NATURAL GAS AND OIL

--Crude Oil Hovers Above $82 In Sympathy With Stocks Despite Bearish Supplies, Firm U.S. Dollar, And Sluggish Economy, While Natural Gas Drops To New Lows After Expected Supply Withdrawal As Winter Demand Recedes

Technical Outlook

(March 11, 2010) Since our last report I said looking ahead that a close below the key critical support level of $4.60 could lead to a deeper washout which I now believe was in progress. Since then the market basis spot April delivery has failed to close back above this key level, and today's price decline confirms my forecast and the intra-day low of $4.41 per million British thermal units brings my lower targeted price closer and could quickly lead to a rapid decline down to test $4.10 and even the $4.00 benchmark over the intermediate term. While most technical signals are still in grossly oversold territory, the linear oscillator and the MACD are indicating a substantial negative divergence still exists that continues to suggest a further decline is in progress. Look for lower highs on rebound attempts to become more difficult to surpass as resistance edges lower to $4.60 above and then $4.74, with the more critical level at $4.80 remaining to contain the market over the near term.

Fundamental Supply Update

This week's EIA report revealed a withdrawal of 111 bcfs which was slightly above previous estimates of 108 and 109 by Dow Jones and Bloomberg respectively. Storage now stands at 1626 bcfs which is 71 less than last year and 19 bcfs or 1.2% above the five-year average of 1607 bcfs. Immediately following the report prices quickly slumped near to session lows at $4.41 before finally settling $11.9 cents lower for loss of 2.6% settling at $4.44 as traders obviously continued to focus on the approaching shoulder period of weaker demand as winter diminishes and the expected season ending heavy supply level historically. The backdrop of the sluggish economy with recovery more of a hope than a certainty is also being reflected in the negative price action, unlike the market's larger and more popular cousin, crude oil, which continues to trade higher ignoring the real fundamentals of weak demand.

Concerning crude oil, today the market managed to eke out a fractional gain to inch higher despite a 5-year high in domestic supply settling at $82.11 for a 2 cent improvement mostly attributed to a variation in the U.S. Dollar, despite the more important fundamentals of winter demand fading, strained consumer demand as confidence slumps and unemployment rages on, and more recently China's inflation challenging their growth outlook. The world's fastest-growing economy raised concerns as their recent CPI data jumped 2.7% in February considerably higher than the 1.5% increase for January and up considerably from estimates of 2.4% by a Dow Jones survey. Food prices also jumped 6.2% but some of the consumer price increases were attributed to colder weather and enhanced consumer demand for the celebration of the Chinese new year. Producer prices also accelerated 5.4% up from 5.0% estimated. Chinese bank lending rose 700.1 billion yuan or $102.5 billion U.S. in February. Meanwhile the money supply as measured by M2 was up 25.5% over the previous year. Also noteworthy was fixed asset investment, the main barometer of capital investment rose 26.6% in the 1st 2 months up from 20% in December. Real estate investment also rose 31% for the first two months of the year versus the annual rate of 25% in the last quarter. And finally China's industrial production in the first two months expanded 20.7% up from 18.5% in December. All of these combined to form a common denominator that China's recent moves to raise bank reserves and institute measures to limit liquidity and apply the brakes to a potential overheating of their economy have had little effect towards that end raising concerns by economists that over the intermediate term their growth could suffer the more critical crash that inevitably leads to a bust. As for now some of these assumptions may seem to be premature as many economists closer to the situation predicts government action geared towards focusing on existing projects and curtailing stimulus funds towards new ones will assist the economy in leveling off and attaining a more stable growth pattern in the second half of the year. Meanwhile crude oil should find more influence on swelling supplies here in the world's top petroleum consumer which have reached the five-year high just as winter fuel demand is soon coming to an end. Let us not forget the recent surge in the U.S. Dollar Index to about 80 from its not too distant lower trading range closer to 70, the expected influx of new foreclosures about to impact the real estate market again, and of course the ongoing chronic unemployment in the nation with a little signs of new job creation on the horizon, all of which are obstacles to increasing energy demand. However, contrary and countertrend to these undeniable facts, crude oil continues to ignore real fundamentals and yet stubbornly marches higher blindly following an equally precarious stock market rally that is so far removed from any discernible connection with the Main Street economy it's actually humorous if it weren't so sad in its despicable faade of economic strengths and recovery while the average consumer and middle income family continues to suffer and teeter on the brink of disaster! As I have stated before the day of reckoning will soon arrive and often shock many of those that bought into the propaganda and ignored the signs that were gradually building in the background. When the investment market realizes crude oil is not a proper hedge against the value of the dollar as would-be gold or another commodity that is also a form of currency, and the ultimate consumption for delivery and purchase is absent as is the current demand that would inevitably translate into is nonexistent, then just the unwinding of the length in the market that has artificially suspended prices up to this level will cause a devastating and dramatic price decline. In the meantime as I stated in last week's report the current momentum of the market being carried by the bullish traders who still have their blinders on should reach $82.50 which has now been confirmed, and in continuation and exhaust peak of $84 may be touched before sharp selloff

Conclusion

Today natural gas slumped to new lows following the expected EIA report and managed to close near the session lows of $4.41 before settling at $4.44 confirming the continued selloff by predicted in last week's report triggered by the bearish close below the critical technical support level of $4.60. Now looking ahead with the technical picture even more bearish along with the negative fundamentals of dissolving winter demand and the path of least resistance continues to look lower over the near term with my target from last weeks report at $4.10 and possibly challenging the $4.00 benchmark now within range. Overhead resistance is now lower with $4.60 critical in the intermediate resistance above this at $4.74 being pivotal to reach a bullish reversal to test $4.80 which should contain advance attempts over the near term.

Concerning crude oil, while fundamentals remain overall bearish, prices found some support from this week's EIA report that showed a smaller than expected increase in crude oil stocks of 1.4 million barrels which in its own right is still bearish, however, this was easily overshadowed by larger than expected drawdown in gasoline inventories of 2.9 million barrels along with an expected decrease of 2.2 million barrels for distillates. Also supportive was the bullish rhetoric supplied by increased demand forecasts by OPEC and the EIA both of which are suspect and remain to be seen, meanwhile the known bearish facts of a wounded housing market, damaged manufacturing sector, chronic unemployment and record consumer debt all of which have contributed to dismal energy consumption and swelling supplies. Meanwhile both crude oil and gasoline have climbed to multi month highs in complete defiance and ignorance of real suppy demand fundamentals. So until the market decides to face reality, price reality will continue to reflect manipulation and the agenda of those in power whereby upward movements will be exaggerated and supported through the process of cherry picking and selective focus as well as enhancing the influence of otherwise little impact economic data while trying to minimize negative influences and critical impedance to demand and supports to increased supplies so as to continue supporting the propaganda of higher prices and benefiting those that stand to profit from such price appreciation. I anticipate the current momentum to run out of steam soon with minor resistance just above current levels at $82.50 with the potential for an exhaust peak at $84 to be attempted culminating in a sharp and dramatic correction that should rapidly return crude oil to break back below the psychological $80 benchmark before returning to test key support at $78.10 per barrel.

March 11, 2010
Guy Gleichmann, Wavelength Energy CTA
2641 E. Atlantic Blvd., Ste. 208, Pompano Beach, Florida
800-974-8744

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