Consensus Report: August 24, 2006

Natual Gas and Oil Report

Crude Holds Support after Gasoline Collapse, while Natural Gas Rebounds on Storm Hype.

Technical Outlook: In our last report dated August 10 we said natural gas was more definitively bearish and that we expected prices to fall back through support at $6.80 especially if the resistance level at $7.60 was not reached soon. This not only transpired, but prices fell down through our target at $6.80 all the way to $6.45 before staging a sharp recovery. Looking ahead, especially after today's rather abrupt reversal to the upside of $.20 and rebound above the $7.0 benchmark, the momentum suggests a strong challenge to key previous resistance at the $7.60 level near term. However, the ongoing pattern has bearish overtones and suggests the market is vulnerable to another sharp rejection from the band of resistance above starting at $7.40 scaled up to $7.65 that could easily send prices cascading lower back to test intermediate support at $6.80 and if breached a further washout down through existing critical support at $6.45 could easily materialize. Only a strong close above resistance at $7.60, due to short covering, would indicate a continuation of the short term uptrend and set the stage for another challenge to pivot resistance at $7.80. We also warn against putting too much reliance upon technical indicators right now when the market in our opinion is almost totally dependent upon weather and its fundamental threat impact on production in the Gulf which we will discuss in the next section.

Fundamental Supply Update

Today the EIA reported an expected net injection of 57 bcfs that was right in line with previous estimates that varied only by a few bcfs from all three key surveys of Bloomberg, Dow Jones, and the ICAP estimates. The market was already poised to rally as prices were up about $.17 before the DOE release on storm hype and concern over tropical storm Debby and more specifically tropical depression number five which is slated to become possibly storm Ernesto later next week. With storage currently at 2857 bcfs which is still 291 higher than last year at this time and 339 or 13.5% above the five-year average of 2518 bcfs, the market is hardly short on supply. However as always with natural gas the market is never short of the ability to exaggerate and so literally before there has been any credible weather reports indicating a storm pattern or even a level of development that suggests a direct threat to the Texas and Louisiana production areas within the Gulf, the short covering has begun with traders prematurely driving up prices as if a Gulf hurricane has already been predestined. Meanwhile in reality tropical storm Debby has already been forecast by most credible and known weather forecasters to become a threat only to marine shipping as its current path leads it northward into the Atlantic Ocean with no apparent threat to any land mass, while tropical depression number five has some strong challenges ahead such as a low-pressure system moving southward down from the Bahamas that is on a collision path and is expected through wind shear to seriously weaken further development to this storm. It has been further explained to me from WSI weather that under the current pattern if it should develop further into a tropical storm it will more likely move westward into the Yucatán area and or impact the southern Mexican coast or Bay of Campeche area rather than the northern area of the Gulf of Mexico which would steer it far from affecting any critical energy production areas off the coast of Texas and Louisiana. This leaves the market after its recent rally well above the $7.0 benchmark quite vulnerable to a storm disappointing collapse whereby hurricane hype buyers will soon abandon their positions with haste likely to cause a vigorous long liquidation and resulting in prices declining to new lows quickly. Looking ahead to the upcoming moderation in temperatures especially in the Upper Midwest and Northeast, leaves little natural gas demand for cooling needs, should a production threatening storm not materialize.

Concerning crude oil this week's EIA update Wednesday gave little support to the recent retreat in petroleum prices led by the gasoline collapse that started last week as yesterday's surprising increase of 0.4 million barrels of unleaded only further served to confirm. Little support came from the drop of 0.6 million barrels to crude stocks as it's still left 330.4 million barrels and well above the upper end of the average range for this time of year. Refinery's also operated at a robust 92.8% of capacity last week while gasoline production increased slightly over the previous week averaging nearly 9.3 million barrels per day. While gasoline demand implications remained firm at 9.6 million barrels per day or 1.7% above the same period last year, it failed to prevent the collapse of almost $.50 from high to low in the price of gasoline over the past 16 sessions basis spot September unleaded, as traders obviously feel peak driving season and thus demand is behind us. This only seemed to further complement the recent cease-fire to the war between Israel and the Hezbollah that finally put an end to the senseless atrocities and merciless killing of the Lebanese people caught in the middle of the conflict and unfortunately most of which were children. Although this provided no immediate relief to supply tightness as this particular conflict had never posed any direct threat to oil supplies in the first-place, it's still seemed to alleviate some of the of the tension between key sympathizers, that if the violence had continued and then spread to these supporters,   then in directly oil supplies could have been compromised. It is just like the ongoing dilemma between Iran's insistence on furthering its nuclear ambitions through continuous uranium enrichment and the opposition from the UN Security Council and mainly the United States who believe their nuclear agenda threatens to further destabilize the already precarious security of the region. And while the strong threats of economic sanctions up to now have failed to interrupt the flow of even one barrel of crude oil, the potential military confrontation that could erupt from the disagreement between the two countries has been responsible for an estimated $10-$15 fear premium added on to the price of crude oil. While Teheran gave no indication of stopping their uranium enrichment program prior to while offering to continue to negotiate the incentive package proposed by the UN Security Council, which quickly drew the criticism of President Bush, some diplomats close to the situation believe Iran hinted it may consider halting enrichment during the negotiations should talks continue. And so the Iran nuclear Saga continues, holding crude prices hostage along with it as the confrontation unfolds and rightfully so as the second-largest producer in OPEC remains in jeopardy to a possible future military conflict with the US. Prices did find some support today from a production snag reported from Prudhoe Bay Alaska whereby a compressor problem in the western half of the field has reduced output by 90,000 barrels per day limiting production to 110,000 barrels. Crude prices no doubt found further minor support today from the recent injection of storm activity in the southern Caribbean between tropical storm Debby and a couple tropical waves that are moving westward from the African coast and now threaten Jamaica in the Atlantic Basin. And with last year's record hurricane count and the resulting devastation from the "perfect 2 storm punch" delivered as a direct hit to critical oil infrastructure in the Gulf of Mexico by hurricanes Katrina and Rita, it seems traders are short covering and buying out of fear even before receiving forecast confirmation of the storm's threatening path. This overcompensation and enhanced speculative buying only serves to artificially inject volatility into an already overheated and inflated energy complex. Let's not take a closer look at the weather and its implications over the energy market in the near term...

WSI Weather Forecast 6-10 day Outlook

Seasonable to seasonably warm temperatures are expected to encompass most of the country next week. As a result, near and above normal temperatures are forecast over most of the continental U.S. for the balance of the next week and 6-10 day forecast periods. The exception occurs in the Pacific Northwest, where seasonably cool temperatures are forecast during the 6- 10 day period in response to a developing West Coast trough. By mid-to-late week, daytime high temperatures are only expected to climb into the 60s and 70s in Seattle and Portland. Meanwhile, the most persistent warmth is anticipated over the South-Central and Southeastern U.S. next week. Highs in the Southeast are generally expected to climb into the 80s and low 90s most of next week while Texas and the South-Central U.S. will continue to see highs rise well into the 90s. The warmest temperatures in the Midwest and North-Central are forecast to arrive during the latter half of next week, when a building central ridge will bring widespread highs in the 80s to near 90 degrees. The Northeast may experience a brief period of warm weather early next week; however a building ridge over Greenland (negative NAO) will bring persistent troughing and seasonable to seasonably cool readings late next week and next week High in the Northeast during the latter half of next week are not expected to climb into the 70s and 80s. Finally, seasonable to seasonably warm temperatures are forecast over California and the southwestern U.S. for the balance of the next week and 6-10 day period. Highs over California are generally expected to rise into the 80s and 90s most of next week while maxes in the 90s and low 100s are forecast to continue in the Southwest. The other area of concern late next week surrounds a potential a tropical system in the Gulf of Mexico. Our current WSI tropical forecast favors the current wave east of the Windward Islands strengthening into a tropical storm or a weak hurricane over the next 5-6 days. This system is forecast to emerge in the Gulf of Mexico near the Yucatan Channel or Yucatan Channel near the middle of next week. As it does, the system will begin to become influenced by the persistent sub-tropical ridge along the Gulf Coast. This sub-tropical ridge will attempt to steer the system into the western Gulf, reducing the threat for the landfall along the Upper Gulf Coast. If the system does strength more than currently expected, it could threaten the central Gulf Coast, but that is the lower probability at this time. The system has appreciable obstacles to overcome the next 5-6 days, but it may threaten the Gulf of Mexico next week. The probability of this threat is about 40% at this time.

Conclusion

Natural gas took out all of our targets from our last report dated August 10 when we forecast a price collapse that would follow rejection from the resistance band between $7.40 and $7.65 that we said would precede a decline back through support at $6.80. Prices not only took out the $6.80 support but then continued to fall to $6.45 before staging the key reversal. Price action over this past week we feel, although reaching grossly oversold levels technically, has now been dominated by the fundamentals of weather which makes price forecasting more difficult as the market's direction is almost totally determined by the storm's path. We feel from the current WS I weather forecast which states the current tropical depression slated to possibly become tropical storm Ernesto and even a weak hurricane has serious obstacles to overcome before it can even threaten the Gulf of Mexico after which if it does is only expected to affect the western Gulf near the Yucatán Channel which puts its threat potential to actual oil and gas infrastructure as a very low probability. Under this scenario in our opinion natural gas prices are already over-inflated in proportion to existing record supplies and once again will do little to prevent starting in November with between 3400 and 3500 bcfs for winter supply. Only an unexpected sudden change of course to the tropical storm leading it to a collision course with the production areas of the Upper Gulf Coast, do we then expect a continuation of the short term up trend to challenge $7.80 and then the $8.0 benchmark once again. However if the current WS I forecast transpires whereby Ernesto either fails to reach hurricane status or even after reaching a category one level then moves westward into the Mexican Coast thereby bypassing the production areas of the Upper Gulf we anticipate a noticeable price collapse that could rapidly bring a return to $6.45 and below for a possible challenge to $6.10 and further as the heat factor in the Upper Midwest and Northeast moderates as summer winds down.

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

Agugust 24, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744

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