Petroleum breaks out from Bull-flag pattern on Support from EIA update and Assassination in Pakistan

enhanced by thinner Trade, while Natural Gas remains in Bearish range from record storage and changeable Weather pattern.

Technical Outlook: Since our last report we said looking ahead, now the market was exhibiting mixed signals with lower basing bearish trade dominating market behavior as stochastics remained generally in oversold territory however, were already beginning to turn negative following the recent modest upswing. Meanwhile, longer-term indicators such as the linear oscillator and the MACD, while maintaining a small bullish divergence, were also beginning to turn whereas the parabolic and short-term momentum indicators suggest weakness ahead. Under this current configuration we anticipated a near-term second attempt for spot January futures to revisit minor upside resistance at $7.25 was likely to fail in either reaching or surpassing this level with the subsequent short interest that was likely induced would then return values to retest recent support levels at $7.02 and then $6.95 with a likely break down below the weekly pivot support at $6.92 for probable test of new lows at $6.80 and possibly within the next 3-5 sessions. This exactly what transpired as the spot January futures, having failed earlier to breach the $7.25 resistance level broke down decisively today upon expiration, breaking each and every one of our declared previous support levels and then came exactly within three cents of testing our target at $6.80 with the intraday low holding at $6.83 before rebounding sharply into the close and actually settling in positive territory. Looking ahead now with the debut of the new February spot, the commensurate support level fell in at exactly $6.95, and then settled sharply higher at $7.20 per million BTU, however, we attribute most of this upside reversal to expiration related short covering and yet the technical outlook still remains somewhat bearish. While gradually some bottoming action is being exhibited in the configuration of stochastics, the linear oscillator and the MACD, however the parabolic, relative strength, and other indicators suggest a core of weakness remains. Look for the February futures to remain near term contained by $7.40 on the upside with a possible revisit to today’s lows near-term and a potential break to new lows established by the January futures near $6.80.

This week's EIA report will be delayed until tomorrow at 10:30 a.m. due to the Christmas holiday and so currently storage remains at 3173, which is 4 bcfs above last year’s record high and now 266 or 9.2% above the five-year average of 2907 bcfs. Winter weather will continue to be the main catalyst for price direction over the near-term with some sympathy to crude oil trading running a distant second. With current gas in storage and such a hefty premium above the five-year average it will take either a new lower price base to be reached and a new weather threat of unexpected colder than normal temperatures forecast to arrive in the key consuming Midwest and Northeast for at least a sustained time period of at least two weeks or both to ignite a significant price break up and out of the recent bearish range. Until then the current fundamentals are likely to keep price action somewhat subdued with upside resistance between $7.40 and $7.50 likely to cap advance attempts whereas the market will be quick to return to press the lower end of the range on any news of subsiding weather demand.

Concerning crude oil, the market today closed up $.65, or 0.7% to settle at $96.62 per barrel after the EIA reported US inventories dropped for a fifth straight week and by a larger margin than expected. Wednesday the report showed crude stocks had fallen by 3.3 million barrels to settle at 293.6 million barrels and the lowest level in almost three years since February 2005 as previous estimates had anticipated a drop averaging between 1.8 and 2 million barrels. The product side of the report was also bullish as distillate fuel stocks dropped by a more than anticipated 2.8 million barrels leaving supplies well below average for this time of year and also gasoline despite increasing, it was by a smaller than expected 700,000 barrels and also remains well below typical averages for this time of year. Refinery capacity inched higher by a modest .3% to 88.1%, and obviously not portending much in the way of product supply relief to come further exposing how dependent the world’s top consumer is on imports to satisfy its voracious appetite for energy. Quickly complementing today’s EIA report that indicates longer-term bullish implications, the market also reacted to the sudden impact of an indirect bullish wildcard in his Pakistani opposition leader Benazir Bhutto was assassinated after a suicide bombing also killed 20 others during a political rallying in Rawalpindi. While Pakistan is not a significant oil producer, the fact that they are a nuclear power and that most of the terrorist régimes such as the likes of the Taliban and Al Qaeda, who derive most of their revenue from petroleum producers holds bullish implications for petroleum as they are known to have strongholds and much of their operations are believed to be centered from within the country. While this may have provided some psychological price support most of the action was centered upon the continuing bullish supply demand revelations of the EIA update with the international tension requiring further deliberations as the precarious and dangerously volatile situation in Pakistan unravels. This was also evident from the strong profit-taking that took place near the end of the session as prices gave up over a dollar per barrel from the intraday high of $97.79 in electronic trading. The only slight negative that came in the supply report was the fact that crude inventories in Cushing Oklahoma, the delivery point for oil traded on the Nymex, rose 46 straight week increasing by 100,000 barrels to total now 17.5 million. Another international situation that contributed to crude oils sharp and almost vertical advance this week that deserves attention is the fact that the Turkish government has begun military incursions involving air-strikes into northern Iraq against their enemies the Kurds.

Changeable temperatures and mainly dry conditions are expected to characterize the weather over most of the country next week, as all models advertise the focus of the ridging and warm weather that has gripped the central and eastern U.S. in late December will briefly shift into the western U.S. A deepening eastern trough is forecast to bring a brief period of below and much and below normal temperatures to eastern two-thirds of the country. The coldest temperatures over the central and eastern U.S. are expected during the next Tuesday through next

Friday time period. Highs in the teens and 20s are forecast over the north-central U.S. on the coldest days next week. Highs in the 20s and 30s are anticipated over in the Northeast. The coldest anomalies though are forecast over Texas and the southeastern U.S., where daytime highs as cold as 10-15 degrees below normal are expected for a 2-3 day period near the middle of next week. These anomalies suggest daytime highs will struggle to climb out of the 40s and 50s over the southeastern U.S. on the coldest days next week. Subfreezing overnight lows are possible as far south as the Gulf Coast and interior portions of Florida on the coldest mornings. Meanwhile, the warmest temperatures over the western U.S. next week are also expected to during the Tuesday through Thursday time period, when highs in the 60s and low 70s are forecast to become more commonplace over interior California and the southwestern U.S. Highs ranging from the 30s to the 50s are anticipated over the northwestern and interior western U.S.

Natural gas has staged a short-term rebound today from its brief foray down to below the key psychological $7.0 benchmark establishing new lows and coming within three cents of the key $6.80 support level basis the spot January futures at expiration. The new debut of the February spot futures followed its predecessor with a similar rebound from lows and short covered on the close to settle at $7.20. However we continue to see a rather bearish scenario remains between a rather negative chart pattern complementing a lackluster weather Outlook that despite suffering short term frigid brief outbreaks from the North, it lacks the sustained demand required to take a more substantial bite out of the 9.2% surplus that exists above the five-year average in supply in order to ignite an upward surge in values. So in our opinion unless a more severe winter blasts arrives on the horizon that can provide a more persistent elevation in demand in a higher consumption regions of the Midwest and Northeast we anticipate values to remain contained within the same parameters established recently between $6.80 on the downside and $7.50 on the upside over the near term.

Concerning the petroleum complex, this week’s price activity, has confirmed almost exactly the forecast on price action that we gave in last week’s report as we predicted a breakout to the upside from the bull flag pattern that formed over the previous two weeks and that this could easily bring the market the test upside resistance at the $95 benchmark. With the current bullish chart pattern indicating from the linear oscillator, the MACD, the parabolic and other technicals signaling a bullish pattern currently complementing the sudden increase to international tension in Pakistan along with renewed violence in northern Iraq between Turkey and the Kurds and conditions are certainly conducive to another assault at recent highs near the $100 benchmark currently established at $99.29 per barrel posted back in November! Of course as a backdrop of support the usual suspects in Nigeria, Iran, and Venezuela are always lurking just outside the headlines as potential hotspots that could suddenly interrupted taking center stage and igniting petroleum upwards to new uncomfortable history making highs! Once again to reiterate as we have stated in many past reports the only potential and still a major threat to the multiyear bull market in petroleum is the looming approach of a US lead recession that seems to gain momentum slowly but gradually on a weekly basis as the recent data showing in the 10 major cities the largest decrease in average home values ranging from 7% to over 12% year on year. This deserves continuous monitoring as one day soon when the recession becomes prevalent and undeniable the following slowdown from the consumer will no doubt take its toll not only upon petroleum, but also in quelling the demand for consumables and financials and especially stocks across the board yielding a noticeable and possibly shocking price collapse in many of these markets! As we mentioned last week while we doubt the recent upward march in petroleum is likely to be reversed over the near term or within the first quarter of 2008, we feel it could very well fall within the balance of the second quarter as it would likely coincide with the ending of the summer driving season as we still anticipate an uncomfortable price spike in gasoline just prior to summer’s arrival. Until then look for support to now come in at $95.20 per barrel with a more critical pivot at $94 per barrel with a close below this technically signaling a return to minor support at $92, however, given the current international situation in the supply demand dynamics, it is our opinion that over the near term and $94 level will hold with a strong potential for the upside resistance at $99 will soon be tested and probably within the next 5-7 sessions! This concludes this year’s abbreviated holiday report, Happy New Year to all and good luck in trading!

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United Strategic Investors Group