Consensus Report: June 28, 2007

Petroleum Breaches the $70 Benchmark on Strained Refinery Capacity and Product Concerns, while Natural Gas Slumps to 2 Year Lows on Disappointing Weather, Adequate Storage and Technical Breakdown.

Natural Gas and Oil

Technical Outlook: Since our last report we said the market was put into negative momentum whereby the stochastics, relative strength index, and especially the wide negative divergence on the MACD suggested further selling. We called for a near term challenge to $7.25, with a chance of follow through selling to test support at $7.10 and the $7.0 benchmark, based on the breath of the down move and  considering the recent close below $7.60 for the first time since March basis spot was a very bearish indicator. We also said outside of the fact that now the market had entered oversold territory, we still saw this as insufficient evidence to now expect bearish forces to yield control so soon as a sudden impetus to buy. We expected the upside and rebound attempts to be contained by the $7.60 level temporarily on a closing basis over the immediate short term. Most of our forecast transpired, and then to our surprise this week crashed through our lowest target at the $7.0 benchmark, and in a total bull capitulation the market continued a washout through several support levels after touching an intraday low of $6.55 basis spot, leaving the $6.40 support level within reach as the next likely target. Technical indicators as expected after the steepest decline in almost a year are now extremely bearish, with a wide negative divergence in both the linear oscillator and the MACD suggesting more downside action ahead. Despite being in grossly oversold territory, the market is still in a very negative posture with momentum, relative strength, and accumulation oscillators suggesting lower values ahead. We anticipate a test next of $6.40 down to $6.25 with a strong potential to washout further to test $6.10, before more aggressive buyers step in to lock in longer term values. Look for rebound attempts to find resistance at $6.80 and then $6.92, with a close above this level pivotal to neutralize bearish forces and eventually restore trading above the $7.0 benchmark. Unless a significant event or weather fundamental shift, impacts the market soon, we anticipate values to remain below this benchmark over the short term.

Fundamental Supply Update

This week's EIA report showed an injection of 99 bcfs into storage that was well above the average injection anticipated in the Dow Jones survey and Bloomberg’s of about 82 bcfs. Storage now stands at 2443 which is still 90 bcfs less than last year at this time and yet 372 or 18% above the five-year average of 2071bcfs. The market reaction ended with prices slumping further and eventually hitting 2 year lows at $6.55 basis August spot, before settling at $6.655 for a loss of .423. After the sharp rejection technically from just above $8.0 over a week ago and without an immediate tropical threat to production infrastructure in the Gulf along with the backdrop of milder weather in the Central Midwest and Northeast US, and it seems the path of least resistance is lower for the near term. Fundamentally we feel conditions are more conducive to lower values, however, we caution traders from getting overly aggressive on the short side down in this range below $6.80, despite us having the same feelings last week when values first close below the critical support at $7.60 which had previously held as support for over two months basis spot. Clearly over the near term the technical back of this market has been broken as the major supporters of the fear premium finally capitulated from the fatigue of artificially propping up the market as the existence of the current storage overhang became too heavy especially after the Calvary of above normal heat in the Midwest and Northeast never arrived early as planned. Fundamentally if this summer doesn't soon provide some sustained heat to arrived in the key consuming regions prices could easily decline further down to test the $6.0 benchmark because of the more than adequate supply cushion that exists above the five-year average. Peaks storm prevalence doesn't arrive typically until late August which leaves an exorbitant amount of time for the market to focus purely on the amount above or below normal in cooling demand for price direction in the face of above average supplies

  Concerning crude oil, the market settled at the highest levels since last September after breaking above the key psychological $70 barrier to an intraday high of $70.50 before settling back well below the highs and $69.57 for a gain of $.60. Crude oil has extended its” overdone rally” on the strength of a combination of a sustained gasoline supply shortage that is currently about 4.4% below the five-year average amidst a backdrop of international instability amongst key producers such as Nigeria and Venezuela along with a supportive technical chart pattern. And of course the ongoing crisis in the Middle East with the quagmire in Iraq only seeming to worsen as time goes on along with increasing tension between United States in Iran and now the renewed violence in the Gaza Strip all combined have hardly contributed as a deterrent to higher energy prices. In fact, as we mentioned in last week's report, if you add to this bullish mix the potential consequences of the delayed threat of a hurricane entering the Gulf of Mexico whereby the chances of this event transpiring dramatically increases in August, and then you realize just how vulnerable the market is to runaway prices! Feeding the fire that may eventually ignite this “cauldron of bullish explosives” is the ongoing labored output of US refineries that has recently been plagued with unplanned maintenance shutdowns and mishaps over the past several months limiting production. Some of crude oil's consolidation and settling back nearly a dollar from its intraday high was accredited to the announcement by two major refineries of partial resumed production. Valero Energy’s major McKee refinery in Texas stated they run track to crank crude refinement back up to honor and 50,000 barrels per day by the end of the month while a BP facility announced the restart of the 75,000 barrel per day crude unit giving further evidence of salvaging some refining capacity during peak demand. This past week the EIA revealed another bullish update as both products experienced unexpected drawdowns with gasoline dropping 0.7 million barrels and remaining well below the lower end of averages while distillates fell by an unexpected 2.3 million barrels per day yet remain in the middle of the average range. This served to more than circumvent any minor bearish implications from the 1.6 million barrels added to crude oil stocks totaling now 350.9 million barrels and remaining well above the upper end of averages and actually the highest level in crude stocks since 1988. However, we feel this unique paradox, whereby the source of the end product is in more than adequate supply while the desired the finished product is in short supply because of strained refining capacity and current elevated demand, a unique disproportionate arbitrage situation exists. Looking ahead it is our opinion that on any fluctuation in demand or increase in supply or both, especially with regards to gasoline that may cause a temporary subsiding in the price, will be reacted to by an exaggerated and sharp sell-off in crude oil pricing! Judging from the over extended rally to crude oil prices this week that proportionately seemed to outrun gasoline which is currently almost $.20 per gallon below recent continuation contract highs, while crude oil as of today closed at nine-month highs more than illustrates my point and may prove soon to be too much of a temptation to value traders possibly yielding a sharp short term collapse to the price of crude oil. Another trigger point to this potential decline could be the arrival of more weak economic data giving further evidence of a slowing economy due to the spread of the sub prime contagion and the ensuing debilitation of consumers from the housing crisis. We feel looking ahead without the aid of a significant supply disruption oversees such as in Nigeria or sudden increase to the violence in the Middle East posing a threat to future supplies, just based on the current supply demand imbalance in gasoline we feel while prices may temporarily breached the $70 benchmark, is our view they will be unable to sustain trading above this key psychological price level for extended period of time, and in failing to sustain this level could easily fall back to test near term support at the $67 benchmark which held this past week just as we predicted in our last report. Another basis for our logic is that crude oil would find difficulty in sustaining the $70 benchmark after the Nigerian strike ended over the weekend just as we forecast, if it was unable to trade above this level prior to the strike when the immediate threat to supplies was unknown.

W. S. I Weather 6-10Day Outlook

6 – 10 Day Headlines

The warmest temperatures and the most persistent warmth next week are expected over the Intermountain West and Southwest. Little relief from the hot and dry weather that has plagued these regions in June is expected in early July. If anything, the heat ridge in the West is only expected to become more intense. As result, the hot weather over the Intermountain West and Southwest is forecast to become even more intense and more widespread. Highs in the low 100s are forecast to become more common place over the Intermountain West than they have been recently. Highs between 100-110 degrees are expected to be easily attainable in the Southwest. Phoenix is forecast to see highs approach 115 degrees on the hottest days. Meanwhile, the biggest change in the forecast for next week develops along the West Coast. With a more El Nino-like pattern forecast to become established in early July, medium range models have trended much warmer along the West Coast and suggest the expanding heat ridge in the West will allow the hot weather that has been centered over the Intermountain West to build westward into interior California and the interior Northwest. Widespread highs in the 90s and low 100s are forecast to overspread these regions toward middle and latter half of next week. The bigger question surrounds how much of the building warmth in these regions spreads into coastal locations. Strong offshore winds remain notably absent from the models this morning. This suggests that while much above normal temperatures are possible along the West Coast, the intense heat over interior locations will struggle to reach the coastal Plain. Seattle and Portland stand the best chance to see widespread highs in the 80s and low 90s. Meanwhile, while medium range models

have come into much better agreement over the eastern two-thirds of the country, European models are still the warmest of all the models over Midwest and eastern U.S. However, even the American models indicate a brief period of summer-like warmth in the Midwest and eastern U.S. will be sandwiched in between periods of cool weather early and late next week. The warmest readings are anticipated during the Tuesday through Friday period, when widespread highs in the 80s and low 90s are forecast over the Midwest and eastern U.S. Otherwise, highs generally in the 70s and 80s are expected to be the rule for the Midwest and eastern U.S. next week. The exception occurs over Texas, where little relief from the cool and damp weather that has plagued region in late June is anticipated next week. Highs generally in the 80s and low 90s are forecast throughout Texas most of next week.

Conclusion

Natural gas has spiraled into a steep decline falling through several support levels and no doubt triggered many stop lost levels along the way down virtually into a free fall scenario culminating in today's challenge of two-year lows on the negativity of a combination of disappointing weather, quiet in the tropics as to storm activity, above average supplies, and a weakening technical pattern in reaction. Looking ahead we still anticipate lower numbers will transpire even if near term the market has a recovery bounce. We expect rebound attempts to be likely contained first at $6.80 and then more critically if reached at $6.92, with a close above this level needed to temporarily neutralize bearish forces. Failing to do this will in our opinion bring a retest of current lows at $6.55 likely to be followed by a test of new low support at $6.40 and possibly $6.25 with the potential washout all the way down to $6.10 before more substantial buying occurs to secure longer-term values in anticipation of future elevated demand.

Concerning the petroleum complex, this week's EIA numbers were, obviously bullish with both products experiencing unexpected declines. Looking for over the next week this will continue to be the primary driving support to elevated petroleum values in general as most of the oversees threat so far has failed to materialize into any real significant supply disruption except to further perpetuate the threat of the same. Given this scenario, the strongest remaining real threat to the recent over extended and fear inspired rally  to crude oil prices is the slowly maturing and insidious revelation of the slowing US economy that is gradually yet inescapably feeling the effects of the crumbling housing market and the spreading real estate fallout. Meanwhile the situation in Nigeria, Iraq, Iran, and Venezuela, all in descending order of importance continue to provide fear banners for the Bulls to waive whenever prices retreat into a short-term correction. However, up to now none of these ongoing fears have materialized into interrupting any significant amount of oil. Of course the ongoing robust growth in China and India as well as the rest of the developing world continues to keep a firm demand on energy prices in general. The refinery challenges faced here in the United States will continue to be the paramount issue in our opinion especially as peak storm season draws near for the critical production areas of the Gulf of Mexico in the August through October time frame. As stated earlier we see crude oil continuing to find stiff resistance between the $70 and $71 benchmark in gasoline will find minor resistance at $2.30 per gallon with a more critical challenge at $2.34 basis spot. We continue to feel because of the fundamentals, on any typical retreat or technical correction in gasoline crude oil will be sold more aggressively causing a more dramatic decline being that it is exhibiting a record historical supply level.

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

June 28, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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