The petroleum complex is range bound in the uptrend as middle east violence continues.

Consensus Report: July 27, 2006

Natual Gas and Oil Report

The Petroleum Complex is Range Bound in the Uptrend as Middle East Violence Continues While Natural Gas Rockets to New Highs on Record Heat Induced Withdrawal.

Technical Outlook: In our last report dated July 20 we said natural gas was looking more constructive and that from the current pattern we expected a near-term challenge to the resistance level at $6.50, and that if breached could then quickly be followed by a test of our bull pivot price at $6.65, leading to a challenge to the $6.80 resistance level that we mentioned in our conclusion. That is almost exactly what transpired as prices rocketed to new highs yesterday and actually hitting and exceeding our target intraday. Today prices extended the rally into overbought territory with natural gas settling above the $7.0 benchmark for the first time in over six weeks as the spot August contract expired settling at $7.04 for a gain of 15.5 cents. Looking ahead we see technical indicators warning the market is now overbought. Key indicators such as stochastics, the linear oscillator, the MACD, certain channeling indexes, as well as the longer-term parabolic, all suggest the market is extremely vulnerable to a correction as most of these indicators have become overextended to the upside. We expect a sharp retreat from a second rejection at the $7.25 resistance band resulting in a close back below $6.75 which would negate our short-term uptrend and return the market to short-term range bound bearish trade leading to a further decline possibly down to initial support between $6.25 and then more critically at $6.10 . Only a further assault to the upside resulting in a settlement closing above the key $7.25 resistance level would negate our short-term bearish outlook temporarily for possible challenge to the more critical resistance price at $7.40.

Fundamental Supply Update

Today the EIA announced a surprise withdrawal of 7 bcfs versus the average injection into storage of about 23 bcfs that was expected by both estimates by Dow Jones and Bloomberg respectively. The market quickly took off as traders reacted to the first summer withdrawal in the market's known history at least for as long as records have been kept. However prices had trouble maintaining the advance and at one point after the intraday high had posted an almost $.40 a gain, the market sold often in the final half-hour with prices actually going negative by about five to six cents before recovering into the close. We feel the bearish implications of the existing record surplus that the market has been carrying all year as a result of this past year's warm winter continues to plague every attempted rally. Despite the one-week anomaly due to the extremely elevated abnormal heat index experienced almost from coast to coast, current storage now stands at 2756 bcfs, which is 379 higher than last year at this time and still 490 bcfs or 21.6% above the five-year average of 2266 bcfs. So we are still more than adequately cushioned against any sudden resurgence in demand or even possibly the outage created by a Gulf storm. A more graphic explanation of how adequately supplied the market is, would be to acknowledge that the industry only needs to average injections of 46 bcfs over the remaining injection season to end in the first week of November with a record high 3400 bcfs to supply winter needs, which is a far cry from the average that runs closer to 67 bcfs per week normally just to bring the ending storage to 3200 which has been considered over the last two years as the new minimum benchmark required. It is our view that the awareness of this situation combined with weather forecasts that indicate the extreme abnormal heat experienced recently will begin to dissipate from the Midwest and even more noticeably in the Northeast beginning in the middle of next week, could trigger some substantial profit-taking and renewed short interest in the near-term. So far the Atlantic Basin has been relatively quiet and looks to continue in this matter at least over the next two weeks. This lack of threatening storm activity that was so heavily publicized earlier in the season could also impact next weeks vacating heat and further contribute to that sudden heaviness in the market that often leads to the dramatic declines that are so characteristic to this market, especially following such a sharp vertical rally to new highs not experienced in several weeks that is the habit of the natural gas market.

Concerning crude oil, there seems to be little sign of relief to the recent violence between the Israeli military upon Hezbollah targets in Lebanon in retaliation for the recent kidnapped soldiers. While the bullish influence from the recent conflict has somewhat faded in its impact over petroleum prices and thus the decline over the past week, however the recent continuation to the ground advance by Israeli troops deeper into southern Lebanon combined with the refusal by Hezbollah to accept the proposed establishment of a buffer zone to be patrolled by UN personnel and other peacekeeping neutral forces and the recent failure to broker a temporary cease-fire at the meeting between Secretary of State Condoleeza Rice, the UN and other members of the multinational gathering in Rome, caused Oil prices to rebound today settling at $74.54. Yesterday's EIA report was long-term bullish as gasoline declined by almost twice what was expected for a supply drop of 3.2 million barrels as of July 21 leaving inventory near the middle of the average range. Crude stocks remained unchanged while distillate fuel inventories rose by a modest 0.8 million barrels and remain above the average range. However, and once again along with the bullishness of the gasoline decline, was the implications of gasoline demand which remain robust at 9.6 million barrels per day or 1.8% above the same period last year. This continues to underpin the bullishness of the market while refineries operated in a small setback from the previous week of 92.5% of their operating capacity whiler gasoline production again declined from the previous week averaging only 9.1 million barrels per day. Nigeria has recently moved back into the limelight as the oil giant Shell has been declaring ongoing output losses whereby the actions of militant rebels have caused output flows to be curtailed by 653,000 barrels per day. In their recent quarterly filing the oil giant said it could not set a date to restart operations and return to full production and some estimate that this considerable outage will remain a burden for the balance of this year. This combined with the recent attack to the Nigerian Agip Oil Company, a flow station and subsidiary unit of Italy's Eni Spa have fostered production loss reports that range from 16,000 to as high as 120,000 barrels but the true measure is yet to be confirmed. Another Nigerian subsidiary had shut down 80,000 barrels per day of oil output due to a massive pipeline leak that was reported in the Angola press Thursday. Overall it is now estimated that attacks by militant groups within the Niger Delta have now cut the country's production overall by one third ora total of 715,000 barrels per day. This is definitely significant considering the country's normal output is about 2.5 million barrels per day and serves as an important importer to the US as they supply a much desired bonny light or sweet crude that is more economical to refine. Let's now take a closer look at the weather over the next 6 to 10 days as it may hold serious implications for natural gas.

W. S. I Weather 6-10 Day Outlook

With the exception of the Northwest, Southwest, and portions of northern New England, warmer than normal temperatures are forecaster grip most of the country. Widespread anomalies are generally expected to average between 1-4 degrees above normal over most of the Continental US. However today's forecast is not as warm over most of the eastern US as previously forecast. Temperatures may trend warmer over most of the eastern and southern central US than currently forecast. While all models depict a weakening of the subtropical ridge and some cooling over the eastern two thirds of the country, they display notable technical differences as to just how much cooling will actually occur. We expect to see a noticeable breakdown to the inclement elevated heat that has presided over the past two weeks in the Midwest as this weakening ridge diverts more of the heat back to the Western US. Temperatures are expected to average closer to seasonal readings in the Northeast and over the western third of the nation as we extended deeper into the two week forecast.

Conclusion

Natural gas will continue its pattern of falling back to technical concerns once the market has completed a cycle of price factoring to ongoing fundamentals of elevated heat causing several blackouts due to maximum drainage of the power grid in high concentration consumption areas in California and New York. We see both as a combination reaction to the recent highs resulting from the surge of better than a $1.50 from the lows at $5.40 basis the spot August contract and the moderating heat index forecast to begin the middle of next week as the catalyst to substantial profit-taking and what could develop into a rather dramatic decline as traders sanity return to the realization that the market is still oversupplied. Look for the recent advance to be contained on the upside most likely by existing resistance at $7.25 with the more dramatic rejection likely to emerge if the critical barrier at $7.40 is challenged sending prices back down first to test support at $6.80 with a negative close below $6.75 likely to trigger further long liquidation ultimately bringing a challenge to the support at $6.25 and possibly down to the critical $6.10 level. We anticipate only a sudden weather shift back to the extreme abnormal heat or the sudden arrival of an Atlantic Basin storm poised to threaten the Gulf could negate our Outlook of vulnerability to a likely correction that will be swift and dramatic in our opinion.

Concerning crude oil and the petroleum complex, the market had earned a much-needed profit-taking after exceeding both of our price targets for oil of $75.80 and then $76.50, with spot prices reaching as high as in excess of the $78 benchmark recently over the initial reaction to the reigniting of historic animosity and hatred between the two key players in the region, that being Israel and the Iran supported Hezbollah. With the spot August contract recently declining as far down to the sub $73 benchmark petroleum prices have now put in a healthy technical correction. In fact the daily chart overall basis the new spot September futures shows a rather healthy constructive pattern that supports the uptrend with several indicators suggesting strong support between 72 and $73 per barrel with a further advance likely to challenge recent highs at $77-$78 per barrel. With the overall technical uptrend remaining firmly intact in our opinion and the addition of the recent bullish gasoline data, along with the backdrop continued Mid-east violence and production losses and Nigeria, we see the bias to the market firmly under bullish domination over the near term. Recent statements designed to try and quell the recent escalation to violence in the region such as those made by Palestinian President Mahmoud Abbas who said negotiations were underway to free an Israeli soldier captured by Hamas-linked militants seem to fall on deaf ears and will continue to be ignored in our opinion until something more significant influencing even a temporary break in the military conflict develops. Until then we expect declines to be brief and quickly bought while challenges and resumptions to the upward assault at resistance to be more fierce and extensive until the $80 benchmark is breached in our opinion. While Israel continues to pound Hezbollah targets from the air while the Hezbollah persists in showering Israel with rockets and this combined with the recent announcement by Al Qaeda threatening the entire world with regards to western interests in retaliation for both the US occupation in Iraq and now the aggressive attacks by Israel against their Islamic brethren, Hezbollah, we see the heat building into a potential boil over igniting oil prices even higher as the environment becomes almost unbearable for the short trader.

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July 27, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744