexico, an ongoing supply concern that obviously will have more critical implications soon when hurricane season begins in June.

WSI Energycast Weather 6-10 day Outlook

Warmer than normal temperatures are forecast over most of the western US and Texas for the balance of the next week and 6-10 day forecast periods. The warmest temperatures over Texas are forecast early next week, when highs are expected to climb well into the eighties and nineties. Cool and drier conditions will arrive late next week as the focus of the troughing and cool weather is expected to shift into the planes and Mississippi Valley. By the end of next week, highs will struggle to climb out of the seventies and eighties over Texas. In fact most of the central US will see much cooler temperatures are arriving late next week. The strongest signals for below normal temperatures for the balance of the 6-10 day cycle exist over the north central US, where daytime highs are not expected to climb out of the sixties and seventies most of next week. In response, anomalies are forecast to average between 2-4 degrees below normal for the balance of the period. The same surface high-pressure expected to bring the cool weather to the central US late next week will bring widespread warmth to most of the West, especially California. While anomalies may average on the warmer side of normal over much of California and for the 6-10 day cycle, the warmest readings are expected to remain over in land locations, where anomalies are forecast average between 3-7 degrees above normal.

Conclusion

Natural gas will continue to exhibit the characteristics of a market struggling between dominant shorts waving a banner of record heavy supplies against the Bulls that have little to run on except to be alarmist's that exaggerate any potential sudden threat to that supply such as this week's lower-than-expected injection that most likely is simply a translation of a reluctance for storage operators to inject too much more supply in an already more than adequate storage level. Time will tell if this week's lower addition to storage was actually bearish as operators may be anticipating lower prices before adding to storage at more aggressive levels. Looking ahead we expect a more subdued demand picture for natural gas as weather cools in the north and central and even southern US next week providing little need to burn Utility Gas for cooling purposes. Should prices stall somewhere at or below the above resistance band between $7.19 and $7.40, be careful of a potential volatile collapse as prices will likely return to recent lows and below for a possible assault at the $6.25 to $6.10 support level. Unless there is a sudden weather shift to much above normal temperatures in the major consuming Midwest and Northeast over the near term, an extension of the recent advance should be hard to sustain above the $7.40 resistance level.

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

May 5, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744

www.strategicinvestors.us

1- 800-974-8744
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