Consensus Report: November 15, 2007

Petroleum Retests Recent Lower Range after EIA Supply Increase, Yet Rebounds sharply into the Close on Continued Demand concerns of Winter, Overseas Tension, Weak Dollar, and Opec Defiance, while Natural Gas fell back following first Cold Season Reduction and Milder Weather expected next week.

Natural Gas and Oil

Technical Outlook: Since our last report we said looking ahead technical analysis revealed a mixed picture with several indicators declaring the market grossly oversold such as stochastics, momentum, and relative strength, and yet longer-term indicators such as the linear oscillator and the MACD, suggests a rather wide negative divergence still exists pointing to further downward movement ahead. With this configuration we anticipated a strong probability for recent low’s at $7.50 with a significant possibility for the market to break down further. We also said to look for follow-through upside movement from the recent minor key reversal that resulted in an upside move of over $.24 from low to high to be contained under resistance above at $7.80 that if breached on close should then invite stronger rejection forces from above this level at $7.92. We had expected this level to contain the market near term until something more significant developed fundamentally which surprisingly the market exceeded by a brief yet noticeable margin on volatility until falling back below our resistance band today by over $.20 cents to settle at $7.70. Looking ahead the market continues to exhibit mixed signals with stochastic and momentum in oversold territory yet still predicting further downside movement, meanwhile the linear oscillator as well as the MACD and parabolic continue to display a wide negative divergence and so overall the market is still technically bearish. Thus from this configuration we continue to feel the process of taking the market lower to test last week’s intraday critical support at $7.50 per million BTU should be tested near term with a possible break down further into the lower range of between $7.25 and possibly even $7.10 before longer-term value based winter buyers step in more aggressively to stem the decline. However, if the weather fundamentals shift the tide to a more bullish scenario, look for minor resistance above at $7.80 to be broken again with a more pivotal test above this at $7.92 possibly carrying the market rapidly to retest recent highs just above the $8.0 benchmark.

Fundamental Supply Update

This week's EIA report revealed the first winter reduction albeit by only a modest 9 bcfs that was basically in-line with previous survey estimates by DowJones and Bloomberg that were running near 8 respectively.  Storage now stands at 3536, which is 87bcfs above last year’s record high and now 273 or 8.4% above the five-year average of 3263 bcfs. After the market experienced the expected injection prices quickly subsided near session lows between $7.65 and where they ultimately settled at $7.70 on the fact that storage is now at all-time record highs approaching winter with longer-term forecasts from NOAA and others calling for a warmer than normal start to winter in extending deeper into February that characterizes typical “LaNina conditions” that could bring noticeably higher temperatures or milder conditions to the early part of winter that could easily pre-stage a noticeable decline in natural gas values. However, it is noteworthy to mention that W. S. I. as well as other forecasters are predicting a potentially much colder scenario could impact the Upper Midwest and parts of the Northeast in the latter part of the 6-10 day period extending deeper into the 11-15 daytime frame that could support a short-term rally beginning midweek. Another supporter factor of course is the fact that petroleum values managed to rebound from lower support today which in sympathy provides indirect support as well as enhances the potential demand on natural gas as an alternate winter fuel especially in the utility power production market who will no doubt find current fuel pricing at stifling record highs. Let me also state that WS I has also indicated the colder scenario possibly impacting a more eastward shift as the trough containing the colder Canadian air mass is expected to move eastward may be short-lived and only provide a couple of colder days in the major consuming Upper Midwest and Northeast. If the colder air that arrives to these regions is that brief it will hardly provide much support to natural gas values as they feel the weight of all-time record high storage, which if this transpires could easily yield a penetration of last week’s lows and beyond taking out $7.50 with a vacuum resulting in an immediate test of $7.25 and even lower perhaps!

Concerning crude oil, the market today again closed down after the EIA released a surprising report declaring crude stocks had unexpectedly increased by 2.8 million barrels temporarily disappointing earlier expectations of a drop in supplies that varied between 0.7 and 0.9 million barrels and yet supply still remains at the lowest level since November of 2005. This temporary negative that leaves ending stocks at 314.7 million for the week ending November 9 also converged with a slight negative of gasoline stocks increasing by 700,000 barrels to total 195 million and yet remain at the lower end of the range, the bearishness of these to supply increases was somewhat mitigated by a larger than expected decrease in distillate fuel inventories of 2.0 million barrels leaving the fuel in the upper half of the average range for this time of year. Refinery’s edged out to 87.7% of operating capacity last week. Gasoline production remained unchanged over the previous week averaging nearly 8.9 million barrels per day while distillate fuel production rose averaging 4.2 million barrels per day. Product demand remains steady yet unimpressive with slight increases reported for gasoline and distillate consumption rates declaring a premium of 0.6 and 0.5% over the same period last year respectively. When one considers the lower than typical operational capacity despite many refineries returning to stronger production following maintenance schedules and the fact that production was unchanged to slightly higher for the products and yet demand was adequately covered with increases cited especially with higher than expected imports, the demand side of the equation is lacking the fundamental substance to justify the recent elevation in prices. This is why we believe the market failed this week following the December options expiration to reach the over-publicized $100 benchmark and instead after falling short of the mark by less than $2.0 from the electronic access highs of $98.62 per barrel prices quickly retreated all the way back to test and $90 benchmark earlier this week and even after today’s noticeable rebound from the low as remain in the lower half of the price range of the past two weeks. Crude oil base is spot December which expires tomorrow settled at $93.43 per barrel for a loss of $.66 after being down in excess of $2.0 at earlier session lows posted in the morning. We feel support for both petroleum and the products came later in the session as traders return focus on OPEC’s decision to disregard recent appeals from US Energy Secretary Samuel Bodman to boost output at their recent heads of state summit in Riyadh this weekend. They instead reiterated earlier contentions that the recent escalation in crude oil pricing was far from their fault our responsibility as a matter of output but rather attributable more to speculative fever over proposed threats to oil supplies from geopolitical concerns worldwide as well as the ongoing refinery restrictions within the US according to OPEC Secretary General Abdullah Al Badri. This leaves traders looking for a bearish scenario forced to delay the expectations for an additional output increase from the cartel to be announced not until their next summit meeting on December 5. Further support to the recent uptrend is provided by the unknown threat of this year’s winter cold in the northeastern US as heating oil supplies are significantly lower than last year, however recent longer-term and yet unreliable historically, early winter forecasts suggest milder temperatures ahead which provides some challenge to the bullish scenario. Looking ahead as stated earlier in past reports, and clearly in more detail in last week’s outlook, the largest threat to the recent price exaggeration in crude oil remains the looming  slowdown and ultimate recession that is on a collision course with the US economy. The Dow Jones industrial average suffered another triple digit loss of 120.96 points or 0.9% to settle at 13,110.05 as the market reeled from news that Wells Fargo, the second-largest US mortgage lender, dropped after saying home-equity losses will remain elevated through 2008. Fannie Mae also tumbled to a two-year low following news that Fortune said the biggest source of money for US mortgage is changed the way it accounts for bad loans. The big retailer JCPenney also declined to the lowest since 2005 after the third biggest department store chain reported a smaller profit and cut its earnings forecast. This of course follows earlier woes declared by the country’s leader in retail mortgages, Countrywide whose credit rating now approaches the brink of junk status seriously undermining the company’s future solvency and instead making it’s survival likely predicated upon a government bailout or rival takeover. Clearly the fallout from the subprime mortgage meltdown has pushed financial shares down 17% this year and obviously far exceeding the detrimental impact on the economy way beyond anything predicted by economists last year that either under estimated the potential damage or were paid by the media to sugarcoat and shield the long-term negative effects from public view. These feeble attempts to hide the harsh reality from the very public that this subprime debacle now threatens to victimize have recently been exposed to the point whereby all those TV economic evangelists that as early as within the last six months up to a year defied violently the potential threat obviously posed to the consumer and thus the nation’s GDP by the now common household nemesis “Subprime”, making their hollow predictions suspect, conspiring or just ignorant at best. When one looks at the financial new stations recently where all the Wall Street pundits continue to herald the recent new highs attained this year in the Dow Jones and S&P 500 indexes as the declaration that the general economy is healthy and thus is indicative of a bright financial future for all whereas in truth the vast majority of the working class especially encompassing from the ever shrinking middle-class on down does not even participate in the stock market with any substantial amount of money of any consequence, is not only an insult, but has elevated the hypocrisy of the wealthier minority of stockholders including the corporate media to the point of disgusting the general public. This is also being revealed in a recent slump in the consumer confidence survey. Eventually just as we as stated in past reports, the country’s growth or GDP which is 70% weighted by the consumer cannot escape the detrimental effect upon that consumer when his home and main asset value easy either taken from him or potentially devalued anywhere from 10% to as high as 30% expected and already experienced in some areas of the country as the foreclosure rate has already accelerated in 45 of the 50 states! This impending economic implosion as the Joint Economic Committee of Congress recently warned that another 2 million homeowners are expected to enter foreclosure over the next 18 months and thus doubling the amount of homeowners that are already behind on their mortgage payments, as the amount of adjustable-rate mortgages that will be ratcheted up too much higher current levels of interest rate charged when compared to their lower initiation points over the next several quarters, the negativity of which will be felt in lower purchasing power for necessities including commodities and consumables across-the-board. Gasoline and thus petroleum will also feel the impact of this major economic downturn. Recent declines recorded in energy giants such as Exxon Mobil whose stock recently reached the lowest level since August with stock values dropping for Chevron and others seeming to anticipate the inevitability of a potential massive correction to the recent meteoric price escalation in petroleum to near the $100 benchmark.

 W. S. I Weather 6-10Day Outlook

Focus of the cold weather to shift into the western U.S. late next week

Summary

Changeable conditions are forecast to characterize the weather over most of the continental U.S. next week, as most of the country is expected to see seasonably warm and seasonably cold readings at some point. The biggest changes are anticipated over the western U.S., where the coldest temperatures of the season-to-date are expected arrive during the 6-10 day period. As the focus of the troughing and cold weather that have been centered over the eastern half of the country in early November retrograde into the western and central U.S., below and much normal temperatures are forecast to overspread most locations west of the Front Range near the middle of next week. In response, widespread highs in the 60s, 70s, and 80s over California and the southwestern U.S. early next week forecast to fall back into the 50s and 60s during the 6-10 day period. Highs in the 30s and 40s are forecast to become common place over most of the interior western U.S. As the western trough swings east of the Front Range late next week, the focus of the cold weather is expected to shift to the Plains and Mississippi Valley. Widespread highs in the 20s and 30s are forecast to overspread the Midwest and North-Central U.S. on the coldest days late next week. Highs in the 50s and 60s are anticipated over Texas and the South-Central U.S. After a brief warm-up late next week, seasonably cool readings expected to redevelop over the eastern U.S. as the central trough swings east of the Mississippi Valley. However, the cold air over the central U.S. is expected to modify significantly by the time it reaches Eastern Seaboard. As a result, daytime highs are only forecast to fall back into the 40s and 50s in the Northeast next weekend after briefly rising into the 50s and 60s late next week. Highs in the 50s and 60s are expected to return to the Southeastern U.S.

Conclusion

Natural gas has recently retreated from its brief foray above the $8.0 benchmark earlier this week as record heavy storage and the disappointment of milder weather to start this winter season along with other forecasts of above normal temperatures extending deeper into midwinter has contributed to the recent and yet rather shallow decline. This time of year old man winter and the degree of which the arctic intrusions from Canada penetrate into the key consuming regions of the Upper Midwest, Southern Plains of Texas, and of course the Northeast, which is also predicated upon the prevalence of an Eastern Trough provided by the oscillation of the jetstream and thus the frequency at which it delivers these cold air masses into the key consuming regions ultimately determines price direction and volatility. Many unknowns remain this early at the inception of winter but one thing is known in that season is beginning with the highest level of supply on record. This scenario should make price corrections sharp and deep on any break in cold air consistency and weather disappointment with only brief support circumventing this from sympathy trade and higher petroleum values which may be short-lived as they also become somewhat codependent on weather conditions especially in the northeastern US. Until then over the short term we anticipate values to remain overall below the $8.0 benchmark unless the colder air anticipated briefly late next week is more sustained and if not we see values easily returning to this week’s lows at $7.50 and below.

Concerning the petroleum complex, this week’s price activity, is beginning to exhibit some of the price fatigue that we mentioned in last week’s conclusion as we clearly stated that without the assistance of a new headline in the form of some type of threat to a major producer or extremely cold weather arriving in the Northeastern US, that the $100 benchmark would likely not be reached in the short term much less surpassed or sustained. Another contributing factor that is beginning to lend itself to quieting some of the over-exuberant bulls eagerly pushing for a breach of the key benchmark is the fact that stocks have now renewed their zest for selling as the credit crunch and bank related write-downs from debts incurred to exposure to subprime mortgage derivatives and investments as well as foreclosures as this stock indices melt down only portends selling in other markets including commodities as well as the recent $10 per barrel decline that culminated this past August graphically illustrated! It is our contention that when the world’s top petroleum consumer, the United States enters a more protracted economic slowdown that financial gurus even of the highest optimistic order will have to label as nothing less than a full-blown recession, it will not only cause a chain reaction of weaker demand for oil that will spread worldwide in today’s global economy, but the resulting decline will not be circumvented by the popular supports of the uptrend that are currently relied upon such as the weaker dollar, Asian demand, or even Iran’s nuclear campaign which has yet to interrupt the flow of any oil, as these headlines will have become stale and will quickly fade from view as the US recession becomes the main headliner! Now obviously these previously stated supportive conditions will return to eventually bring buyers back into the market, but that may not materialize until after the fear an initial shock of what could transpire as a correction of at least $10-$15 per barrel possibly taking the market back to between 78 and $80 per barrel culminates, and just like in August this could materialize in a matter of days not weeks! When will this take place is of course the Paramount issue at hand and anyone of a number of key disappointments could trigger such a decline especially as the market is beginning to show technical fatigue and traders begin to lose patience as the market’s upward acceleration begins to slow. These trigger points could very anywhere from an abnormally mild winter seriously mitigating the fears implied from a potential heating oil shortage, a sudden peaceful settlement of the Iran nuclear conflict which at this point is an extreme long shot and almost impossible at least during the remainder of the Bush administration, or as mentioned earlier strong evidence that the US recession is now closing its grip on the US economy. So buyers beware and exercise caution as it could be very painful to be the last buyer attempting to elevate the market’s price over a benchmark that current fundamentals may have a hard time sustaining especially if the underlying power to purchase the commodity is being drained by the debilitating economics of the high price of the same! Remember, sometimes the ultimate solution to higher prices is yet higher prices. Until then, looking ahead, we continue to see a near-term endeavor to once again test recent highs at the $98 per barrel resistance level which unless the near-term weather in the Northeast turns viciously cold or some other international wildcard blindsides the market with a new threat outside of Nigeria or northern Iraq, we see attempts to reach this level quite possibly failing at somewhere between 95 and $96 per barrel with values likely turning Southward for a return test of recent lows at the $90 benchmark and quite possibly bringing a new low in the range at $88 with a potential further washout down to $85 per barrel.

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

November 15, 2007

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd, Suite 311
Hollywood, Florida 33020

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