The present contango in oil prices bears all the hallmarks of an oil market where supplies are well above present fundamental physical consumption.

The recent large inventory build of petroleum, under a steep contango which now is flattening, within the big oil consumers (like the OECD countries and China) have left some with the expectation that major economies soon will begin to grow again, and that the contango now signals increased oil demand and higher oil prices in the future.

My analysis indicates that in recent months, as much as 2 -3 Mb/d of global petroleum supply has been used to build inventories. This is about to come to an end, because available storage is getting closer and closer to full and contango has begun to flatten. When additions to storage cease, the resulting drop in demand can be expected to lead to substantial downward pressure on oil prices.

The chart above shows one component of inventories--US inventories. The chart indicates that US oil inventories (green) have been increasing since after the September 2008 hurricanes, and, in fact, started increasing as early as May 2008. Brent oil prices (red) decreased between June and December, but recently have been slightly increasing.

Below the fold I give a summary of US, OECD and China petroleum inventories, inclusive of oil stored on tankers, and indicate what I expect will happen to near term oil prices.