Concensus Report: July 30th, 2009

Crude Oil recovers to challenge $67 after yesterday’s collapse in sympathy with stocks and precarious assumption for future economic rebound, while Natural Gas rebounds after weekly lows and EIA report.

Natural Gas and Oil

Technical Outlook: Since our last report, I said the technical decline had put a temporary ceiling at $3.80 to contain rebound attempts with spot August targeting $3.40 heading into expiration with the new September spot challenging $3.60 commensurately, both of which transpired yesterday. Today’s rebound has left technical indicators mixed with stochastics and the rate of change still negative, while momentum, relative strength and other oscillators are neutral to slightly positive. Under this scenario look for support over the near term to be tested at $3.46 with downward momentum slowing to $3.35 and then reversal attempts taking the market back up to challenge resistance at $3.80 and then eventually $3.92. I expect range bound trade between these price parameters until the technical indicators become more clearly defined.

Fundamental Supply Update

This week's EIA report showed an injection of 71 bcfs, which was in line with estimates yet slightly lower than the survey by Dow Jones and Bloomberg that ran closer to 74 bcfs respectively. Storage now stands at 3023 bcfs, which is 571bcfs higher than last year at this time and 478 above the five-year average or 18.8% over 2545. Following the EIA update the market gradually strengthened throughout the session before closing stronger near the highs of the day for a gain of 21.5 cents or 6.1% to settle at $3.76 per million British thermal units basis the new spot September futures. However the market reacted equally from bargain buying based on yesterday’s lows as expiration related selling reduced values just prior to the report making an ideal environment for selling the rumor in buying the fact after the data was released. Looking ahead the fundamental outlook over the near-term remains weak with industrial demand still suffering recessionary conditions while the immediate weather outlook continues to be mild with no storm threat on the horizon as of yet. An usual jetstream pattern has kept a lot of the abnormal high heat bottled up in the Pacific Northwest with cooler conditions tempering demand in the high consuming Upper Midwest while changeable conditions have dominated the East, meanwhile humid slightly above normal heat dominates Texas and the southern Plains, all of which has combined to produce a milder than normal summer of lower demand for cooling needs this year allowing the healthy storage surplus above the five-year average to persist. Until the economy shows more defined signs of recovery and or weather conditions, such as the arrival of a tropical storm, present a potential change in the demand picture prices will continue in a subdued lower basing trade pattern.

Concerning Crude Oil, today the market closed with a dramatic gain that almost equaled yesterday’s sharp collapse culminating the close of two of the most volatile back-to-back sessions of the year. Crude for September delivery rallied $3.59 or 5.7% to close at $66.94 per barrel following yesterday’s even more impressive one day routing of 5.8% with values dropping over four dollars on the day! Today’s advance was attributed to sympathy with the impressive gain on Wall Street as traders continue exercising selective focus in cheering on another decline in US jobless claims as an indicator of economic recovery while ignoring numerous critical negative components that continue to reveal that recessionary conditions remain well intact. Stocks continue to rise unabated despite the continuing collapse in commercial property values, rising record consumer debt, and while the rate at which unemployment increases has subsided new job creation is virtually nonexistent. These are hardly the telltale signs that the recession is over much less labeling our plight as fertile ground for economic recovery. Yesterday’s $4+ decline in crude oil was ignited by the higher-than-expected 5.1 million barrel increase to crude stocks totaling 347.8 million barrels for the week ending July 24 leaving stocks almost 30 million barrels above the five-year average which easily overshadowed the larger than expected drawdown of 2.3 million for gasoline which was also circumvented by the 2.1 million barrel increase to distillates as product demand overall remains anemic in this slumping economy of unemployed consumers. The fact that durable goods orders for June declined 2.5% also played into yesterday’s negativity. Total petroleum inventories including the products are now at a 19 year high, making today’s prices clearly overvalued regardless of any temporary funded hot air that stock money managers have managed to inject into the indexes.

Conclusion

Natural gas closed with a substantial short-term jump of $.21 to settle at $3.76 basis the new spot September futures, however this was more of a knee-jerk rebound following yesterday’s brief flirt with weekly lows as expiration related selling took the market down $.16 cents as contracts changed hands. Looking ahead with technical signals mixed and continued weakening industrial demand I expect price action to remain subdued with lower basing action as values increase short participation until the profit potential diminishes to the point at which they must cover their positions attracting buyers returning the market up to previous key resistance levels. This continued volatile price pattern should keep values range bound between $3.35-$3.46 on the buy side up to $3.80 -- $3.92 on the sell side until the fundamental picture changes by way of the economy or the weather or both.

Concerning crude oil after today’s substantial recovery the market continues to maintain its upward bias in sympathy with an overinflated stock market that also suffers its own form of reality denial. However values have managed to stay between the price points that I have outlined since early June with the ceiling above at $72.50 remaining intact and $58 holding support on the bottom. Last week might call for resistance at $70 likely to send a market that to test the $60 benchmark saw values decline all the way down to $62 before the sharp recovery today that had little substance behind it other than the blind optimists that are cheering along Wall Street in claiming a very precarious and presumptuous and to the recession quickly followed by economic recovery that also lacks justification. Crude oil which is blindly following the cheerleading squad that is claiming the premature economic salvation is even further detached from reality as supply levels approach 19 year highs here in the US, global demand continues to subside, and OPEC production reserves are at the highest levels since March 2003 before the Iraq war began! Despite the flimsy support of the recent weakness in the US dollar, at the next critical trigger point whether that be a stockmarket correction, an upward fluctuation in the dollar, another sizable increase in supply or commensurately noticeable drop in demand, and the market could easily yield a vicious selling avalanche as traders liquidate layers of long positions that are vulnerable to the sobering arrival of excepting the existing facts and relinquishing their current obsession with the speculative Mirage of future economic growth yet to materialize.

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

July 30th, 2009

United Strategic Investors Group

Guy Gleichmann, President

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

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