Crude oil futures are up in early trade after OPEC pledged to support prices following a weekend meeting in Qatar. President Chakib Khelil said on Sunday that OPEC’s willing to further reduce output as much as necessary to stabilize oil prices, the Associated Press reported. OPEC is “determined” to stabilize oil markets, added Ali al-Naimi, Saudi Oil Minister.

According to analysts at MF Global Research, crude oil could be setting up for at least a mild upside correction after last week’s losses. In a research note, Energy Analyst Tom Pawlicki said prices could advance toward the $49.40 level this week and $52.95 over the next 2-3 weeks. “Support will come from a recovery from last week’s expiration-fueled decline, the fog-related closure of Gulf of Mexico ports, OPEC’s reduction in output, and from last week’s sign of an up-tick in U.S. oil demand,” he said.

On Friday, December 19, the expiring January crude oil contract fell 6.5 percent to $33.87 a barrel, the lowest settlement for a contract nearest to expiration since Feb. 10, 2004. Meanwhile, the most-active February contract rose Friday and is currently trading above $43. Pawlicki noted as a result of the spread between January and Februrary prices, the contango widened to $8.49 from $5.45. He said wide contangos usually signal weak demand and an incentive to store oil, and are thus a negative indication.

“However, there isn’t much room left at the Cushing, OK facility, where inventories are nearly as high as they were in early-2007 when Valero’s McKee refinery caught fire. That may not be a problem this week, since fog in the importing channels over the past four days may prevent normal amounts of oil from entering U.S. ports. That could set up for a bullish surprise during Wednesday’s inventory report. The Feb-Mar contango closed at $2.80 and will create a gap higher on Monday. Such gaps in the past have signaled short-term support for oil prices,” said Pawlicki.

As detailed in the chart below, in seven of the nine extreme contangos since Jan 2006, prices advanced in the week that followed, he notes.

Pawlicki added that there was also a sharp gain in the non-commercial net-long positions as reported in the weekly CFTC’s Commitments of Traders Report. Non-commercials added 53,313 contracts to reach a net long of 64,120 contracts.

“It’s the biggest net long position that large funds have held since May ’08 and follows the nearly 53,000 contract net short reached just five weeks earlier. It signals a major repositioning by traders who traditionally have been correct in predicting market direction,” said Pawlicki.

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