Concensus Report: September 11th, 2008

Crude test’s $100 despite the promise of further supply disruption from hurricane Ike as it enters the Gulf, while Natural Gas remains in bearish range trade as weather fears face-off against softening demand.

Natural Gas and Oil

Technical Outlook: Since our last report we said with the market now holding a double bottom at $7.02 from which values would likely rebound from the near-term low that is now in place and we called for a test of resistance from $7.60 scaled up to $7.75, which has been confirmed from Monday’s posted high of $7.70 before values subsequently fell back into bearish range trade since then. Since that low support has so far held, price action has demonstrated sufficient consolidation whereby I am still anticipating a challenge of overhead resistance that remains at $7.80 with a potential punch through this level to test the $8.0 benchmark. Technical values are still grossly oversold both in relation to where crude oil is priced and by how far natural gas prices have fallen since their peak in early July especially when you look at the longer-term indicators such as the parabolic, Bollinger band and the MACD. While values may still test recent lows over the near term, I still anticipate prices will gravitate higher and rechallenge recent highs between $7.80 and $8.0 over the next two weeks prior to expiration of the spot October futures.

Fundamental Supply Update

This week's EIA report revealed another consecutive injection of 58 bcfs, which was right in line with both estimates that ran closer to 56 by DowJones and Bloomberg respectively. Storage now stands at 2905 bcfs which is 146 bcfs below last year’s record and now 82 bcfs or 2.9% above the five year average of 2823 bcfs. This report was obviously received as a bearish report considering supply had been reduced by almost 40 bcfs from storm shut-ins along with the promise of further supply disruption from hurricane Ike, and yet prices still managed to close negative for loss of 14.5 cents to settle at $7.24 per million British thermal units basis October delivery. Looking ahead the fundamental picture looks more balanced as prices have fallen more into a more proportionate equilibrium concerning value based on the current supply demand equation. While the backdrop of a full-blown recession confirmed by a chronic and dismal unemployment situation that continues to feed a growing housing foreclosure crisis only brings the promise of weaker demand for energy to come, the recent price collapse combined with sudden supply disruptions from two storms impacting critical Gulf production within two weeks back to back has now collided with valuations slumping to such a low-level that traders are finding it difficult to build a case for prices to drop below the $7.0 benchmark. Looking ahead combined with a grossly oversold technical condition and the market looks more conducive to a gradual appreciation in value as short covering may converge with longer-term buyers looking to get a jump on this winter. And let’s not forget the final verdict on damage assessments for hurricane lke are still yet to be revealed.

Concerning crude Oil, today the market continued its downward track despite the potential supply disruptions that hurricane Ike threatens to impose as it enters the Gulf with the potential of reaching category three status before making landfall somewhere in the middle of the Texas coast. Today the October delivery contract fell $1.71 to close at $100.87 a barrel on the Nymex rebounding only slightly from the intraday low in $100.10 leaving the price at levels not seen since early April. While many feel once the price breaks the low the psychological $100 benchmark values could quickly slump deeper for immediate test of $80 per barrel, however, with a combination of supply outages from the two storms along with the surprise production cut of 520,000 barrels just announced in this weeks OPEC meeting in Vienna, and this conclusion may be premature. Total damage assessments will not be revealed from hurricane Ike until next week as it is not likely to impact the Texas coast until this weekend and could strengthen to as high as a category three by that time. According to the US Minerals Management Service an estimated 96.9% of oil production and 93.3% of natural gas production in the Gulf remains shut-in. And so the facts remain that while the extreme destruction the Gulf suffered three years ago from hurricanes Katrina and Rita may have been avoided, we are still unable to add supplies into energy storage just prior to peak winter demand season for natural gas and also while gasoline supplies have recently been reduced to the lowest level since 2000. This week’s EIA report despite being historically bullish with a larger than expected drawdown of 5.9 million barrels for crude oil now totaling 298 million barrels and in the lower half of the average range while motor gasoline inventories dropped by a much larger than expected 6.5 million barrels and are now below the lower boundary of the average range, price actions still remained bearish as these facts were undermined by the expectations of still slower consumer demand yet to come as the housing market looks to only get worse deep into 2009. Refinery operating capacity dropped to 78.3% because of storm shut-ins, and this condition will easily be repeated in next week’s report.

WSI Weather 6-10 Day Outlook

The remnants of Hurricane Ike and a deepening trough over the eastern U.S. are expected to combine to bring cool and damp conditions to Texas most of the eastern U.S. during the next week forecast period. Though the models still display still notable differences late in the 6- 10 day period, the one thing that all agree on is that seasonable to seasonably warm temperatures will, at least briefly, develop over the north-central and northeastern U.S. late next week. As a result, the coldest temperatures over the eastern two-thirds of the country are anticipated the first half of next week, when widespread highs in the 60s and 70s are generally expected to be the rule. As remnants of Ike weaken and the eastern trough lifts northward, highs in the 70s and 80s are forecast to become more common place over the eastern two-thirds of the country. Meanwhile, the big story in the West remains the warm and dry weather. While all models feature a weakening western ridge and suggest the hot and dry weather in the West early next week will diminish in intensity during the 6-10 day period, temperatures are expected to remain well above normal over most of the western U.S. next week. Widespread highs in the 80s and 90s are generally forecast over the most of western U.S. next week though readings in the 80s are expected to become more common place during the 6-10 day period. Perhaps the biggest changes over North America next week will occur in the Pacific Northeast, where the hot and dry weather early next week is forecast to yield to seasonably cool and damp conditions during the 6-10 day period. Highs may reach into the low 90s in Portland early next week but may struggle to reach 70 degrees by the end of next week.

WSI Storm Update

At 4 PM CT, Hurricane Ike was located about 400 miles ESE of Galveston, Texas. Maximum sustained winds are near 100 mph, making Ike a Category II storm. Movement is West-Northwest at 10 mph.

PATH SUMMARY: The center of Hurricane Ike is forecast to make landfall around Freeport, TX late Friday night/early Saturday as major hurricane (Category III). After landfall...the center of Ike will move northward across portions of southeastern TX during late morning-early afternoon Saturday. Ike will likely still be a hurricane as it moves through southeast TX. Ike will weaken to a tropical storm over northeast TXSaturday night then cross western Arkansas as a depression Sunday morning...finally departing into southeast Missouri Sunday night.

NOTE: Due to Ike's large size and curved path toward the N/NE after landfall... the risk of Tornadoes may be even higher than normal. The primary Tornado risk will cover eastern TX, western portions of LA, southwest and south-central Arkansas.

Conclusion

Natural gas today closed negative as a prices settled closer to the lower end of the price range posted last week at $7.02 with today’s settlement at $7.25 versus the top of the range at $7.70 posted earlier this week. However with a combination of storm threat this weekend along with the supply disruption it implies and short covering should dominate trade heading into the weekend with possible damage assessments carrying the market higher next week as longer-term winter supply reliability may come into play to support values. I anticipate the short term support at $7.0 should psychologically hold up considering the longer-term risk imposed that historically has revealed much higher values to follow the pre-winter low.

Concerning crude oil, this week was surprising only in that values were able to test the $100 benchmark sooner than anticipated especially when traditionally the approach of two major storms threatening the heart of Gulf production would under normal economic circumstances immediately have injected a massive amount of fear premium into the price and thus carrying values upward in the opposite direction. Our prediction last week that OPEC was more likely to cut production was confirmed and much to the chagrin of most analysts who expected them to leave output unchanged. Only Saudi Arabia seems to have hinted by their vague pledge to meet the markets demand adding that that policy has not changed. While this implies a more comprehensive approach as it acknowledges their own assessment that values are currently inflated by the perception of the peak oil theory along with refinery limitations in the US more then any admission that OPEC production was purposely cut back or in any way insufficient thus unnecessarily boosting prices for fear of a lack in supply. However OPEC may very well find themselves virtually ineffective in stopping an eventual and future price collapse from a global recession that ultimately originated from an unhealthy price escalation in such a short period of time to the most critical strategic commodity that directly impacts the growth prospects economically of the entire developed world! Any further perception from here on out of an overly aggressive attempt by OPEC to willfully restrain supplies so as to promote further debilitating price escalations that leave the world more critically vulnerable to the blind side effect such as from natural disasters like hurricanes or terrorist acts against producers, will only result in a more rapid, concerted and efficient effort to attain and manifest alternate energy sources so as to remove the debilitating dependency on petroleum for energy usage. The temporary condition of the rebounding US dollar against the basket of major currencies as the index this week surpassed 80 also continues to underpin the recent collapse to petroleum prices, however it is my strong opinion that this condition that currently benefits the greenback in a perception of flight to quality will be short-lived as the negative pitfalls that are soon to uniquely plague the US economy will render the safe haven to be a false one. Certainly when you begin to ascertain the economic impact of how deep the sub-prime crisis will penetrate the US financial foundation when the commercial real estate market begins to crumble taking all the investment bank spin-off derivative and collateralized debt based investments down with it, the meltdown and economic collapse that begins to loom large will hardly attract investment capital or renew any confidence to an already fragile structure as it is. When you also add in the promise of future debts incurred from both wars being waged in Iraq and Afghanistan that are unique obligations only to the US and then weigh in the fact that the United States is already the largest debtor nation in the developed world owing billions to the likes of China, Russia, Japan, and the European Union just to name a few, one begins to wonder how the greenback managed to rise so dramatically recently whereby the euro actually fell below the 140 mark today after recently hitting a high of 160! Certainly when one begins to compute the devaluating affect of the feds recent decision to bail out the two largest mortgage providers, Fannie Mae and Freddie Mac, along with the potential of their services spreading out to provide monetary assistance for investment interests such as Lehman Brothers and possibly the big three automakers in the future, which can only be facilitated by printing more currency as the treasury is already empty and in debt to several nations, it is virtually impossible to create a scenario where the long-term prospects for the value of the US currency is an upward appreciation! When the reality of these economic conditions relates into another greenback collapse many of the traditional commodities such as petroleum, precious metals, and even the grains will quickly return as hedge fund and institutional investment targets because the prospect of securities and stocks are far from attractive in a recessionary environment. While the current momentum certainly seems upward for the US dollar and thus conversely negative for petroleum, I don’t subscribe yet to the sudden collapse in the price of oil down to the $80 benchmark upon the first penetration below the $100 psychological support. In fact it seems more economically balanced to anticipate a rebound from intermediate support at $96 that could easily see values retest $108 per barrel before falling significantly lower than the $100 level prior to that.

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

September 11th, 2008

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

Back to top