MARKET WATCH
Energy prices rebound slightly

Sam Fletcher
Senior Writer

HOUSTON, Jan. 8 -- Energy prices climbed slightly Jan. 5, with the front-month New York crude futures contract up from the lowest closing price since June 2005 on forecasts that temperatures across the northeastern US will drop later this week and boost demand for fuel.

"While any cold weather would certainly help provide at least a momentary boost to natural gas prices, the question is then whether it would be enough to counter the mid-winter record-high natural gas storage levels," said Robert S. Morris, Banc of America Securities LLC, New York.

Meanwhile, a monthly survey of tanker traffic indicated the 10 members of the Organization of Petroleum Exporting Countries, other than Iraq, produced 26.96 million b/d of crude in December, up 60,000 b/d from November. However, December production from that group was 680,000 b/d less than in October, analysts said. The 10 OPEC members said in October they would cut production by 1.2 million b/d on Nov.1. Another cut of 500,000 b/d is scheduled for Feb. 1. Iraq is exempted from those cuts because it's still struggling to bring its production back up to preinvasion levels.

"We believe the cartel will continue to defend $60/bbl as the price floor for crude," said analysts in the Houston office for Raymond James & Associates Inc.

Energy prices
The February contract for benchmark US light, sweet crudes gained 72¢ to $56.31/bbl Jan. 5 on the New York Mercantile Exchange. The March contract rose by 75¢ to $57.39/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by 72¢ to $56.32/bbl. Heating oil for February delivery increased by 2.27¢ to $1.57/gal on NYMEX. The February contract for reformulated blendstock for oxygenate blending (RBOB), which replaced the previous unleaded reformulated gasoline futures contract on NYMEX, climbed by 0.61¢ to $1.49/gal.

The February natural gas contract gained 2.2¢ to $6.18/MMbtu. On the US spot market, gas at Henry Hub, La., fell 11.5¢ to $5.50/MMbtu.

"We believe that many E&P companies are prepared to face natural gas price volatility this year, as the average company has hedged approximately one-third of its gas at $7-8/Mcf, with room for upside should the energy markets improve throughout the year," said Raymond James analysts. "Short-term, energy investors could take a more conservative stance by looking at well-hedged producers, which will provide the most insulation from price volatility."

Hedging by producers "will help generate ample cash flow to fund bullish capital spending programs and even free cash flow (which could be used for share repurchases or dividends, for instance). While acknowledging the possibility of further price fluctuations and milder weather throughout this winter, we feel that E&P stocks should still fare well in 2007," the analysts said.

In London, the February IPE contract for North Sea Brent crude increased by 53¢ to $55.64/bbl. The January gas oil contract lost $7.75 to $486.75/tonne, however.

The average price for OPEC's basket of 11 benchmark crudes dropped $1.98 to $51.25/bbl on Jan. 5. During the first week of 2007, OPEC's basket price averaged $53.99/bbl, down from an average price of $61.08/bbl during all of 2006.

Contact Sam Fletcher at samf@ogjonline.com.

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