Concensus Report: June 18th, 2009

Crude Oil remains range-bound after retreating from my targeted resistance at $72.50 on Economic optimism and Iran’s instability yet still ignoring real supply demand, while Natural Gas slumps from advance fatigue and heavy injection.

Natural Gas and Oil

Technical Outlook: Since our last report I said looking ahead, the market was still in a bearish technical pattern that should find values falling back and possibly retest the week’s lows and even lower, however, I also said the time in the cycle was short in my opinion and if prices didn’t fall back below $3.70 again within the next 3-5 sessions, that I anticipated the market would ascend back over $4.0 soon and test $4.25 near within the same time frame. That is exactly what transpired after the market managed to hold above $3.70 and then quickly advanced up through my resistance target at $4.25 eclipsing an intraday high of $4.32 before staging a classic bearish reversal that resulted in a $.16 cent decline to settle at $4.09 for a loss of 3.8%. Now looking ahead technical indicators overall have turned negative once again after the steep and volatile advance and values became grossly short-term overbought with the market now targeting lower support at $3.92 and then the more critical pivot price at $3.80 that will likely result in a rapid washout back to the weekly low at $3.65. Only a subsequent balance from above the $4.0 benchmark returning the market to retest overhead resistance once again at $4.25 could temporarily stall bearish forces that should inevitably regain control of price direction.

Fundamental Supply Update

This week's EIA report showed an injection of 114 bcfs, which was substantially higher than the survey estimates by Dow Jones and Bloomberg that ran closer to 106 bcfs respectively. Storage now stands at 2557 bcfs, which is 662bcfs higher than last year at this time and 472 above the five-year average or 22.6% over 2085. Following the update the market completed a rather volatile session that saw values trade is high as $4.32 prior to the news and then suddenly slump to as low as $4.06 before settling slightly higher at $4.09 at the close of the session for loss of 3.8% or $.16 on the day. Meanwhile, contributing to the bearish backdrop was the release by an industry group concerning US proved natural gas reserves suggesting supplies had jumped 35% over the past 2 years to a supply level that could support the nation’s consumption rate for nearly 90 years. However, obviously, the market failed to put much credence on this evaluation otherwise prices would have collapsed to a much more dramatic degree in my opinion. There also exists a wide variance concerning the accessibility of those suggested reserves that are mostly situated in the Appalachian Basin, mid-continent, Gulf Coast and Rocky Mountain areas according to the industry group. Fundamentally the market is still reacting in my opinion to the subdued industrial demand that current economic conditions support, ongoing financial and economic data concerning employment and GDP growth looking forward, the value of the US dollar, and the weather Outlook concerning the approach of enhanced cooling demand along with potential storm threat and most likely in that descending order.

Concerning Crude Oil, today the market closed slightly positive following two-sided trade and some improved economic data that further suggested optimism for economic recovery near the end of the year. July delivery crude oil ended with a gain of $.34 or 0.5% to settle at $71.37 a barrel on the Nymex. This price action continues to characterize range bound trade after the market abruptly fell back following a brief eclipse of my upside price target forecasted in last weeks report of $72.50 and thus far managed to rebound from the weekly low at $69 with values obviously leaning towards the upper end of the trading range and yet becoming increasingly overbought. Part of the support for the market holding the upper end of the trading range was no doubt the interpretation of the Philadelphia fed survey that showed noticeable improvement in the manufacturing sector with activity improving to a negative of only -2.2% in June from -22.6% the previous month when most in the survey had expected a reduction to negative -15%. New orders and shipments also improved dramatically by 21% to a negative -4.8% from -25.9% reported previously. The shipments index improved to 2.1% from a -19%. In the survey for June 30% of companies expected improvement with 32% expected things would get worse and 35% anticipating no change. Leading economic indicators also improved by 1.2% in May, and the second consecutive positive month. Also continuing jobless claims dropped for the first time since January by 148,000 and despite the fact that an isolated month does not prove a trend change, it certainly lends support that the rate at which unemployment was increasing has now dramatically declined and now suggests a bottoming has occurred. What it does not prove is that job creation will now commence and then the unemployment situation will suddenly begin to improve. But nonetheless the fact that unemployment has stopped growing at least sets the stage for optimistically looking for job creation to somehow begin to appear on the horizon sometime soon. None of these conditions however can immediately erase the multiyear highs in crude oil supplies that currently exists, nor can it necessarily prevent the ongoing breakdown in commercial real estate from continuing to plague our economy as will the recent fallout in the US auto sector. And let us not forget even more influential concerning energy prices, is the continued staggering rate of home foreclosures along with the escalation in consumer debt that must impact consumer demand for gasoline in the energy sector as a whole in a very real and practical sense. Based on these ongoing conditions in the existence of heavy supply and subdued demand here in the world’s top oil consumer, the market is still more properly valued under the $60 benchmark fundamentally in my opinion.

Conclusion

Natural gas closed near the lows of the session after the bearish reaction to the higher-than-expected weekly injection announced by the EIA of 114 versus the 106 that was expected in the survey averages as prices fell back $.16 to settle at $4.09 basis the July spot delivery. Looking ahead now with the market grossly overbought in the short-term I anticipate values can easily decline further building on today’s negative momentum and thus returning values to test previous support at $3.92 and then quickly followed by $3.80 setting the stage for a deeper washout down to the weekly lows at $3.65 before a more sustained bullish defense emerges.
Concerning crude oil after today’s volatile session of two-sided trade that still culminated with values closing nearer the upper end of the trading range above the $71 benchmark, while I feel the market is fundamentally ahead of itself while also being technically grossly overbought, values will continue to maintain a bloated and rather hefty artificial premium as the US dollar remains under siege amidst an unprecedented expansion of the money supply by the fed with a backdrop for increased Central Powers being awarded by the new Administration’s regulatory proposals, economic optimism creeping in both in the manufacturing and employment sectors of the economy and finally and yet no less important is the recent instability in Iran with civil unrest erupting over charges of a compromised election, which indirectly raises concern over the second-largest producer of oil in OPEC. However, with none of these conditions insuring the promise of actual increased demand for energy but more feeding the fuel of the speculative buyer, the market remains still way overpriced considering existing fundamentals along with the exaggerated premium that is currently based on a fore drawn conclusion that economic recovery here in the United States is almost a certainty. This week’s EIA weekly supply update was more neutral as the dropping crude oil supplies of 3.9 million barrels was more than offset by increases for both products but mostly headlined by a 3.4 million addition to gasoline inventories while refinery capacity remained at 85.9% and yet demand figures didn’t change much for the week with gasoline running a little above 1% higher than last year at this time well distillate fuel demand remains noticeably weak at almost 9% lower than last year. This week confirmed my report last week along with my interview in the Wall Street Journal dated June 8 calling for the momentum technically to carry the market up to test $72.50 which transpired. Although the correction that I stated should follow began with last week’s retreat back to $69, I still feel a more substantial decline to test my initial support level at $67.80 is still in progress with a strong probability for a deeper washout down to test more critical support at $65. If the market should stubbornly shake off its technically overbought condition and continues the recent advance back up to assault their recent highs just above the $73 benchmark, I expect an exhaust peak will invite strong rejection forces from just below key resistance at the $75 benchmark unless something dramatic blindsides the market overseas such as a more severe breakdown in the civil stability in Iran threatening the security of their vital supply of petroleum in the heart of the Middle East.

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

June 18th, 2009

United Strategic Investors Group

Guy Gleichmann, President

2641 E. Atlantic Blvd. Suite 208
Pompano Bch. Fl. 33062

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