Petroleum Trades at the sub $70 level on Dean Aftermath

Petroleum Trends up from the $70 level on Bullish EIA Update and Reduced Refinery Capacity, while Natural Gas Rebounds from year’s low on Technical Concerns.

Technical Outlook: Since our last report we said as expected after such a sharp and devastating decline breaking through several support levels and breaking to new yearly lows, the market had taken on a new bearish configuration. The market obviously suffered a tremendous technical blow to the uptrend because of storm disappointment from hurricane Dean’s passing without consequence, and that left the market with conflicting signals in our opinion. We said under such posture we anticipated a possible short-term bounce back up to key resistance at $5.75- $5.80 which had previously supported the market, with this area likely to contain the advance to be followed by a rejection that could easily send prices to new lows below $5.50 to test $5.36 scaled down to a more critical level at $5.20 possibly near term. This is exactly what transpired following that report as Friday the market had rallied right up to our resistance point and failed at $5.70 before the then September spot futures went into a definitive price collapse that did not see any buying until exactly $5.19. Then to confirm our outlook whereby we said traders would be reluctant to sustain aggressive selling from this level, aggressive buying from this level soon followed which carried the market all the way back up to the same resistance point at $5.75. Now after the debut of the new October spot futures, today we saw strong resistance from the same area as the intraday peak held at $5.78 with the market retreating to as low as $5.52 before settling up with a modest gain of 5.4 cents to settle at $5.63. Looking ahead technical indicators remain mixed with the longer-term still showing a vulnerability to the downside where as shorter-term indicators such as stochastics, relative strength, momentum, and other oscillators are now exhibiting grossly oversold warnings. However, we feel the bearish warnings of the longer-term signals are nearing the end of their cycle and so in conjunction with the shorter-term indicators exhibiting grossly oversold warnings we feel a bottom, short-term, may soon form. We anticipate over the next three to five sessions prices may very well form a short-term low possibly somewhere between $5.40 scaled down to $5.20 that will likely precede a strong and formidable rally. Should this bullish reversal that we anticipate culminate soon, based on technical merits, then converge with a potential bullish fundamental such as the arrival of a tropical storm on the horizon, then the resulting price advance will be that much more dramatic, whereby recent resistance above at $6.10 could easily be taken out.

This week's EIA report revealed an injection into storage of 43 bcfs that was pretty much right in line with survey estimates by DowJones and Bloomberg that were running at 43 respectively. Storage now stands at 2969, and still 71bcfs above last year at this time and yet 315 or 11.9% above the five-year average of 2654 bcfs. The market ended on a positive note to settle floor trading with a gain of 5.4 cents closing at $5.635per million BTU basis the new spot October futures. Fundamentally the market will continue to be underpinned by traditionally heavy supplies, milder weather ahead as this summer heat begins to dissipate into the shoulder month of September, and the lingering threat of hurricane season as a storm could easily suddenly appear coming off the coast of Africa. But until the last of these conditions becomes a reality, we anticipate the market will trade more on technical concerns and the weekly EIA updates.

Concerning crude oil, the market today closed with a moderate loss following yesterday’s impressive rally after the release of a very bullish EIA update revealing sizable drawdowns in both crude stocks as well as the primary concern for consumers, gasoline. Crude stocks declined by 3.5 million barrels last week, almost double what had been expected leaving stocks totaling 333.6 million barrels and yet they remain above the upper end of the average range whereas gasoline stocks also dropped by a similar 3.6 million barrels and yet remain below the lower end of the average range for supplies, where as only distillate fuel increased but by a minimal 0.9 million barrels as they are in the middle of the average range for supply this time of year. The other important element of the report was a noticeable drop in refinery capacity to 90.3% from the previous week’s report of 91.6% as production for both products declined on the week at the same time that imports have been reduced recently. This combination of higher than expected reductions in both key commodities comes in conjunction with early hurricane season to make traders uneasy about the near-term future for price direction as it no doubt adds anxiety to the short interest. The obvious low volume trading that the market experienced ahead of the long Labor Day weekend contributed to a continuance of the recent enhanced volatility along with the ongoing nervousness over the specter of further signs of a weakening US economy evidenced through more stock index pillaging as the uncertainty makes evacuation attractive.

The La Nina-like pattern that has developed over North America in August is forecast to continue into early September. As a result, above and much above normal temperatures are forecast over most of the continental

U.S. during the next week forecast period. During the 6-10 day period, the La Nina-like pattern is expected to weaken as all models feature to building West Coast ridge and a deepening central U.S. trough. In response weakening La Nina-like pattern, the focus of the warm weather is forecast to shift into western U.S. while most of the eastern two-thirds of the country is expected to be on the downside of a cooling trend. The most persistent warmth in the West is anticipated over the interior California and the interior western U.S. While a brief period of cooler weather may arrive near mid-week,daytime highs generally in the 80s and 90s are expected to be the rule for these regions most of next week. The warmest temperatures in the Southwest are forecast early in the week, when widespread highs between 100-110 degrees are expected to be rule. While notable difference still exist between the medium range models regarding how much moisture associated decaying tropical system

in the eastern Pacific becomes entrained into the monsoonal flow, all models depict an increase in the influx of the monsoonal moisture into the southwestern U.S. As result, highs in the upper 80s and 90s are expected to become more common place in the Southwest late next week. Warmer than normal

temperatures are also forecast over most of the eastern two-thirds of the country during the next week forecast period though the warm weather in Northeast may be briefly interrupted by a 2-3 day period of seasonable to seasonably cool readings nearly the mid-week. In response, highs in the 80s and low 90s are expected to be the rule most of the central and eastern U.S. for most of next week. Though notable differences still exist amongst the medium range models regarding how much cooling actually occurs over central and eastern U.S. during the 6-10 day period, all models feature a deepening but progressive trough. In response, near and below normal temperature are forecast to overspread most eastern two-thirds of the country during the 6-10

day period. As a result, widespread highs in the 80s and low 90s early next week are forecast to fall back into the 70s and 80s during the latter half of next week.

Natural gas has recently rebounded from this year’s new contract lows into a trading range that finds traders juggling the post hurricane Dean sell-off, existing heavy supplies, and the approach of softer demand in the shoulder month of September as the summer heat fades into memory, all the while as the threat of a late-season hurricane still lingers. These factors will continue to converge and repel off one another as the ongoing technical outlook is revealed. Near-term we see an oversold cycle ending soon with a short term bottom possibly appearing between the $5.20 critical support scaled up to interim support at $5.40 with resistance clearly defined at between $5.75 -- $5.80 scaled up to $5.92, with a bullish break out achieved should the market managed to penetrate these levels with a close above the $6.0 benchmark. It will be difficult in our opinion, for the market to achieve the bullish break out on technical merits alone, and so bullish traders will continue to keep their eyes closely focused on the weather and specifically the tropics and the coast of Africa.

Concerning the petroleum complex, this week’s price activity confirmed our last report as prices clearly held above our support level $68.10and then quickly took out our upside target resistance band at $72--$72.50. Technically the market is beginning to show longer-term bottoming action where as shorter-term indicators such as stochastics and momentum have become slightly overbought from the speed at which prices rebounded from below the $70 benchmark. Traders continue to focus on key factors of continuing strained and actually shrinking refinery capacity, ongoing reductions for both crude stocks and gasoline despite the impending end to this summer’s driving season, the potential and never ending threat of international tension and possible disruption to production in the Middle East, the late arrival of a tropical storm, and finally last but certainly not least, the ongoing threat to demand posed by further revelation of the slowing US economy which now faces the legitimate threat of a full-scale recession born from the worst real estate crisis in decades! As stated last week we still feel the short term up trend in petroleum remains intact after the recent dramatic correction from all-time highs at $78.77 basis spot. This is mainly because of the seriousness of our restricted refinery capacity and its implications as to future product availability, especially concerning gasoline which is already in short supply, the lingering the threat of a late-season storm, and the fact that evidence of the slowing US economy is a more gradual and protracted revelation over time before its debilitating affects over energy demand materialize. So in looking ahead we anticipate over the next post holiday week for the market to find strong support first at $72 with scaled down buying below this from $71.50 with a more critical defense of the uptrend appearing at the $70 benchmark if attained, with a near-term push to new highs above the recent peak at $74 plus, with a likely challenge to the $75 benchmark expected before the end of next week especially if a tropical development occurs .

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

United Strategic Investors Group