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Oil Rallies 3% On Colder Weather, But Crude Still Under Pressure

Reuters
Friday, 19 Jan 2007 | 3:45 PM ET

Oil jumped 3% on Friday, holding above the key $50 a barrel level as colder weather lifted natural gas and heating oil prices. But many analysts think crude prices are still headed lower.

Even with today's gains, U.S. oil has fallen nearly 16% since the end of last year and about 34% since record highs of $78.40 struck in July.

After government report showed a 6.8 million barrel rise in U.S. crude stocks on Thursday, U.S. crude fell below $50 for the first time since May 2005 to $49.90 before recovering slightly in late trade.

Friday's recovery was helped by colder weather in the U.S. after exceptionally mild weather in the Northeast in early January sapped demand for heating fuel.

But many analysts predicted the $50 a barrel mark would not hold for long.

"Bears in Charge"

"The bears should now be firmly back in charge," said Edward Meir of Man Energy in his daily report. "We would not therefore be surprised to see rallies sold into more aggressively here, and the series of lower lows will gradually take us below the $50 level. It has been a wild ride lower thus far and the bottom still seems elusive."

Technical analysts, who predict future price direction from studying charts, said should there be a convincing break below $50, the next key level would be around $44.50 -- the 50% retracement of the rally from the December 1998 low of $10.35 to last July's record.

Some commentators have said a concentration of "put," or sell, options around the $50 and $45 a barrel level could trigger deep selling.

Countering that, producers, who have been relying on a rising market to protect their revenues, have started to buy oil futures to hedge their output and investment projects
against further price declines.

Other analysts say the $50 barrier may be further away than it appears at first sight.

March Contract Higher

The front-month February U.S. contract, which is expiring on Tuesday, is relatively close to $50. But March crude, which will become the front month, is trading at $53.

"The bulls might get a temporary relief when February WTI (light sweet crude) goes off the board on Monday because March is trading a $1.50 higher," said Nauman Barakat, senior vice president at Macquarie Futures USA, in a morning note.

In addition, long-term investors, who view commodities as an important diversifier against falls in other asset classes, increasingly see an opportunity to buy.

The Organization of the Petroleum Exporting Countries has agreed on two output cuts totaling 1.7 million barrels per day (bpd), but so far has failed to implement them fully.

In its monthly report, the producer group said the 10 OPEC members involved in supply curbs had pumped 26.8 million bpd in December, 111,000 bpd less than in November, but still above a 26.3 million bpd target.

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