The “stability for now, upside later” argument for crude oil prices appears to be holding true for both WTI and Brent pricing, which has done little to set any directional bias so far in 2009. But one thing FirstEnergy Capital analyst Martin King says he can be sure of, is that his call for the price bottom in mid-December remains correct.

“This is a market, though still dealing with some oversupply issues at Cushing, Oklahoma, that has begun to realize that corrective forces are at work,” he said in a research note, adding that OPEC production cuts is a powerful force that is finally getting some attention. “If anything, these cuts look to be more serious than many market pundits originally thought.”

FirstEnergy’s optimistic view that the cartel could take up to 2.5 million barrels per day off the market between the end of the third quarter of 2009 and the end of the second quarter of 2009 has been raised to 2.3 million barrels.

“We see this as being sufficient to bring balance to the market by the middle of the this year, especially given that non-OPEC supply is likely to under-perform many of the optimistic Street forecasts,” Mr. King said.

While OPEC’s production cuts have resulted in U.S. imports trending downward erratically since late in 2008, the analyst expects that imports will go much lower as the refinery maintenance season gets going in the next few weeks. In fact, he wouldn’t be surprised if imports dip below the five-year range before making a seasonal recovery going into the summer.

With imports falling, U.S. crude oil stocks continue to rise materially. But Mr. King attributes this to refiners that continue to run well below historic averages as they wait for signs of concrete macroeconomic and end user demand stabilization.

He said a series of elements need to be in place for oil prices to make a convincing run and break out above US$50 per barrel. They include steady to declining oil inventories, stronger refinery crack spreads, declining contango, a closing of the Brent premium to WTI, declining days of inventory cover and some macro stability.

FirstEnergy does not see prices getting to this range until later in the second quarter of 2009. Mr. King see the upside theme after stability coming when negative economic data and sentiment subsides somewhat, which will allow some focus on OPEC supply moves and the emerging of what may be a poor performance for non-OPEC supply this year.

Jonathan Ratner