Natual Gas and Oil Report

Energies Rebound Declaring the Post Wilma Correction Maybe Over as Selling Reverses, Except for Natural Gas, Still in the Grips of Technical Weakness

Technical Outlook: In our last report dated October 20th, two weeks ago due to the interruption of power failure from hurricane Wilma, we forecasted an extended sell-off that would bring new lows under $12 .70 resulting in a challenge to $12 .20 with a potential deeper decline to test $11.50 before longer-term Bull forces reemerge to support the market. We predicted, these specific targets to be hit based on the overall bearish technical picture and our Outlook was confirmed almost to the penny with yesterdays’ low posted at $11 .49! Looking ahead, technical indicators remain weak with a strong negative divergence still lingering in momentum, the MACD, stochastics, along with continued negativity in relative strength, moving averages, the parabolic as well as several oscillators all of which, however, are approaching grossly oversold levels. It is our view that residual selling from the current momentum initiated by the sharp decline that began seven sessions ago from the $14 .50+ peak, will likely bring a test to the $11.25-11.00 level, and possibly a potential deeper probe to fill in the gap at $10 .87 basis the spot December contract. However, with most technical indicators, already showing oversold warnings, we urge caution to those playing the short side of the market as the reward for holding such a position is rapidly diminishing in our opinion. We feel the market is close to completing an important correction phase, which usually precedes a dramatic and formidable rally. Under the current pattern we see the strong likelihood of this weeks rapid decline reversing soon from new lows into a sharp short covering the value based advance, forming a short term V-bottom on the chart. Should the $11 –$11 .25 level support hold, leaving the gap down to $10 .87 intact, and thus maintaining a breakaway gap, this would be a sign of strength in our opinion, resulting in a more powerful and sustained rally to follow. We expect the remaining weakness in the market, to be short-lived with attempts to post new lows likely to be realized within the next 2-3 sessions as the groundswell of buying from Bull forces is building up beneath the market and growing impatient. Look for confirmation of the short term correction to be over with a break back above the pivot price at $11 .98 to be quickly followed by a close over $12 .20. A failure and reversal from either of these two price points would return the market to a bearish lower basing support search.

Fundamental Supply Update.

Today, the EIA reported an injection of 29 bcfs that was slightly below both estimates by Bloomberg and Dow Jones of 32bcfs, respectively. It was also just above our company call for an injection of 22-27 bcfs. This however, failed to ignite any robust buying of any consequence as the news was quickly overshadowed by the mild temperature outlook for the Eastern two thirds of the country, along with the MMS update that showed Natural Gas had a noticeable improvement in production recovery to 47.27% in the Gulf and the first break under 50+ percent in the past two weeks. Storage now stands at 3168 bcfs as of October 28, which is 119 bcfs less than last year at this time, and yet 79 bcfs above the five-year average of 3089 bcfs. Despite the injection season now being officially over, it is expected storage may experience some additional injections in the weeks ahead due to the mild start to the winter in early November. While this would seem to continue to weigh on prices, it is our view that much of this early November weather has been priced in with the recent three dollar collapse in the market over the past seven sessions. This puts trader’s focus firmly on the horizon as to winter temperatures in the second half of November, along with gauging the production recovery rate in the Gulf of Mexico and the commensurate demand destruction from the region. This obviously puts a heavy emphasis on when and to what degree “Old Man Winter” shows his face in the weeks ahead as to price direction, and the continuation of the Bull trend. With past history suggesting that winters that follow an active tropical storm season are typically colder than normal, especially in the Northeast, then this weeks’ decline may end up only providing a brief and temporary respite from this year’s unprecedented “Bull Run”. Logic only dictates at least to expect a high probability for some frigid conditions then following the “most Active storm season on record!”

Concerning Crude Oil, there was little headline News to influence prices outside of the surprisingly mild weather, lingering storm disappointment, and the weekly EIA data. None of these factors, posed any major price implications, and thus did little to interrupt the corrective phase. The petroleum complex, led by the products experienced new Multi-month lows posted yesterday after subdued and largely anticipated weekly inventory figures amidst expected demand. Yesterday, the EIA reported crude oil stocks that increased by 2.7 million barrels from the previous week, bringing the total to 319.1 million barrels and well above the upper end of the average range for this time of year. Total motor gasoline inventories rose by 1.0 million barrels last week, leaving them in the lower half of the average range, while distillate fuel inventories inched lower by 0.2 million barrels last week, and now remain just above the lower end of the average range. What seemed to spark a rather robust price reversal from early weakness today was the continuation of the technical rebound that began yesterday as the market held above important price supports at $58 .75 and $59 .25 on close, combined with the short covering following the expected announcement of a noticeable improvement to the production recovery in the Gulf. Production is now reported by the MMS to be 790, 610 bopd or 52.71% of daily oil production in the GOM, bringing the total cumulative output shut in year-to-date to 77,413,102 bbls, which represents 14.139% of the total yearly output in the Gulf and is a sharp recovery over yesterdays’ status. Let’s take a closer look at the weather forecast with W. S. I over the next 6-10 days as the implications of potential shifts in the degree of cold in the weeks ahead are critical to the value of the winter fuels that lead the energy complex...

W. S. I Energycast November 9-13.

Summary
Unseasonably warm temperatures are expected to continue over most of eastern two-thirds again next week. Daytime highs in the 60s and 70s are forecast as far north as the Midwest and Ohio Valley. Highs in the 70s and low 80s will encompass the south-central and southeastern U.S. Anomalies are expected to average between 4-10 degrees above normal over the south-central U.S. and Midwest for the balance of the 6-10 day period. Confidence in the 6-10 day forecast is considerably lower for the Northeast based on the notable model differences.

European models depict a brief warm-up over the region where as American/GFS models indicate the warm will be more persistent. For now, a preference is placed in the European models for the 6-10 day period as the Canadian models and Navy ensemble model both depict at least weak troughing overspreading the region. More seasonable temperatures are now forecast over most locations west of the Front Range during the 6-10 day period. Troughing and cool weather early next week will be replaced by ridging and warm weather late in period. As a result, highs in the 60s and 70s will encompass the Intermountain West and most of California next week. Highs in the 70s and 80s will prevail in the Southwest though the forecast for the Southwest is not quite as warm as previously expected.

Conclusion.

Natural Gas is near the end of a short-term price correction in our opinion, that has culminated from the unique combination of bearish technicals, along with short-term bearish fundamentals, resulting in the steepest and most dramatic price correction of the year within a short period of time. This week’s drop to below $12 pmbtu confirmed our technical outlook quoted in the November 1st issue of the Wall Street Journal. We feel this will soon provide an overpowering magnet attracting a massive amount of sidelined capital in the hands of managers of commodity funds and hedge funds that will find the largest correction of the year in the most volatile market of the energy complex just before the impact of the strongest demand cycle is felt to be too tempting to ignore! We still see some lingering residual selling from the recent decline moving values down further, possibly to new lows for a test of $11.25-11.00 and there is an outside chance for a short-term thrust down to fill the gap at $10 .87 if the above normal temperatures persist deeper into the second half of November. In the event, however that a cold front, should enter the picture in either the Northeast or the Midwest, or both, values will quickly rebound from these lows and immediately threaten resistance points above at $12 .20, $12 .70 and then $13 .50 and possibly within the same day. On technical concerns alone values could easily rebound to test $12.20 resistance from these stated lows.

Concerning Crude Oil, we see little regard for OPEC’s recent claims of their excess capacity of about 2 million barrels, being more than adequate to compensate for any demand requirements that may materialize this winter. Their forecast for prices to subside to the $45-$55 per barrel level in the first quarter of next year seems to draw similar skepticism. What seems to be much more obvious, and in many ways more ominous is Crude Oil’s stubborn ability to maintain a level above $60 per barrel overall during a period in the year of typical weakness. This could later translate into a powerful show of strength, as if to awaken a sleeping giant as crude quietly watches Heating Oil and its reaction to a rather lethargic beginning to winter. You can’t help but feel that like a snake recoiling, poised waiting to strike, the oil market is just hovering here at this elevated level above $60 looking for signs of a strong demand winter, so as to justify another break out to challenge recent highs. Certainly with over 50% of Gulf production still shuttered in and recent Chinese demand figures ramped up from 3.7% in August to 6.3% in September, with current imports and refinery run levels, implying further growth acceleration in October and November in the same report mentioned in the November 1st issue of the Financial Times, and we see the dye is cast for continued strong global demand in the fourth quarter. Add to this the threat of strikes at Shell’s Rotterdam refinery, the biggest in Europe, along with continued civil unrest in the production areas of the Niger Delta, and the ongoing instability in Iraq, Saudi Arabia and the Middle East in general, and we see too many bullish possibilities for aggressive sellers to find comfort in shorting the market beneath $60 per barrel. Given this current global geopolitical tension, and we continue to expect crude prices to hold support above $58 .10 on a closing basis over the near term, unless a significant bearish fundamental factor suddenly emerges from an economic standpoint in the way of demand destruction from elevated prices and or economic slowdown from the same, or an unexpected sustaining of mild temperatures in the East persisting into December, or a combination of both. However, we feel, neither of these conditions will be able to compete with a sudden turn to below normal temperatures in high consumption regions of the country, which is already expected in January and may very well appear in December. As for the uptrend look for a challenge to $62.90 resistance near term, with a close above this leading to $64.25. Overall, we see the short term technical picture for Crude to be more constructive than that for Natural Gas, Thus today’s sharp advance as opposed to the subdued settlement for gas.

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

Novemeber 3, 2005

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744

September 1, 2005