energy Stocks: Energy shares erase early gains as crude prices fall

by Jasmina Kelemen (MarketWatch)

Shares of major oil companies were unable to hold onto the slight gains achieved early Wednesday and declined as oil prices reversed course and slipped into decline.

The Amex Oil Index (XOI :1,158.40, +5.18, +0.4% ) was off 0.3% to 1,149.93 points as crude for April delivery dropped 17 cents to $56.68 a barrel.

The Amex Natural Gas Index (XNG : 456.53, +0.26, +0.1% ) slipped 0.3% to 455.07 points as natural gas rose 0.2% to $7.59 per million British thermal units. The Philadelphia Oil Service Index ($OSX : 195.37, +1.10, +0.6% ) was flat at 194.42 points.

Forecasts for warmer-than-average temperatures across the northeastern U.S. from now until March has kept the market in check, with few players willing to move sharply in either direction. See full story.

Uncertainty over the market's direction is also keeping the equity sector contained within a trading range.

"Stocks feel trapped between gas bulls / bears and deciding battle might not be waged until fall (when storage is either full or it isn't)," said Dan Pickering, of Pickering Energy Partners in a pre-market note to clients.

"Nothing to catapult us [in] either direction...so we drift," he said.

On the oil index, over half of the eleven components were trading at a loss. The only issues to break out of the early session's torpor were Sunoco Inc. (SUN :63.62, +1.25, +2.0% ) and Valero Energy Corp. (VLO :57.10, +1.13, +2.0% ) , which both rose 1.5%.

Friedman Billings Ramsey raised Valero's 2007 and 2008 earnings forecast to $7.80 from $7.50 and $7.10 from $6.75, respectively. According to analyst Jacques Rousseu, Valero is likely to have significant cash flow due to a likely sale of its Lime, Ohio refinery and could "easily" repurchase up to 20% of its shares this year. On the natural gas index, which largely consists of exploration and production companies, Pogo Producing Co. (PPP : 49.05, -0.32, -0.6% ) was again a loss leader, falling 1.1% to $48.83.

Bear Stearns downgraded the Houston-based company's shares to peer perform from outperform after the company announced last week that it swung to a loss of 29 cents a share, falling well below the Street's estimates.