The longest period of contango in the U.S. oil market may end as storage capacity expands by more than a quarter at Cushing, Oklahoma, the biggest U.S. crude- trading hub.

West Texas Intermediate oil for delivery next month traded at $1.86 a barrel less than the six-month contract on the New York Mercantile Exchange yesterday, compared with $9.88 a barrel in May. The contango, in which prompt oil is cheaper than later delivery, has averaged $2.70 during the past five years.

Nymex futures nearest to expiration have traded below next- month contracts since November 2008 as oil stored in Cushing more than doubled. Companies have announced plans to build about 14 million barrels of tanks by the end of 2011. That would boost capacity as much as 27 percent, based on an estimated 51 million to 52 million of existing storage according to Bob Levin, a managing director at CME Group, the owner of Nymex.

The additional storage "limits the opportunity for contango," said Stephen Schork, the president of the Schork Group Inc. in Villanova, Pennsylvania. "If you do have that ability now to put those barrels into storage, you will see a return back to fundamentals."

Oil supplies at Cushing were 31.8 million barrels as of Nov. 5, according to the Energy Department, down from a record- high 37.9 million in May. Most companies assume operational capacity is about 80 percent of total capacity, said Michael Shore, a Nymex spokesman. Operational capacity is less because some oils can't be mixed and pipeline shipments require extra tank space.

Eoin Treacy's view The size of the US Oil fund's crude oil futures' position and the predictability of its contract roll schedule distorts the spread between the various oil contracts. While this effect has lessened somewhat over the last year, there is still a clear roll schedule evident on the contango chart. This would suggest that the raw price action is probably a better measure of supply and demand that the spread chart.

The fact that storage capacity is set to increase should make attempting to buy cheap near-term supply relative to comparatively expensive medium-term supply a more cost effective trade to pursue so storage in and of itself is unlikely to cause the spread to narrow. Of more potential importance is the demand growth for oil from a resurgent global economy which is contributing to oil prices moving to new recovery highs despite the strength of the US Dollar over the last few days.

Oil prices have been broadly ranging between $70 and $80 for more than a year. There have been a number of failed upside and downside breaks along the way, so a breakout cannot be confirmed until it has been sustained for a reasonable period of time and/or finds support above or in the region of $80 following a pullback.

On a commonality basis, other energy commodities such as coal and recently uranium have outperformed. Heating oil, which is in a seasonally firm period, broke upwards to new recovery highs last week and is improving on that performance this week. These factors as well as the positive chart pattern further bolster the argument that oil is under accumulation.