Concensus Report: August 13th, 2008

Petroleum Continues Consolidation in Range bound trade after support at $117 held as market weighs Weakening US economy against Supply disruption in Turkey and Iranian tension, while Natural Gas continues to follow bearish range in sympathy with Crude amidst mild heat outlook, quiet in the Tropics, yet remains Technically oversold

Natural Gas and Oil

Technical Outlook: Since our last report we said in looking ahead, that several technical supports had been broken and that a close back below the $9.0 benchmark was needed to cause a deeper washout down to test $8.60 which was confirmed earlier this week with the intraday low posted Tuesday of $8.33 basis spot and then again today at $8.48 before settling higher yet just below the key support to close at $8.57. Now almost all technical indicators remain still grossly oversold with stochastics, relative strength, momentum, the rate of change, the MACD, Bollinger bands, along with several oscillators exhibiting depleted value indications that typically precede a bullish reversal. I now anticipate that if the price of the September spot futures fails to retest recent lows made earlier this week at $8.33 then values should gravitate higher with a likely close achieved soon back above key psychological resistance at the $9.0 benchmark. If however prices should manage to retest existing lows, I expect only a brief penetration not to exceed $8.10-$8.20 on the downside before more powerful bullish buying emerges resulting in a more dramatic key reversal to the upside whereby a .50 to $.60 rebound is probable returning values back up to intermediate resistance between $8.75 and $8.80 respectively.

Fundamental Supply Update

This week's EIA report revealed another consecutive injection, and close to what had been expected at 50 bcfs, which was right in line with Global Insight’s call for the same and just slightly below both estimates that ran closer to 61 by DowJones and Bloomberg respectively. Storage now stands at 2517 bcfs which is 353 bcfs below last year’s record and now 6 bcfs or -0.2% below the five year average of 2523 bcfs. This report being slightly lower than what had been anticipated by both previous estimates of the two key surveys failed to prevent the continued slide in natural gas prices as the market sold off into the close after an initial knee-jerk rally to a session intraday high of $9.09 before a sharp bearish decline back below key support at $8.60 for a loss of .20 cents to settle at $8.57.With the outlook ahead concerning fundamentals, the weather is still mild overall until after day 11 in the 15 day outlook along with the slowing US economy which portends anemic industrial demand and a residential consumer looking to conserve every penny he can as historically high gasoline prices continue to plague him as he struggles in an environment where jobs are scarce. However, as we stated last week after the market gave up almost 39% in the recent decline since the markets peak of $13.69 posted July 2, we continue to warn now that the market has been totally deflated of almost all its fear premium and is now technically grossly oversold, the risk to increased short interest below $8.60 is building as sensitivity to quickly approaching peak storm threat that typifies August and September is growing more acute, attracting interest from longer-term value based buyers.

Concerning crude Oil, today the market staged the first rebound in several days with a gain of $1.44 to close at $120.02 basis spot September. The main impetus was the news that the fire Wednesday that debilitated the Ceyhan pipeline may cause a shutdown of between 2 to as long as 5 weeks which could impede as much as 30 million barrels from reaching their European destinations in the Mediterranean from delivery points in the Caspian Sea according to a DowJones report. News of this quite substantial supply disruption was more than enough to ignite short covering and attract recently more tepid bulls to reenter the buy side as today’s intraday low at $117.91 seemed inexpensive under existing conditions especially after prices briefly hovered above $147 per barrel last month. The fact that the critical pipeline transports over 850,000 barrels a day from Azerbaijani fields mainly under operation by BP makes it an important delivery source to European clients. Yesterday oil tested a key support level at $117 per barrel confirming our call for selling to probably dry up at this level preceding a more probable rebound which transpired today as values managed to close back over the psychological $120 benchmark. The strategic low was no doubt induced by a bearish reception to the EIA report which revealed another larger than expected increased accrued stocks of 1.7 million barrels although leaving inventory at 296.9 million which is still in the lower half of the average range for this time of year. And the markets seem to ignore another larger than expected drawdown of 4.4 million barrels to motor gasoline stocks, which remain in the middle of the average range while distillate fuel stocks increased by 2.8 million and are closer to the upper boundary of the average range for this time of year. The reason petroleum contained its decline despite the larger drawdown in gasoline is the fact that we are on the backside of driving season and consumer demand continues to run between 2 and 4% below last year’s level with little promise of increasing in lieu of the country being firmly in the grasp of a full-fledged recession that is beginning to spread its tentacles overseas. The situation continues to look dismal as a recent unemployment numbers confirmed the seventh consecutive monthly loss of jobs with unemployment jumping to 5.7% as layoffs continue emanating from the automotive and financial districts along with continued fallout from the ongoing housing crisis. The recent announcement that Citicorp, the nation’s largest bank will settle a multimillion dollar concession to the Attorney General of New York over the recent bond auction scandal that is likely to spread to other investment banks who also perpetrated the same lies and misrepresentations over the investments to key an more affluent clientele of such brokerages, continues to plague the stock market and undermine a desperate need to rejuvenate a damaged trust in the US securities market and the financial industry.

WSI Weather 6-10 Day Outlook

Late summer warmth to redevelop in the Midwest next week

Summary
A pattern change late August is expected to bring more persistent warmth to northern tier of the central and eastern U.S. In response, above and much above normal temperatures are forecast over the north-central and northeastern U.S. for the balance of the next week and 6- 10 day forecast periods. There are no signs for any significant late summer heat (highs in the 90s) yet, though widespread highs in the 80s are expected to become more common place next week. The warm weather looks to be more persistent over the north-central U.S. as the warm weather in the Northeast is expected to be briefly interrupted by cold front around the middle of the week. Despite the warm weather over the northern tier of the country, the warmest temperatures and the most persistent warmth next week are actually anticipated over the interior western U.S. While deepening will bring cooler weather next weekend, above normal and much above normal temperatures are forecast over the interior western U.S. for the balance of the next week and 6-10 day forecast periods. Highs in the 80s and 90s are expected to be rule for the Great Basin, northern Rockies, and northern Plains most of next week. Highs in the 90s and low 100s are forecast in the Southwest. Meanwhile, the coolest temperatures and the most persistent cooler weather are anticipated over the southcentral U.S., where medium range models all advertise a weak trough or upper-level low will bring cool and damp conditions. In response, below normal temperatures are forecast over the south-central U.S. for the balance of the next week and 6-10 day periods. Highs in the 80s and low 90s are expected to be the rule for the south-central U.S. most of next week. Finally, the most challenging forecast next week still exists over the southeastern U.S. as the medium range models continue to differ with impact a tropical system may have on the region. If the European and Canadian operational models are correct, the southeastern U.S. may see cool and damp conditions arrive late next week.

Conclusion

Natural gas, this week continued its consolidation in our opinion as prices remained in a more condensed range that has recently been defined by $8.40 on the lower end and slightly above the $9.0 benchmark scaled up to $9.10 on the upside as the market continues to feel pressure from sympathy with crude oil which is underpinned by a perception of softening demand from a suffering economy along with a mild weather Outlook that has been devoid of elevated heat in the key consumption regions of the Midwest and Northeast amidst a backdrop of temporary quiet in the tropics concerning storm watch. However we continue to feel as we stated last week now that the market has confirmed our forecast for the deeper wash out that took out our downside target at $8.60 which was confirmed a second time today, that the market remains grossly oversold both on a technical level as well as fundamentally after giving up almost 40% with the recent wash out down to $8.33 posted earlier and continues to attract long-term buyers as the larger risk in my opinion remains to the upside at peak storm season approaches over the next two months. While the market may attempt to test support at the existing lows I do not expect values to venture much lower it at all below $8.33 with an intraday low at $8.25, if briefly obtained, viewed as an attractive buy that would likely ignite a powerful bullish reversal that could easily carrying values back above $8.60 and beyond. With peak storm season ahead, winter shortly thereafter, and the fact that supplies still remain slightly below the five-year average, continues to support my feeling that shorts will be reluctant to hold positions with any conviction below $8.40 and are much more likely to cover which will continue to attract new buyers.

Concerning crude oil, so far this week has confirmed our call in last week’s conclusion for a potential test of new lows at $117 before the selling dries up which has thus far been confirmed with yesterday’s intraday low at $117.11 before short covering sharply into the close. The ongoing tug-of-war continues whereby traders weigh the more serious threat to demand that we have warned for months would become more formidable as time passes in the ailing US economy as the consumer’s plight becomes more desperate with each passing week, against the ongoing threat to supplies which remains mainly in Nigeria, the Middle East and mainly in the tension between Israel and Iran over their nuclear campaign, and now even more timely the recent disruption to the key Ceyhan pipeline in Turkey. In relation to the ongoing tension over Iran, Israel’s recent purchase of 90 F-15 fighter jets could quickly pose more serious bullish implications for the petroleum market over the near term. As I stated in today’s radio interview with Bloomberg News the price of crude oil will remain more sensitive to such issues as supply disruptions and or an approaching storm to the Gulf region now that prices have recently declined to below the $120 benchmark versus the overbought status they had reached approximately a month earlier above $140. Traders obviously found credence in short covering with new buyers willing to assume some risk in the face of a clearly slowing economy in the world’s top Energy consumer as the perception of threat to supply became more realistic at these lower levels as the potential loss of output between Nigeria, and now Turkey, is substantial. Furthermore, if the supply that has been interrupted to the Ceyhan pipeline is extended closer to the five-week downtime, then I could easily see crude values drifting higher back above key resistance at $121 per barrel with a more likely target of more critical pivot resistance at $126 per barrel. I also stated in today’s radio interview that I don’t necessarily agree with the popular opinion that crude oil will now continue its downward path to $100 per barrel and actually stated the market will find it difficult to test $110 over the short term with peak storm season now eminent and so many major producers suffering recent output declines such as in Russia, Mexico, and Nigerian. I also stated that commensurate to this while retail gasoline prices may decline further in the short run I felt values would likely rebound up from $3.70 per gallon for regular before arbitrarily dropping straight down to $3.50 per gallon as many analysts suggest. Remember the perception of threat to supply even though often unrealized such as in the case with Iran, can be a very powerful motivation for buying that is often under estimated by many and yet has proven to be very costly and influenced prices in a very real way. Concerning the value of the US dollar and its role in the recent petroleum correction, I continue to feel that many times currency traders based some of their decisions on buying the greenback after first seeing commodities retreat versus the opposite with crude oil traders rather choosing to sell their positions based more on the weak economic data in the US and its promise for slower energy demand as the value of the greenback would have no consequence to their existing positions that were already purchased based on previous currency valuations. The only implications the recent strengthening of the US currency has had concerning petroleum is to possibly deter some of the would be overseas buyers that would normally have stepped in to take advantage of recent lower prices if they had maintained stronger purchasing power but instead probably remained on the sidelines as crude values declined. The next major threat to demand here in the US remains the implosion of the commercial real estate market which we have warned about in many previous reports and yet will still take some time to be revealed and thus until more evidence of this bigger problem emerges, I feel petroleum values are likely to stage a modest rebound back up between $121 and possibly retest key resistance at $126 before pressing new lows again back below $117 per barrel.

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

August 13th, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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