Crude Falls Back in the Range on Diplomatic Rhetoric with Iran and Technical Concerns

Consensus Report: June 01, 2006

Natual Gas and Oil Report

Crude Falls Back in the Range on Diplomatic Rhetoric with Iran and Technical Concerns, While Natural Gas Rebounds from Oversold Territory on Storm Season Jitters .

Technical Outlook: Last week we said the market was overall in a bearish posture, however, we warned about this markets characteristic behavior that lends itself to exaggerated upward price spikes, especially following a price break to new lows penetrating a major benchmark such as the recent breach of the $6.0 level. We also said a bearish fatigue may soon emerge from the extension of an oversold condition, and that we see the potential for volatile Range expansion involving two-sided trade. Under these conditions we said to look for a potential expansion of the downside over the near term, and likely between the next 3-5 sessions whereby the $5.75 -- $5.80 level is tested, and then to be quickly followed by a sharp momentum reversal back to the upside for a test of the $6.40 resistance level and a potential upside expansion to test our bull pivot level at $6.65. This is almost exactly what transpired as Friday the June spot hit our low precisely at $5.75 before short covering up to $5.92 on close. The new spot July futures then confirmed our outlook calling for a strong reversal up to test our Bull pivot price of $6.65 with the intraday high at $6.72 posted today! Looking ahead, technicals are now mixed with some of the longer term indicators and momentum still bearish, yet there are some short term signals in stochastics and the MACD still exhibiting some positive divergence. We anticipate a test of minor support at $6.40 and then $6.25, with a break below this on close setting the stage for a retreat to $6.10. However, if $6.25 holds we feel the market will soon test new highs at $6.75 on tech merits alone.

Fundamental Supply Update

Today the EIA reported a net injection of 80 bcfs that was below previous estimates from Bloomberg and DowJones of closer to 85. Storage now stands at 2,243bcfs as of Friday, May 26, which is 477 higher than last year at this time and 706 bcfs or 45.9% above the five-year average of 1537 bcfs. While causing an obvious bullish temporary lift reaction to the unexpected lower addition to supply, prices soon faded back from session highs that quickly seemed expensive in spite of the lower injection. Supplies are still traditionally very high and will continue to weigh on the market in our opinion until a more definitive bullish weather demand cycle appears whereby cooling needs are dramatically increased. It is our opinion that in order to extend the existing rally into a more established up trend the market will need the impact of highly exaggerated temperatures that need to sustain themselves way above normal, for an extended period of time. Baker Hughes currently reports 1381 rigs pumping gas, up 3 from the previous week, as of the week ending May 26.

Concerning Crude Oil, the market continued its volatile pattern after dropping over a dollar per barrel over the past two sessions on the negative sentiment generated by the highly publicized speech of Secretary of State Condoleeza Rice in a Clearly Outlined attempt to open a direct Diplomatic Dialogue with Iran. The invitation, in conjunction with European allies stated the US is willing to explore further economic incentives in return for Iran's willful dismantling of its nuclear program. However at the" bitter " end of the " sweet" she also warned that the US will only entertain further negotiations with Iran based on its full compliance with ending nuclear uranium enrichment. While the knee-jerk reaction was a quieting effect over the recent short-term up trend in oil flirting with the $72 benchmark, many feel the subdued trading reaction will be short-lived as Iran's response is anticipated by many to be obstinate and even defiantly belligerent at best. Today's EIA data seemed to take a back seat to the renewed headlines of the recent banter between Rice and Iran, however a couple weekly figures are noteworthy. Crude stocks rose a surprising 1.6 million barrels to now total 345.5 million and remain well above the average range for this time of year, yet gasoline inventories increased by 0.8 million barrels or only half of expectations which allowed gasoline prices to remain positive on the day despite the modest retreat in oil. Distillate fuel in the Tories rose by 1.8 million and had little fact as supply remains above the upper end of the average range for this time of year. The most important part of the report was the fact that refineries operated at the highest level of 91.4% which is the most utilization since August of 2005, and yet gasoline production remained relatively flat compared to the previous week averaging 9.2 million barrels per day and yet barely keeping pace with demand. In fact over the last four weeks motor gasoline demand has averaged over 9.3 million barrels per day which is 0.9% above the same period last year. This part of the report certainly defies earlier feelings from economic indicators suggesting gasoline demand may be slowing. The market seemed to draw little comfort from the expected OPEC decision announced from their meeting in Caracas Venezuela rejecting calls by some for quota cuts as the decision was made to leave the current production quota of 28 million barrels in force as it has been for the past 10 months. This can easily be construed in either the Bull or Bear Camp as while the obvious reaction initially is bearish as they chose to bypass the decision to cut production which would immediately elevate prices, however it is more likely a decision born of necessity to keep up with maximum output to counteract the very real threat posed by this year's hurricane season which has now officially begun. We continue to feel the petroleum complex will be supported by the fact that gasoline supplies are currently 2.7% below last year's level and are now entering the peak demand cycle and will soon be facing the high storm prevalence threat cycle of August through November shortly thereafter. These conditions will keep an upward bias to unleaded pricing unless more pronounced weekly supply gains are achieved. Since the unleaded gas market is leading the complex, a condition we have reiterated for months now, it will continue to keep crude oil prices elevated over the near-term.

WSI Energycast Weather 6-10 day Outlook

Hot and dry conditions are expected to encompass most of the western two thirds of the country next week as a building heat ridge is forecast to bring widespread above and much above normal temperatures. Though much above normal temperatures are possible at times along the West Coast, the strongest signals for warm weather exists east of the Cascade and Sierra Nevada mountain ranges. As a result, widespread highs in the eighties and nineties will mainly remain confined to the Intermountain West and the central US most of next week. Highs as warm as 110° are forecast over the southwestern US. For the balance of the 6-10 day cycle, anomalies are to average between 4-12 degrees above normal over the Intermountain West, Southwest, and central US. The West Coast will remain notably cooler as highs are only forecast to climb into the sixties and seventies over coastal locations most of next week. Meanwhile anomalies in the Northeast are forecast to average close to seasonable levels next week as changeable conditions are expected to characterize the weather next week. While temperatures in the Northeast may trend warmer or cooler than currently forecast, any prolonged periods of unseasonably warm or cold weather are not expected at this time. As a result, highs will mainly climb into the seventies and low eighties in the Northeast most of next week. Texas and in the southeastern US is the region where the forecast has changed the most from yesterday. Weather models suggest widespread highs in the nineties are possible over the lower Mississippi Valley and southeastern US and even suggest daytime highs may approach 100° in Dallas by the end of the 6-10 day cycle.

Conclusion

Natural gas continues to trade under the influence of a heavy and record supply that is now fully factored in and well-known, making the market much more sensitive to any sudden changes or perceived changes to the weather and thus future demand. This will make certain technical price parameters more critical in the minds of traders, in our opinion, as to what governs their decisions, along with an enhanced sensitivity to any dramatic shifts in the weather pattern. Looking ahead under the current weather forecast, supply injections should remain steady and even considered traditionally high, yet we see the downward pricing movement likely to be limited by the $5.50 -- $5.75 band of support because of the near-term threat imposed by the very active storm season currently forecast. Remember, upon the arrival of this year's first named storm, especially if expected to go anywhere near the Gulf of Mexico and all bearish bets would be off as many consider a lot of the existing negativity has already been priced in. So we anticipate increasing volatility this week with a likely test of key price points stated earlier such as $6.25 support with a potential further washout down to $6.10 on the downside, especially if the current weather pattern persists, while any sudden change in the weather pattern suggesting the approach of any extreme above normal heat, and the current technical rally will resume bringing an immediate challenge to resistance above at $6.72 with a close above this level suggesting a rapid test of the key $6.92 price. Of course the arrival of that first Atlantic storm could ignite a dramatic and formidable, vertical price acceleration.

With regards to crude oil and the petroleum complex, OPEC didn't really do anything outside of expectations. The EIA data did not have a dramatic impact except for the gasoline inventory and demand numbers which displayed mildly bullish implications for unleaded and the whole complex over the near-term. Comments from president Hugo Chavez of Venezuela calling for limiting production and suggesting putting a floor to oil of $50 per barrel failed to produce the bullish impact on pricing that he no doubt attempted to initiate. While it is Chavez's routine to advocate an output cut in the run-up to every OPEC meeting in an endeavor to elevate his country's oil revenue, it seems to ring hollow as his country continues to produce approximately 700,000 barrels below the country's quota of 3.2 million due to its failure to fully recover from the 2002 strike that crippled the country's output. Total production losses combined between Indonesia, Venezuela and Nigeria continue to prevent OPEC from achieving any real nominal output gains. The continued sabotage and insurgent strikes to pipelines in Iraq undermine production from that country, and while being deliberately ignored and left out of the Main Stream media, no doubt because of influence from the administration, it remains in the background as a major deterrent to arresting the perceived supply shortage dilemma and the failure to gain any ground on global demand. Under current conditions we continue to feel that an extended sell-off below existing support at $68.10 basis spot for crude oil will be hard to justify, while any signs of reconciliation to the Iran nuclear standoff seemed to be precarious at best as foreign minister Manoucher Mottaki said that Tehran is ready to talk but will not entertain the halt of their nuclear development program. Until there's a more defined diplomatic path to possibly settling the nuclear standoff even at least for an unidentified period of time, while there is a lurking threat to supply from the arrival of the first named storm to threaten the Gulf of Mexico and Crude could easily threaten new resistance above the $75 benchmark. We continue to see the leader of the petroleum complex in unleaded hard pressed to fall back below existing support at $1.96 per gallon until well after peak driving season transpires, while new highs above $2.25 per gallon with our forecast for a test of between $2.40 and $2.50 per gallon still remaining very much a realistic projection.

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June 01, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744