Consensus Report: September 27, 2007

Petroleum Closes at New High above $82 for November Spot Following Bearish EIA Update, on Storm Fear Hype, and Technically Overbought, Putting the Market in a Precarious Elevation, Vulnerable to a Sharp Correction, while Natural Gas Retreats further on Heavy Supply, technical weakness and Storm’s Fading.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead technical signals suggest a more negative composition whereby we anticipate a test soon of new lows within the range of $5.80 with a likely breach of this level leading possibly to a more critical test at $5.50, and that only a sudden rebound taking the market back up to close above pivotal resistance at $6.40 could return the market to positive action and a resumption of the short term up trend. This is exactly what transpired as the October spot contract penetrated our targeted support level at $5.80 and tested an intraday low of $5.72 before rebounding this past Friday which ultimately led to the close back above key resistance to settle at $6.42 upon contract expiration yesterday. Looking ahead now to correlate price targets with the new spot November contract which being the first winter month carries an obvious whether premium, the values have also declined recently from weekly highs leaving the market in a generally bearish composition. Most indicators such as the linear oscillator, stochastics, the MACD, relative strength, and others, suggest further weakness ahead whereby we anticipate a test soon of minor support at $6.80 with a possible challenge to more critical support at the previous key low of $6.70 that if broken could lead to a rapid decline to a more defensive value between $6.40 and $6.50 per million BTU. In order to stage a bullish reversal the market would need to rebound resulting in a close back above minor resistance at $7.10 to then stage a challenge to key resistance at $7.40 which currently contains the market from above.

Fundamental Supply Update

This week's EIA report revealed an injection into storage of 74 bcfs that was just slightly higher than previous survey estimates by DowJones and Bloomberg that were running near 73 respectively.  Storage now stands at 3206, which is 37 bcfs less than the supply last year at this time and yet 238 or 8.0% above the five-year average of 2968 bcfs. Although the market experienced a slightly higher than expected withdrawal from storage natural gas still ended with a loss of 12.7 cents close at $6.91 per million British thermal units basis the new spot November contract’s debut. Despite being a weaker close the market made a noticeable rebound from earlier session lows posted at $6.73 which represented a net loss of .30 cents intraday as the market and no doubt felt the effects of sympathy trade as the petroleum market experienced buying with reckless abandon on questionable inspiration that will be discussed in the next section in more detail. Concerning the fundamentals for natural gas, in our opinion today’s weakness is a more logical reaction to this storm hype as there is no credible threat currently posed from any of the existing storm systems being monitored when it comes to the production coast in the northern Gulf. So without any current storm threat, more than adequate existing supply as many feel storage is on track to end the injection season with a new record high supply approaching 3600 bcfs pre-winter, and the market is in the middle of the shoulder month period between September and October when summer demand is winding down along with hurricane season. This convergence of mildly bearish fundamentals all combine to make a path of least resistance for prices lower in our opinion. Realistically outside of some unexpected late-season abnormal heat in the Midwest or the unlikely surprise arrival of the late-season tropical storm in the Gulf, and it should be difficult to justify a sudden surge upward in prices, especially if petroleum values which are now grossly overbought enter a much-needed correction phase. Sympathy trade with the current escalation in petroleum and the resulting elevation of competitive fuels, is the only thing that prevented natural gas from continuing the more extended sell-off that began earlier this session, with the market likely to return and retest those earlier lows posted today later next week.

Concerning crude oil, the market today closed by making history again as it was another new high in the current spot November contract settling near the $83 benchmark as petroleum surged $2.58 for gain of 3.2% to settle at $82.88 per barrel on the New York Mercantile exchange. What was strange about the session was that the media seemed to be scrambling to find a valid fundamental reasoning behind the rally other than a continuation of the strong technical reversals staged yesterday following the intraday low that held up at $78.44 per barrel on the November contract after the EIA released a rather bearish inventory update. Not only did the Department of energy reveal an across-the-board increase to both petroleum and products, but it was also after announcing refinery capacity had slipped again to a six-month low obviously a sign that demand had dampened for petroleum products despite strained refinery output. The actual numbers revealed 1.8 4 million barrels for an increase nationwide leaving supplies totaling 320.6 million barrels which is still 8.5% more than the 5-year average despite being lower than last year while gasoline increased by 0.6 million barrels and distillate fuel inventories also rose by 1.6 million barrels, while the all-important refinery operating capacity dropped to 86.9% and a six-month low. Despite the fact that in the news three major conditions were being heralded as the reason for the remarkable panic buying session, none of them represented any real threat to actual supplies. While some renewed violence had returned to Nigeria, as one oil worker was reported shot to death and another kidnapped, still no supply was impeded. As for the storm threat, while the media kept repeating the triple threat presented from storm system 13 in the Bay of Campeche, a storm system that past through Key West earlier, and finally what was entering serious wind-shear far out in the eastern Atlantic in storm Karen, and yet none of these show any signs of actually threatening oil infrastructure in the northern Gulf! So when you remove from the equation, tropical storm 13 which at best is slated to be a strong tropical storm approaching 55 mph winds according to private forecasters and has already been written off by Pemex, the state owned oil operation in Mexico which is the only oil infrastructure that may possibly lie in the path of the storm, and then this system that passed through the Keys and just below the Florida Panhandle which is not slated for further development and already passed without consequence, and finally the fact that if tropical storm Karen, which is currently at about 970 mi. east of the Windward Islands and being seriously diminished by strong forces of wind-shear that according to the official forecast if it manages to survive would likely become what they call a “fish storm” that poses no threat to any land mass or at best may approach the northern US coastline somewhere near the Carolinas or above, then as far as storm threat to critical oil infrastructure in the Gulf of Mexico you come up empty. While the presence of such storm systems certainly contributes to the anxiety of the short interest in the market, it hardly justifies the rally into extremely overbought territory that took place today. With the removal of the storm threat, to justify the current escalation the media was left with the recent new lows in the value of the US dollar which is being attributed to artificial elevation in commodity values across-the-board, but hardly nothing new, and then of course the current intensification of saber rattling between the United States and Iran after their leader recently addressed the UN in New York with renewed defiance against their current uranium enrichment program, supposedly designed only to provide energy production for civilian use, and again not a new story. This of course stands in direct contrast to the US position that it is clearly an ongoing program for the attainment of nuclear weapons capability and thus warrants further sanctions soon to be decided by the UN Security Council members, which only serves to provide the other had of the conflict which again is an old news story that has yet to interrupt the flow of one barrel of oil, and remains an old stale bullish condition that was priced in oil a long time ago. So in conclusion, when you isolate each fundamental condition that the media supposedly pointed to for justification of today’s robust rally following yesterday’s clearly bearish EIA report, and conditions lack substance with none of them posing any immediate threat to supply, meanwhile inventory levels increased interrupting a multi-week trend of reductions in the midst of a backdrop of a slowing US economy plagued by a housing meltdown and is slated to only get worse whereby warnings of recession are becoming common and can only mean a commensurate slow down in energy demand. This leaves the current escalation in petroleum prices precarious at best in our opinion, and vulnerable to a likely sharp sell-off near term. Remember this market could easily give back five dollars from the current level, returning to minor support at $77.50 and not come anywhere near damaging the current long-term uptrend.

 W. S. I Weather 6-10Day Outlook

While readings may not be quite as warm, even relative normal, as they have been this week, late summer warmth is expected to continue over most of the eastern two-thirds of the country next week. In response, above and much above normal temperatures are forecast over the central and eastern U.S. for the balance of the next week and 6-10 day forecast periods. Widespread highs in the 70s are generally expected to be rule for the northern tier of the country most of next week. Highs in the 80s to near 90 degrees over portions of Texas are generally forecast over the southern tier. The most persistent warmth is anticipated over the Mississippi Valley, lower Midwest, and the Ohio and Tennessee Valleys. Temperatures are not expected to be quite as anomalous or the warmth as persistent over the north-central U.S. and along the Eastern Seaboard. A series of weak cold fronts and a persistent easterly flow off the Atlantic are forecast, respectively, to limit potential warming in both locations. Highs as warm as the low and middle 80s are forecast as far north as the lower Midwest, Ohio Valley, even the Mid-Atlantic States on the warmest days. The southwestern U.S. is also expected to above normal temperatures most of next week. In response, highs in the 80s and 90s are generally anticipated in the Desert Southwest. The remainder of the western U.S. is expected to see cooler than normal readings most of next week due to a persistent West Coast trough. As a result, below and much below anomalies are forecast to grip the West Coast and northern Rockies for the balance of the next week and 6-10 day periods. The most persistent cool weather is anticipated in the Northwest, where daytime highs in the 50s and 60s are generally forecast most of next week. High are forecast to range from 60salong coastal locations of California to the low and middle 80s over inland locations.

Conclusion

Natural gas has recently retreated from new highs in the pricing range as traditionally supplies are still near all-time highs, despite this week remaining below last year’s record level, they remain comfortably 8% above the five-year average and obviously from today’s price move feel little threat from the tropical storm systems that currently pose no immediate threat to Energy infrastructure in the Gulf. Also as stated earlier, the market is being influenced by technical concerns as it has noticeably subsided from overbought status. Looking ahead we feel as the path of least resistance is lower near-term, a test of lower support is anticipated at $6.80 and then potentially $6.70 with a break at this level possibly yielding a rapid test at the more critical value level between $6.40 and $6.50. Look for minor resistance above at $7.10 with a breach of this level leading to a more critical test resulting in a bullish break out at $7.40, that is likely to contain the market near-term unless a wild-card fundamental impacts the market from the weather side such as from a late tropical storm entering the Gulf that actually threatens Energy infrastructure.

Concerning the petroleum complex, this week’s price activity confirmed our last report’s conclusion in which we stated clearly that current conditions despite the markets determination to test higher price levels between $83.50 and possibly the $85 benchmark if a legitimate storm thread had materialized, could not be sustained in our opinion as the current fundamentals did not justify such lofty levels and that we expected a correction at least to return values back to the $78 benchmark which was confirmed by yesterday’s intraday low at $78.44! Despite briefly testing our downside target, the sharp bullish reversal yesterday that led to today’s extended advance seems to me to be too much too fast for the current fundamental situation and thus leaves the market very vulnerable to a more violent and abrupt decline near-term. The current price level is likely to influence OPEC into announcing another output hike of at least 500,000 barrels to head off further price inflation that in conjunction with an already recession bound world consumption leader in the US, poses a real threat to global growth that could lead to a more permanent and dramatic slowdown in energy demand longer-term that could lower values and represents a more costly scenario to the cartel’s income in the future. As we stated last week, traders should be aware of the risk of being the last to buy into a market that may very well be experiencing the final stage of an exhaust move up, especially when the fundamentals quoted are all existing conditions that are already known and some that are soon to be faded out, such as the storm threat. Certainly supportive conditions to the uptrend such as the weakening dollar, storm season, supply reductions which was reversed this week, are all either well priced in, precarious, or soon to expire. Meanwhile the opposing threat to the uptrend in contrast, becomes more ominous on a weekly basis as revelations of the slowing US economy continue flowing from a badly wounded housing market that is hemorrhaging promises of the deeper recession yet to unfold and a resulting slow down in demand for not only Energy, but consumption in general across-the-board. You cannot escape the reality that in an economy that is 70% driven by the consumer, there will be negative consequences when you devalue his main asset, that being his home! Let’s not forget when the perception that the approaching subprime market meltdown was leading to a more extended economic slowdown that contributed to a 10% drop in the US stock market between July 19 and August 17 when the Dow Jones plunged from its existing all-time high of 14,000 down to 12,600, the price of crude oil commensurately shed $10 a barrel from the then existing all-time high of $78 per barrel down to $68 in about half the time! The only difference now is the crude oil market is at a higher level and the US economy has now received more evidence that it’s headed into a serious threat of recession, despite the late efforts of the fed to cut interest rates which cannot bail out the current foreclosures as well as the thousands pending, and obviously the stock market is still temporarily suspended by disbelief and yet to react. Once this perception becomes more manifest, the crude oil market in our opinion, especially in conjunction with a likely addition of another OPEC output hike, could easily go into a more extended decline of $8-$10 per barrel, eclipsed in a matter of days, and yet this may be following a short term upward thrust to the $85 benchmark before hand! Remember technically this market is short term extremely overbought, and fund managers will be quick to head to the exits if they feel perceptions have changed, and to lock-in profits quickly, the result can be a drop that is as quick or more rapid than the rise.

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

September 13, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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