Concensus Report: September 3rd, 2009

Crude Oil hovers at $68 awaiting key unemployment data tomorrow, stubbornly overvalued ignoring ample supplies and the weak economy, while Natural Gas settles at new lows for the year following EIA update.

Natural Gas and Oil

Technical Outlook: Since our last report, I said looking ahead although the new October spot was still grossly oversold, with the futures holding a hefty premium above it’s predecessor September that expired above $2.80, with the new spot trading almost $.40 cents higher, the risk was still substantial that the October would drift deeper into oversold territory before a key bullish reversal transpired. I also said looking ahead, with all technical indicators revealing grossly oversold status the market remained vulnerable to a sharp and dramatic short-covering rally and yet I anticipated the market would attempt to trade below the $3 benchmark again, which also transpired as I expected, however, the market failed to hold the higher support I thought would hold at $2.86 and instead slumped to new lows at $2.50 displaying extreme bearish domination with the bulls in full retreat. Looking ahead, this market is obviously still searching for a bottom and all technical indicators are still deeply oversold with the spot price now targeting $2.40 and possibly $2.36 before the shorts get anxious and begin making their exit to lock in recent gains and value seeking longs begin entering the market to secure a vantage point. As would be expected the result will be a dramatic bullish reversal with the market returning first to challenge $2.80 and then $2.92 initial resistance levels basis spot October delivery.

Fundamental Supply Update

This week's EIA report showed an injection of 65 bcfs, which was in line with estimates yet slightly below the survey by Dow Jones and Bloomberg that ran closer to 67 bcfs respectively. Storage now stands at 3323 bcfs, which is 489bcfs higher than last year at this time and 501 above the five-year average or 17.8% over 2822. Following the EIA update, despite being slightly below the expected injection, the market found little support and continued the recent carnage of selling that has plagued the market for weeks as values slumped to new lows for the year and finally settled at $2.50 after losing $.20 cents. The market continues to suffer from no change and the same overriding theme of the hefty supply overhang above the 5 year average, dismal industrial demand, a mild summer, and no threat from quiet in the tropics. These conditions have sustained themselves for most of the summer to the point where the bulls have totally vacated the market and today demonstrated their final capitulation yielding full trading control to the bears. This may finally signal the approach of a near term bottom as once the opposition leaves the bar, the fight is over, and soon after the traditional victory drinks are poured, the party’s over and everyone goes home…except when the bears decide to go home, they have to buy their way out to exit the bar. And as always there will be the early bull arriving to catch the first drink of the next “happy hour”.

Concerning Crude Oil, today the market closed after a rather volatile session that saw prices peak as high as $69.40 and then trade as low as $67.66 before settling slightly negative at $67.96 after a loss of nine cents. The market seems to be wrestling between being partial to the hype of sympathy trade with a stock market that continues to trade in defiance of the reality of a very weak economy reeling from a consumer base that is plagued with chronic unemployment, soaring credit debt and rising mortgage defaults, and falling home values and yet all the while ignoring traditionally ample supplies and falling global demand. In desperation traders are trying to claim a bullish scenario centered on an apparent rise in gasoline demand from the previous week of 4.1% to 9.48 million barrels a day and supposedly the highest since May 22, while petroleum products supplied rose 1.2% in 19.7 million barrels per day and are perceived as an implied gauge of demand, however this small spurt of added consumption may prove to be short-lived as the end of summer driving season draws near. What will follow is traditionally the slow pre-winter demand period for energy from an economy that is far from proving the recovery that many of the Carnival acts in the media are so quick to proclaim. Adding fuel to the fire of hype was a small drop in filings for state unemployment benefits which fell for the first time by 4000 to a seasonally adjusted 570,000 last week according to the Labor Department, however the more critical number will be revealed tomorrow morning as the national nonfarm payroll data for the month of August will no doubt declare the chronic unemployment of our nation marches on as economists expect another sizable job loss of 250,000 and an unemployment rate edging up to 9.5%. The negative report from the private sector as the ADP payroll reported a loss of 298,000 did not suggest a pleasant surprise is likely in tomorrow’s key unemployment update. The fact that the Federal Deposit Insurance Corp said that 416 banks were now on it’s ”problem list” as of the end of June equivalent to about 5% of the nation’s banks and a substantial increase from 305 at the end of March is just further troubling evidence that the economy is far from a recovering healthy state. Furthermore news that the FDIC’s insurance fund, which stands guard over $6.2 trillion in US deposits fell to $10.4 billion at the quarters and in the lowest level since mid-1993 hardly instilled confidence in the resilience of the banking system and instead ignited further safe haven buying in the precious metals markets as investors chose to move assets into hard-currency in an obvious protest against the precarious soft currency security of regional banks. The ongoing disconnect between level of the stock market and the vast disparity from the dismal plight of the consumer that ultimately must carry the weight of the countries economic well-being will only become more clearly defined as the weeks unfold. Looking ahead energy demand will be far from robust or growing and should soon yield lower petroleum values with the market targeting $65 per barrel over the near term.

Conclusion

Natural gas closed with a loss of 20.7 cents or 7.6% to settle at the lowest price in eight years of $2.508 basis the spot October delivery leaving the market in deeply oversold technical ground. Looking ahead the market seems determined to continue its bottoming search which could easily lead to testing $2.40 and possibly lower down to $2.36 before the shorts begin looking for the exit and move to lock in profits. As the market becomes more compressed with the short interest finding less room to maneuver, the attraction for new length should soon become ominous and thus trigger the culmination of buying from both directions. The result of short covering and new length entering the market should soon ignite a dramatic bullish reversal with the values quickly returning to challenge overhead resistance at $2.80 scaled up to $2.92 and possibly higher before the buying subsides. This will mostly be technically induced as the pervading fundamentals remain overly bearish with industrial demand crawling at a deplorable rate, which only further exposes the falsehood of economic recovery that supposedly is supporting oil at almost $70 per barrel. Unless a tropical storm suddenly arrives on the horizon to threaten the Gulf of Mexico, natural gas prices will continue to remain subdued under the weight of record heavy supply and mild weather and an anemic economic outlook.

Concerning crude oil today marked another session whereby petroleum managed to ignore another dose of reality as evidence seems to be emanating from almost every sector of the economy with the banking crisis now looming large as a major obstacle to a rebound in energy demand in the months to come. This ongoing propaganda that continues to be spewed forth so wantonly in the media is now reaching almost humorous proportions in its reliance on public ignorance as the weak retail sales, orders for durable goods, rising unemployment, 3.5 to 4 million mortgages in the foreclosure stage, and credit card debt climbing to a record 9.95% in the red on bank balance sheets is the furthest substantiation that the recession is over and that we are in the economic recovery that so many of the Wall Street pundits are claiming on television. Soon the public will begin to outcry to some of these lying talking heads who are obviously pushing their own economic agenda in seeking higher stock levels, and will ask them the truth defining question in explaining how the short term rebound in stock levels since the march lows somehow automatically proves the recession is over and economic recovery is right around the corner! In fact the way they so glibly predict that unemployment is always a lagging indicator and will just automatically recover months after the economy does is actually flawed thinking. Because in a capitalist society where by 70% of economic growth is measured by the exchange of goods and services born from buying and selling from a healthy consumer base and thus allowing the profitable marketing of products and services by these various corporations, and expecting this will somehow be initiated by some starving companies now light on inventory and with less employees and then eventually they will be joined by a consumer base that is currently jobless and without home-equity is truly a fantasy and a fractured theory. The only way commerce in our beloved nation can return to normalcy again in a sustained manner that epitomizes true economic recovery is when the common consumer has stable employment and thus the confidence to make the normal purchases involved with everyday living which would then restore the exchange of goods and services allowing for corporate profits allowing for business expansion and thus hiring more workers and then the cycle repeats itself and you have economic growth. It doesn’t happen the other way around whereby some how the consumer miraculously starts buying goods and services again without employment or while he’s afraid for his job, has no stable housing, and his personal credit status is either deeply in debt or nonexistent, and especially if he has little faith in the bank down the street staying in business! So while the consumer’s plight continues to worsen as measured by real-life indicators such as growing unemployment, rising mortgage defaults, soaring credit card debt amidst even tighter credit restrictions, continued commercial property meltdown, and growing bank failures…proclaiming under these conditions an economy that is 70% driven by the consumer is now in recovery and no longer in recession is nothing more than a bald-faced lie!! And to further depend upon this mirage of economic recovery based on the temporary elevated levels of some stock issues supported by a few stock money managers and members of the wealthy minority to bolster the cause of an inflated crude oil price based on the expectancy of a return to energy demand from this ghost recovery is even further removed from the truth. And so as I have stated before when this aberration from the truth is finally realized the coming correction when oil prices finally return to the equilibrium of the real supply demand balance the correction will be violent and sobering. Until then I expect a range for crude oil should be contained over the near term by $71 resistance above and the market should soon test the $65 benchmark and possibly by next week unless tomorrow’s unemployment number is unusually lower than expected.

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

September 3rd, 2009

United Strategic Investors Group

Guy Gleichmann, President

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

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