Consensus Report: December 28, 2006

Petroleum Retreats into Bearish Range Following Christmas, while Natural Gas falls to New Lows on Abnormally Mild Weather Extending into January .

Natural Gas and Oil

Technical Outlook:  in our last report before Christmas week we said conditions had become more decidedly bearish given the retreat from the recent lower highs, and that technical signals from several indicators suggested further weakness ahead. Momentum, relative strength, the MACD, the commodity channel index, the parabolic, and the linear oscillator, were all decidedly more bearish in our opinion, and while stochastics gave an oversold warning we still felt the market was vulnerable to new lows ahead before value buyers might step in. Prices had just retreated sharply from the $7.90 highs basis January futures and we said we expected a retest of the lows at $7.21 -- $7.25, with a strong chance for a further washout down to even $6.92 before any possible substantial buying emerges. This not only transpired following our report but prices not only hit our target at $6.92, but fell right through it crashing through sell stops and collapsing all the way down to below the $6.0 benchmark to test the mid- $5.70s basis spot just before the January expiration yesterday. This is technically very bearish, and has now placed the new spot February spot in grossly oversold territory, however due to it’s inherent weather premium back above $6.10, the market is still quite vulnerable in our eyes to further weather induced weakness. Because of the obvious failure to rebound from the Holiday collapse into already oversold levels, it is very clear the market is feeling the dominating force of mild weather fundamentals which has taken precedent over technical factors, and thus contributed to an overwhelmingly bearish pattern. Looking ahead, technical conditions continue to look negative for pricing despite being in grossly oversold territory, as the previous spot low at $5.75 seems plausible. Look for upside resistance to contain the market at first $6.50 with more critical resistance above this level from $6.80 scaled up to $6.92. Near-term expect consolidation and Range trade between $5.90 and $6.65 as the more likely scenario over the next five sessions.

Fundamental Supply Update

Last week's EIA report showed a drawdown of 71 bcfs that was right in line with both previous estimates by DowJones and Bloomberg. This week’s EIA report will be delayed until tomorrow due to the past holiday weekend. The Bloomberg survey indicates an expected drawdown of 71 bcfs that falls well short of typical drawdowns from the five-year average. Storage now stands after the last EIA update at 3167 bcfs which is 342 higher than last year and 274 or back up to 9.5% above the five-year average of 2893 bcfs.  Traders will begin to focus on whether elevated demand will emerge in the first half of January as milder Pacific air is expected to continue to impact much of the central US through the holidays and into early January. While the balance of that forecast can shift, and there still exists a potential deepening of the trough above the country's midsection whereby some very colder “Arctic Air north of the Canadian border could impact the US midsection in mid to late January, time for this to support prices is quickly evaporating. As always during this time of year, Old Man Winter has the final say with regards to natural gas pricing, however, it seems some lingering effects of the El NiZo phenomenon are beginning to reveal themselves as these cold air intrusions from the north are sporadic and failing to sustain themselves for any substantial length of time as the jetstream seems to flatten out yielding to the milder Pacific flow of air from the West that intermittently moderates temperatures. As long as this pattern continues, it will likely keep price advances to within a range that has already been established and well below the $9.0 benchmark unless more sustainable colder weather arrives in the central and eastern US soon. While a sudden shift to colder temperatures in mid to late January were to arrive and sustain itself for longer than a week, the resulting increased demand could very quickly impact supply, the time window for this to substantially affect values is closing rapidly. Recent price action as larger funds and traders have quickly abandoned long positions indicates traders sentiment has almost become unanimously bearish with a sense that the threat normally imposed by pre-January weather has already been written off.

Concerning crude oil, prices have retreated noticeably from the recent resistance at the $62.50 level, and even more definitively from the recent peak near the $64 benchmark despite the violent unrest in Nigeria and saber rattling from Teheran over the newly imposed UN sanctions in response to Iran's nuclear program. The recent threat posed by another announced cut in production by OPEC of 500,000 barrels seemed to be easily ignored this holiday week as the market focused on the EIA supply report and the economic numbers revealing the lethargic state of the US economy. Although today's rather surprising drop in crude stocks that was almost triple the average estimate reducing supply by 8.1 million barrels would seem bullish, it barely influenced price to a gain of only $.19 as crude settled just above $60 benchmark at $60.53 as the impact of the drawdown was diminished by attributing most of it to closing temporarily most of the Houston ship Channel because of the navigational hazards to tanker traffic from the heavy fog that descended into the area earlier. In minor support of the rest of petroleum complex, distillate supplies increased by a smaller margin and expected of 500,000 barrels while gasoline inventories surged by 3 million barrels due to higher imports. Refinery capacity edged higher up to 90.9% as increased gasoline production was experienced to meet the demand of increased consumption as more Americans took to the road in response to milder weather conditions for holiday travel. The gasoline consumption rate has increased by 1.6% over the past four weeks above the same period last year, and this may serve to support crude prices later as gasoline inventories still remain just precariously above the lower end of averages. That is one reason why we believe the degree to which the US economy slows down in response to the continued downward momentum of the nation's housing market will be critical to the perception of energy demand in the first quarter of 2007. Until then based on current fundamental conditions we still believe crude oil, unless something sudden and dramatic emerges out of the Middle East and specifically Iran, just as we stated in our recent Bloomberg TV interview Tuesday, we expect prices to continue lower and possibly test the bottom of the range at $56 per barrel. This week's price action on crude oil with spot prices taking out our target at $61 per barrel from the recent high end of the range confirmed exactly the forecast from our last report dated December 14 before the holidays.

W. S. I Weather 6-10 Day Outlook

Little change in the overall pattern is expected in early January. If anything, medium range models indicate today's 6-10 day forecast may be one of the warmer ones issued, relative to normal, over the north-central and northeastern U.S. thus far this winter. In response, widespread above and much above normal temperatures that have gripped southern Canada and most of the continental U.S. in mid-to-late December are forecast to continue the first 7-8 days of January. More seasonable readings are now forecast over the western U.S. for the 6-10 day period as troughing and cooler weather are expected to arrive near the end of the period. The warmest temperatures and the most persistent warmth are forecast over the North-Central U.S., where a strong and progressive northern branch of the jet stream is expected to continue to flood the region with mild Pacific air. Daytime highs in the 30s and 40s are once again expected to be the rule for the northern Plains, Midwest, and Great Lake States next week. Overnight lows are only forecast to fall into the teens and 20s. Anomalies between 12-20 degrees are expected to encompass the North-Central U.S. for the balance of the next week and 6-10 day periods. Though the strongest signals for warm weather exist west of the region, persistent warmth is also anticipated in the Northeast and Mid-Atlantic States. In response, widespread highs in the 30s and 40s are expected to be the rule in the Northeast again next week.

The warmest temperatures in the Mid-Atlantic and Northeast are forecast next weekend, when highs as warm as 60 degrees are possible as far north as Boston. Elsewhere over continental U.S., changeable conditions are expected to characterize the weather next week. In response, any prolonged periods of unseasonably warm or cold weather are not expected over the western U.S. and the southern tier of the country. The warmest temperatures in the West are expected early in the week as troughing and cooler weather is forecast to develop late in the week. Meanwhile, the coolest temperatures along the Gulf Coast are anticipated early next week. Warmer readings are forecast to develop by early next weekend.

Conclusion

Natural gas continued its corrective and volatile path after hitting new lows recently of $5.74 per million BTU in a full collapse of values as both unusually mild weather conditions converged with an already bearish technical chart pattern which resulted in an avalanche of selling. Looking ahead as fundamental conditions continue to favor the shorts maintaining control as bearish sentiment permeates traders minds much like a mild Pacific air invades the Midwest and Northeast over the next week and a half as the stronger El Niño condition controls the jet stream from the West. One thing traders need to be mindful of as the market approaches these extreme oversold conditions, is the habit and propensity for natural gas to seek out and suddenly grasp a bullish event or condition, exaggerate it and then the market erupts in an explosion of short covering and opportunistic buyers seizing the chance to capitalize on the reversal. This obviously becomes more likely as the market grinds lower making the profitability for the short interest diminished proportionately as the downward momentum slows. This should serve as a sobering warning to those looking to aggressively short the market below the $6.25 level as the new February spot market remains vulnerable to testing January's recent pre-expiration lows. Look for resistance overhead first at $6.50 and then more critically above at $6.80 scaled up to $6.92 which becomes an attractive short in our opinion if attained.

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

December 28, 2006

United Strategic Investors Group

Guy Gleichmann, President

1926 Hollywood Blvd Suite 311
Hollywood, Florida 33020

(800) 974 – 8744

1- 800-974-8744
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