Petroleum Complex Continues Strong Gasoline led Technical Uptrend

Consensus Report: June 29, 2006

Natual Gas and Oil Report

Petroleum Complex Continues Strong Gasoline led Technical Uptrend, Supported by Supply Update and Economic Growth, While Natural Gas Declines into Oversold Territory.

Technical Outlook: last week we said several indicators were now bearish and to expect further selling ahead with a likely retest of previous lows below the $6.0 dollar benchmark due to the current negative momentum. This is exactly what transpired as the July futures expired yesterday at new contract lows touching $5.81 before settling at a new low settlement of $5.88. The new spot August contract also traded at new lows this week breaking below support today penetrating the $6.10 level intraday. Looking ahead technical indicators are still overall bearish yet quickly approaching grossly oversold conditions whereby several signals such as stochastics, the Bollinger band, the MACD, momentum, the linear oscillator and others are already in deeply oversold territory. Under the current posture, while there's still a negative divergence suggesting the August spot could at least equal the current low support band at $5.75 -- $5.80 on the continuation charts, we feel it is prudent to exercise extreme caution when contemplating selling in an already oversold environment whereby the window of opportunity to participate in further down side action is quickly closing. We see on the outside that the market may experience a further decline of only about $.25 -- .35 cents for a possible brief test of new lows, and this may only transpire intraday likely to be followed by an abrupt and rather sharp bullish rebound. Whereas the upside range is quickly expanding as the market grinds lower gathering more short exposure while attracting the attention of value conscious low price buyers. We anticipate due to the potential bullish reversal that is characteristic behavior to this market and quite typical following a sharp selloff, that the possible upside objective could easily exceed a one dollar range, especially if the technical rebound from oversold conditions is complemented with a supportive fundamental. This will probably culminate in the sudden appearance of a prominent V- bottom formation on the daily chart. Once the current bottoming action is finished and thus the correction phase is complete, which under this time cycle is likely over the next three sessions in our opinion, we anticipate a rapid assault on overhead resistance first at the bull pivot price at $6.65 which if breached on close, could lead to an almost immediate test of key resistance above at $7.02 and then $7.25!

Fundamental Supply Update

Today the EIA reported a net injection of 66 bcfs that was mostly in line with pre-release estimates by market participants. Storage now stands at 2542bcfs, which is still 423 higher than last year at this time and 611 or 31.6% above the five-year average of 1931bcfs. While this week's injection was well below the five-year average for this week of 98 and also comfortably below last year's injection for the same week of 95bcfs, it still failed to prevent weakening prices as the existing surplus and current record storage level dominated traders thoughts. Despite the fact that this was the fourth straight week of below average injection, the market could not escape the weight of breaking above the 2.5tcf level so early in the season as it reminded traders of the hefty supply cushion that still exists to counteract any possible sudden increase in cooling demand from elevated summer heat, or the possible output disruption from a Gulf storm. However, the market did close well above the lows this session, settling at $6.135 for a loss of only 2.5 cents. We must be mindful of this markets ability to quickly factor in the current supply situation and then almost at will, ignore this monumental fact and then conveniently shift total focus to any sudden shift or dramatic increase in demand. This unique behavior characteristic that is so typical to Natural Gas, makes the market very sensitive to the arrival of a potential Gulf storm, as the sudden appearance of storm Alberto so graphically demonstrated a week and a half ago which ignited prices into a vertical acceleration from near the $6.0 benchmark, to crossing above the $7.25 level in only a few sessions! Technically the market appears to be positioning itself for an almost exact repeat performance, although the fundamental support is yet to arrive. However, short traders from this level should exercise extreme caution as any seasoned weather expert will tell you there is a high prevalence for the creation of Gulf proximity storms in the June to mid-July period. Concerning production, Baker Hughes currently reports 1371 rigs pumping gas, down 12 from the previous week as of last Friday.

Concerning crude oil and the petroleum complex, prices continued their dramatic advance achieving an impressive close above the $73 benchmark today while gasoline hit and settled at a noticeable new post Katrina high of $2.29+ per gallon. Today's action was a continuation of bullish reaction to an impressive drop in crude stocks that was more than double what analyst anticipated as inventory declined by 3.4 million barrels leaving a total of 343.7 million barrels as imports declined oil inventories are still 4% above last year and still near eight-year highs. The more influential figure was the fact that unleaded gasoline inventories eclipsed a nine week increase and also dropped by more than expected by 1.0 million barrels to settle at 212.4 million leaving inventories in the middle of the average range. What was also supportive was the fact that gasoline demand has averaged 9.4 million barrels per day or 0.9% above the same period last year and has consistently maintained a moderate premium of demand over last year. Despite refineries operating at a slight elevation of 93.8% of their capacity last week, gasoline production still failed to keep up with demand with an output of just 9.3 million barrels per day. Distillate fuel inventories were the only one in the group that rose by 1.8 million barrels yet this fact quickly faded from the minds of traders as supply remains in the upper end of averages for this time of year. The rather steep rise in energy prices led by the complex headliner, gasoline, also found support in the temporary closing of the key Calcasieu shipping channel in Louisiana following an oil spill on June 20 that cut production to four refineries. In reaction to the mishap the government agreed to lend 750,000 barrels of crude from the US Strategic Petroleum Reserve to minimize the potential downtime to refineries owned by Citgo Petroleum Corp and Conical Phillips located near Lake Charles. The Coast Guard reported late Wednesday that parts of the channel had been reopened easing some concern about supplies as we approach the peak demand of the July 4 holiday. There was also some minimal support in the few minutes remaining before the session closed after the fed comments and following the well telegraphed incremental raise over quarter-point to bring the key fed funds interest rate to 5.25%. However what was more telling was the fed language which clearly indicating a softer stance against inflation stating that economic growth was experiencing a moderation and a cooling housing market in the wake of rising interest rates and elevated energy prices, but more importantly that recent productivity gains had held down unit labor costs and that overall inflation expectations were contained. While they obviously kept the door open for a potential 18th consecutive rate hike if certain inflation fears resurfaced, the dialogue was noticeably "less hawkish" in a general unspoken understanding that the potential damage from further decelerating the economy certainly outweighed the desire to curb the rate of inflation growth in its current "wage less" accumulation. Hopefully what the fed came to realize is that the housing market is already on the verge of a possible devastating collapse that could ignite a shock wave that could ripple through every critical support within the economy that the consumer currently operates in. It is our view that if energy prices were going to buckle in the face of fed policy and their potential to cripple economic growth by overdoing the rate hikes, it would have happened two weeks ago when the Bernanke anti-inflation stance rhetoric was at its peak. This is not to conclude by any means that the oil market is not susceptible to an economic growth stifling sell-off. We believe, as usual, the Energy traders gambled that the worst of the fed comments have passed and that the language of the hawkish would moderate, and they were right! So at least for now traders have obviously returned their focus, after an expectancy to a return of moderate GDP growth of 3-3.5 %, on such bullish contingencies proposed by this year's hurricane season, Nigeria's militant activity, restrained Iraq war oil output, Venezuela's instability, and of course and still the biggest threat, the Iranian nuclear challenge.

W. S. I Energycast 6-10 Day Weather Outlook

Near and above normal temperatures are expected to encompass most of the Continental US for the balance of the next week and 6-10 day forecast periods. However, the focus of the warm weather in the most persistent warmth is expected to shift from the western US into the north central US during the 6-10 day period as troughing and cooler weather are forecast to arrive along the West Coast. As a result, the warmest anomalies are now forecast over the northern Rockies and north central US for the balance of the 6-10 day. Widespread highs in the 80s and low 90s are forecast to become commonplace over the northern Rockies and north central US for the balance of the 6-10 day period. Meanwhile, cooler readings are also forecast in the Southwest late next week as monsoonal moisture is expected to infiltrate the region. Just how strong the influx of monsoonal moisture is not certain. The current patterns suggest highs as warm as 110° are possible in Phoenix late next week. There is also an indication that highs will only climb into the 90s and low 100s. Meanwhile, near seasonable temperatures are expected to grip most of the eastern and south-central US for the 6-10 day period as the redeveloping eastern trough is forecast to bring cooler weather to the east during the latter half of next week. As a result, widespread highs in the 70s and 80s are expected to be the rule in the Midwest and Northeast during the latter half of next week. Highs in the 80s and 90s are forecast to become commonplace in the South and Southeast.

Conclusion

Natural gas seems to be near the final phase of a short-term correction and has now entered grossly oversold technical territory. We caution against aggressively attempting to short the market at obviously new contract lows for the year basis spot as invariably this market has a propensity for finding a reason whether it be technical or fundamental to foster a sharp and formidable rally from traditional lows, especially new lows. Looking ahead while we acknowledge the fundamental impact of record supplies in storage certainly justifying a further decline to possibly test existing lows at $5.75- $5.80 basis the continuation charts, which would require the August spot to decline to even a more dramatic new low for the year, recent history will tell you it is perfectly within the markets rights to ignore this logical scenario. It is quite possible that if the spot contract begins another decline down to or just below the $6.0 benchmark traders may find the rapidly shrinking room for-profit of what could be only another .10 to $.20, while in contrast, the upside potential from a buyer's standpoint which could easily exceed $1.0 to $1.50, to be too much of a risk to avoid capitalizing on. Especially in consideration that the major part of storm season has yet to materialize in which case the sudden arrival of a real Gulf threatening storm and the price escalation from current lows could easily escalate to between $2.0 and $3.0, and in quick order!

Concerning crude oil and the petroleum complex, price action continues to confirm our Outlook from the previous week as we forecast a likely test of first, the $72.50 level which was taken out today with a vengeance on the close settling at $73.52 a barrel while unleaded gasoline settled at an even more impressive price level within over four cent premium above its recent high of $2.25 per gallon to settle above $2.29 per gallon and a new post Katrina high! The unleaded gasoline market continues to lead the complex just as we have forecast for months and has become a major driving force that has kept the average price of crude oil well above our key support at $68 per barrel for the past three months! As we have stated in the past, these two commodities will continue their uptrend whereby the key support level for gasoline at $1.96 along with crude oil at $68.10 will be maintained until either there is a significant troop reduction and or temporary peace accord reached in Iraq which at this point seems doubtful or until a breakthrough negotiation is achieved whereby Iran's nuclear uranium enrichment program is ended even if temporarily, which also looks like a longshot at best. The wildcard still remains the economy here in the US, which after today's noticeable change in fed rhetoric that seems to accommodate growth versus inflation as a priority, at least for now delayed the slowdown correction. Also lets not forget Mother nature could easily throw all existing headlines to the wind with the arrival of a category three storm heading for the Gulf of Mexico. This potential will continue to loom large as a backdrop of support for the entire Energy complex going forward. In the meantime and over the immediate next five sessions, it certainly seems as if the traders have now got enough fundamental as well as technical ammunition to muster another assault at record highs at the $75 benchmark which could easily spark further speculative participation enough to achieve ringing the bell at a new high between $75.80 and $76.50.

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

June 29, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744