SPECIAL COMMENTARY January 9, 2007

Energy Forecast Chartbook: Q1 2007

Jason Schenker, Economist
jason.schenker@wachovia.com
(704) 383-3695

Energy Prices in 2007

• For over a year, we have forecasted the price of crude would average around
$60 per barrel in 2007. Our expectations of slowing U.S. and global growth
fed directly into the expectation that prices would be under pressure. At the
same time, an economic soft landing, coupled with a depreciating dollar are
likely to buttress the price of crude, preventing a collapse. After all, even if
growth is slower, it’s still growth. However, most energy prices are likely to
moderate in 2007 versus 2006 (Exhibit 1).

Energy Markets and the Soft Landing

• In 2007, U.S. and global growth will be critical for energy markets. We are
forecasting a soft-landing scenario (Exhibit 2), but if the landing turns out to
be harder, it would hit energy prices even more. After all, commodity
markets are fundamentally driven by current supply and demand, as well as
future supply and demand expectations. Since global GDP growth and year-
over-year growth and oil demand are highly correlated (Exhibit 3), prices
could be under pressure.

Risk Premiums Fade

• In the past year, Iran has shown itself to be a paper tiger (with regards to
cutting off oil exports) and extreme weather was over-priced for the
hurricane season. With below-trend growth expectations for the first half of
2007, and a slowing of growth expected globally, there will be some real
downward price risks to energy prices. At the same time, however, refined
product markets remain tight and, since the global economy is likely to
manifest a soft landing, prices are unlikely to collapse. A weakening dollar
is also likely to be supportive of the price of crude. In light of all of these
factors, we see the price of crude vacillating around the $60 level in 2007,
down a bit from the average price in 2006.

$60 Oil in 2007

• Aside from the dynamic of slowing – but not collapsing demand – there is
also the likelihood that some OPEC production could come off-line. Not a
lot, however, is likely to come off, but OPEC has stated that they will defend

This report is available on www.wachovia.com/economics and on Bloomberg at WBEC

 Energy Forecast Chartbook: Q1 2007
January 9, 2007 SPECIAL COMMENTARY

$60 per barrel, and production has already leveled off somewhat (Exhibit 5).
Gasoline prices are not likely to see new records with oil at $60 per barrel, and
consumers and markets in general seem willing to pay $60 per barrel. As such, we
are forecasting this to be the price–on average– for the year.

Alternative Energy Product

• If oil prices remain at a relatively uninteresting $60 per barrel (moving primarily
between $55 and $65), alternative energy fuel sources and energy substitutes could
become less attractive to investors and consumers. In other words, the alternative
energy space could be at asymmetric risk to lower, or even flat, prices. Ethanol
volatility could push some producers out of the market. Coal prices could also
remain under significant pressure, as production levels are currently very high.

$7 Natural Gas in 2007

• We believe that the average price of natural gas is likely to be around $7 per MMBtu
in 2007. The drop in housing starts and an easing in capacity utilization are likely to
result in a diminution in future demand growth rates. This means that while prices
are supported, they are unlikely to surge on these fundamental factors alone. With
inventory 15.3 percent above the five-year moving average, levels are clearly high
(Exhibit 6). Even with cold snaps through the rest of the winter, inventories are
likely to remain lush through the spring shoulder period. This poses significant
downward risk to natural gas prices after the winter. Without a warm rest of the
winter, however, price pressures could be supported. Continued rig expansion and
natural gas imports from Canada and Mexico will be critical for containing natural
gas price volatility. Big upside risks for natural gas are likely to remain around the
hurricane season, peak summer cooling demand periods and the winter strip of the
forward curve. Risks are asymmetrically to the upside for natural gas prices further
out the curve, as this market is less fluid globally, and domestic aberrations in
demand or supply would likely wield greater power over prices.

Ultra Low Sulfur Diesel (ULSD)

• One of the biggest risks for energy prices is Ultra Low Sulfur Diesel (ULSD). With
the ongoing conversion from Low Sulfur Diesel (LSD), there is a significant chance
that diesel prices could spike sharply. On a national basis, $3 diesel is conceivable in
the spring, with spikes to $4 per gallon in isolated areas. Price pressures and
logistical constraints of diesel supply lines are likely to have worked themselves out
by the end of 2007. ULSD should reduce smog, reduce global diesel price volatility
and make way for more retail diesel vehicles in the U.S. Although this is not exactly
the energy ‘alternative’ many have envisioned, it is likely to be prevalent.
Exhibit 1
Average Prices
Forecasts 2004 2005 2006 2007 2008 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

Sweet Crude (Cushing WTI - $/Bbl) 41.39 56.64 66.23 60.00 58.00 60.00 62.00 60.00 58.00 57.00 59.00 58.00 58.00

Brent Crude ($/Bbl) 37.98 55.14 66.11 58.75 58.00 58.00 60.00 59.00 58.00 58.00 58.00 58.00 58.00

Natural Gas (Henry Hub - $/MMBtu) 6.18 9.00 6.99 7.00 6.75 7.50 6.25 6.50 7.75 7.25 6.00 6.50 7.25

BSB Coal ($/Short Ton) 54.21 60.08 51.87 42.50 40.00 45.00 45.00 40.00 40.00 40.00 40.00 40.00 40.00
Source: Bloomberg L.P. and Wachovia Corporation (Return to text)

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Energy Forecast Chartbook: Q1 2007
January 9, 2007 SPECIAL COMMENTARY

Exhibit 2

Wachovia International Economic Forecast

GDP CPI
Year-over-Year Percentage Change Year-over-Year Percentage Change
Country 2006 2007 2008 2006 2007 2008
Global 4.8% 3.8% 4.0% N/A N/A N/A
Major Economies
United States 3.3% 1.9% 2.8% 3.2% 1.8% 2.0%
Eurozone 2.7% 2.0% 2.0% 2.2% 2.1% 1.9%
Germany 2.7% 1.7% 1.8% 1.8% 1.6% 1.7%
France 2.0% 2.0% 2.0% 1.9% 1.7% 1.8%
Italy 1.8% 1.4% 1.6% 2.2% 1.9% 1.8%
UK 2.5% 2.2% 2.2% 2.3% 2.0% 1.6%
Japan 2.0% 1.5% 1.9% 0.3% 0.3% 0.6%
Canada 2.7% 2.1% 2.4% 2.0% 1.6% 1.8%
Developing Economies
China 10.5% 8.9% 9.1% 1.4% 1.8% 1.4%
India 8.7% 7.3% 7.9% 5.8% 5.9% 4.6%
Mexico 4.9% 3.0% 3.2% 3.6% 3.7% 2.9%
Brazil 2.6% 2.9% 3.0% 4.2% 3.2% 3.2%
12/14/2006

Source: Global Insight and Wachovia Corporation (Return to text)

Exhibit 3

Oil Consumpton and Global GDP

6.0%

4.0%

2.0%

0.0%

-2.0% Y/Y % Change in Oil Consumption

Y/Y % Change Real Global GDP Growth
-4.0%

-6.0%
1980 1985 1990 1995 2000 2005

Source: Global Insight, the IMF and Wachovia Corporation (Return to text)

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 Energy Forecast Chartbook: Q1 2007
January 9, 2007 SPECIAL COMMENTARY

Exhibit 4

Prices of Natural Gas and Crude Oil

Prices Since January 2005
$80 $16.00
January 8, 2007
$75
$14.00
$70
$12.00
$65

$60 $10.00

$55
$8.00
$50

WTI Oil (Left Axis) $6.00

$45
Natural Gas (Right Axis)
$40 $4.00
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07
Source: Global Insight and Wachovia Corporation (Return to text)

Exhibit 5

Total OPEC Production

in Millions of Barrels Per Day
35

30

25

20

15
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05
Source: Bloomberg L.P. and Wachovia Corporation (Return to text)

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Energy Forecast Chartbook: Q1 2007
January 9, 2007 SPECIAL COMMENTARY

Exhibit 6

Natural Gas Inventory Surplus Above the Five-Year Moving

Average
Since January 2006
80%

60%

40%

20%

0%
Jan Feb Mar Apr May Jun Aug Sep Oct Nov Dec
Source: Bloomberg L.P. and Wachovia Corporation (Return to text)

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Wachovia Economics

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wachovia.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wachovia.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wachovia.com
Sam Bullard Economist (704) 383-7372 sam.bullard@wachovia.com
Gina Martin, CFA Financial Economist (704) 383-6805 gina.martin@wachovia.com
Huiwen Lai, Ph.D. Quantitative Analyst (704) 715-7415 huiwen.lai@wachovia.com
Jason Schenker Economist (704) 383-3695 jason.schenker@wachovia.com
Phillip Neuhart Economic Analyst (704) 715-8457 phillip.neuhart@wachovia.com
Adam York Economic Analyst (704) 715-9660 adam.york@wachovia.com

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