MARKET WATCH: Energy prices drop on mixed signs of US economy

Sam Fletcher
Senior Writer

HOUSTON, Dec. 10 -- Energy prices fell Dec. 7 among mixed reports on US employment that could leave the door open for another interest rate reduction when the Federal Open Market Committee, the policy-making arm of the Federal Reserve Bank, meets Dec. 11.

The US Department of Labor reported 94,000 nonfarm payroll jobs in November. A separate survey of households showed the strongest job growth in nearly 6 years, with 696,000 more people reporting they were employed in November. That kept the US unemployment rate steady at 4.7%.

"Crude is now 11% lower than its highs from late November and could drop further in the coming weeks. Investors continue to think that the Federal Reserve will cut rates and traders will be closely monitoring the decision. Natural gas is trading over 2% lower this morning as the 8-14-day forecast shows warmer than normal weather on the horizon," said analysts in the Houston office of Raymond James & Associates Inc.

Robert S. Morris, Banc of America Securities LLC, New York, reported, "After a volatile week, West Texas Intermediate spot oil prices ended up posting a 43¢/bbl decline even though the Organization of Petroleum Exporting Countries decided to not increase output and a sharp drop in US crude oil inventories was reported. Oil prices had posted a nearly 10% drop the prior week due largely to speculation that OPEC would announce an increase in production at last week's meeting. However, the cartel stated that the market was 'well supplied' and that there was never any discussion about boosting output. OPEC plans to meet again Feb. 1 in order to keep an eye on 'market uncertainties.'"

In Paris, analysts with Societe Generale Group said, "The markets have been weighed down by oil demand concerns in the last 2 weeks and recent data from the US continue to indicate weakness there." They noted, "Many oil market participants focus only on the weekly US data and ignore the monthly data because of the 2-month time lag for the latter. However, US final monthly data is more accurate than the preliminary weekly data; importantly, this year, a strong pattern of downward revisions in the monthly figures shows a very different and much weaker oil demand picture for the country that still accounts for almost a quarter of global consumption. High prices do appear to be having a negative impact on US demand, which has not grown year-on-year since May."

Energy prices
The January contract for benchmark US light, sweet crudes traded as low as $87.07/bbl in the Dec. 7 session on the New York Mercantile Exchange before closing at $88.28/bbl, down $1.95 for the day. The February contract dropped $1.79 to $88.15/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.95 to $88.29/bbl. Heating oil for January delivery fell 4.03¢ to $2.50/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) declined 3.23¢ to $2.27/gal.

The January natural gas contract dropped 17.5¢ to $7.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 22¢ to $7.08/MMbtu.

In London, the January IPE contract for North Sea Brent crude lost $1.54 to $88.64/bbl, again topping the NYMEX price for WTI. The December gas oil contract dropped $3.25 to $784.25/tonne.

The average price for OPEC's basket of 12 reference crudes gained 78¢ to $85.26/bbl on Dec. 7. So far this year, OPEC's basket price has averaged $67.94/bbl, up from $61.08/bbl for all of 2006.

Contact Sam Fletcher at samf@ogjonline.com.

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