Petroleum Hits 3 Month Highs on Overseas Tension

Petroleum Hits 3 Month Highs on Overseas Tension and Renewed Gasoline Supply Concerns, while Natural Gas Rebounds off Technical Support and EIA Update.

Technical Outlook: Since our last report we said that while stochastics, momentum, relative strength, and other indicators suggested further weakness ahead, we did not anticipate the selling to penetrate beyond key support at $7.60 due to the breath of the overall move along with the buying forces that are likely to accumulate as the market approaches this level. We then predicted scaled-down buying to emerge first in the mid to low $7.70s range, with more intense buying pressure materializing at $7.65 scaled down to $7.60 if attained. What transpired followed our forecast to the letter as the spot month failed to penetrate $7.60 on a closing basis and then just as we warned, when intraday the market fell below this pivotal level to an intraday low of $7.55, strong buying emerged to bring a bullish reversal that culminated in today’s strong advance back up to the first minor resistance point at $7.80 basis spot July. Now the market is in a recovery stage from an oversold condition and stochastics, and relative strength and other oscillators suggest a further advance is in order. Look for overhead resistance to begin first in a minor degree at $7.92 basis spot, with a more formidable barrier at $8.10, and should a breakout occur, brought on by a bullish event, it would be signified by a close above $8.25 per million BTU and would suggest the first challenge to key traditional resistance at $8.60 per million BTU and would be significant considering it was last year's summer high.

This week's EIA report showed a slightly lower than expected injection into storage of 92 bcfs that was well below the 99 anticipated in the Dow Jones survey. Storage now stands at 2255 which is still 131 bcfs less than last year at this time and yet 365 or 19.3% above the five-year average of 1890bcfs. The market reaction ended with prices rising on a combination of follow-through technical buying from an oversold condition and partially in sympathy with the strong advance in petroleum values. Technically now the market seems poised to test higher resistance levels above first at $7.92 and then quickly followed by the $8.0 benchmark. Prices should start to gravitate higher in respect to the approaching summer demand and storm season anticipation. Don’t forget, natural gas has a history of factoring in existing supply, ignoring it and then focusing on demand only whereby prices react violently to any anticipated increase to gas consumption and with the current backdrop of industrial demand running at record highs, the Bulls already have the upper hand and have proven it by maintaining at least a dollar premium over last year’s average pricing while enduring on average 20+% more supply! And let us not forget that the likelihood of the sudden arrival of the first Gulf threatening storm is lurking in the back of traders minds and serves to limit the down side as well as providing a hair trigger to an explosive bullish reversal.

Concerning crude oil, the market managed to close at the highest level in 3 months as reports of how Hamas has seized control of almost all of the Gaza Strip added fuel to the fire of an explosive extended rally that began with yesterday's EIA revelation of gasoline inventories remaining unchanged for the week defying expectations for a sizable addition of between 1.5 and 2 million barrels. And despite crude oil supplies inching 100,000 barrels higher, to day prices escalated by $1.39 or 2.1% to close at $67.65 per barrel on the Nymex for a combined gain of $2.30 over the past two sessions. The other important fact that was revealed in the government's supply update is that refining capacity unexpectedly dropped again fractionally by .4% to settle at 89.2% of operable capacity and setting the stage for possibly no gain next week or worse a potential drawdown! This has caused noticeable alarm, especially in the bears camp as serious doubt has been put on the reliability of supply to keep up with what is expected to be strengthening demand over the duration of peak driving season this summer as normally our refining capacity is closer to 95% this time of year. With peak hurricane season just around the corner, this provides little comfort for both consumers as well as bear traders looking for some price relief in petroleum values. The ongoing chronic situation in Nigeria, the instability recently resurfacing between Chavez and the people of Venezuela, and now the implications of the eruption of violence between Hamas and the Palestinian authority in Gaza, certainly provides little security amongst international oil producers as we move forward during a critical time. Today crude oil prices confirmed our prediction from last week's report coming within $.11 of our target of challenging the $68 benchmark with today's intraday high of $67.89 per barrel basis spot. Looking ahead fundamentally one can easily see the potential for crude prices to exceed the $68 benchmark near-term, and with a close above $68.50, can easily make a run at $70 per barrel on any sudden interruption to oil production overseas combined with the expected continuous rally in gasoline prices which at the round figure price of $2.20 per barrel have much more room to the upside to run before challenging recent contract highs at $2.44!

With the exception of the West and GulfCoast States, warmer than normal temperatures are expected to encompassmost of the country. The warmest readingsare forecast over the Great Basin and in the Northeast, where anomalies between 2-6 degrees above normal are anticipated.
Today's forecast is warmer over the north central and northeastern U.S. than previous forecasts.
Confidence in the forecast is below average based on notable differences that exist between the medium range models this morning.
Temperatures may trend cooler over most of the eastern third of the country than currently forecast if American models come to fruition. American models still depict the deepest eastern trough and are the coolest of all the medium range models in the East late next week. European and Canadian models have trended much warmer, and delay the arrival of the troughing and cool weather.

With the exception of the West Coast and the Gulf Coast states, warmer than normal temperatures are expected to encompass most of the country. The warmest anomalies are anticipated over the Mountain West and the northern tier of the country.
Today's forecast is warmer over the Great Lake States and northeastern U.S. than previous forecasts.
Confidence in the forecast is about average based on the reasonably good large-scale model agreement.
Temperatures may continue to trend warmer over most of the country than currently forecast as all models advertise a more La Nina-like pattern will become established over North America in late June. Meanwhile, the AO and NAO are forecast to transition to neutral (American) if not positive (European) phases. Posted: 06/14/07

Natural gas recently failed in its attempt to establish a close below the key support at the $7.60 per million BTU level. Now as the market tends to gravitate higher from recent oversold conditions we see the technical posture as conducive to higher elevations and will soon feel fundamental conditions complementing this scenario as well. We feel looking ahead more summer-like conditions will obviously be raising cooling demand, along with the unknown and bullish implications of this year's much-publicized and anticipated highly active hurricane season. We anticipate soon a challenge of the key resistance level at $8.25 per million BTU. Look for support on pullbacks to be well bought at $7.70 scaled all the way down to $7.55, and only in the case of a sharp bearish retreat resulting in a close down below $7.60 do we anticipate any signs of future sustained weakness in the market over the near-term. Sympathy trade with recent higher elevated petroleum values also provides added strength to the natural gas up trend.

Concerning the petroleum complex, this week's EIA numbers were, obviously very bullish when considering the surprise factor of interrupting what was expected to be the sixth consecutive increase to gasoline supplies and also by a sizable amount on average of between 1.5 and 2 million barrels, along with the added concern of the unexpected decline in refining capacity setting the stage for a lower chance of increase in gasoline supply next week! When you add to this the renewed violence in the Middle East in the Gaza Strip, the ongoing instability in Venezuela, the chronic situation and continued threat to oil infrastructure in Nigeria, and finally the continuing tension that only seems to escalate between Iran and the UN over the nuclear issue, and you virtually have a powder keg of explosives with bullish potential to further elevate petroleum values to what has already become uncomfortable levels. With the implications of summer demand from both the driving season concerning gasoline and in the cooling demand concerning natural gas, and then when you mix in the wild-card of a sudden storm entering the Gulf of Mexico and directly threatening critical domestic production, and the future for price relief to consumers can look pretty dismal. Over the near-term we see crude oil values easily exceeding minor resistance at the $68 benchmark, and possibly making an outside thrust upward to challenge the $70 mile marker upon achieving a technical close above $68.50. Look for the market to be well bought on pullbacks first at $67.50 scaled all the way back to $64.80 on technical correction. Gasoline values in our opinion will continue to reflect an undertone of critical supply tightness providing the impetus for a challenge near-term of $2.34 per gallon, and we expect strong buying to emerge on pullbacks first at $2.16 and if attained $2.12 per gallon.

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United Strategic Investors Group