Crude Prices Face 'Super Contango'

Wednesday's Energy Information Administration report is likely to put more downward pressure on oil prices.
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The crude oil inventory report that the Energy Information Administration will release Wednesday morning will likely put pressure on crude prices in New York Mercantile Exchange trading.

"I certainly expect to see another massive build at Cushing in tomorrow's numbers," said Stephen Schork, energy analyst and publisher of

The Schork Report

. I also expect to see serious weakness in the February crude contract at the Nymex."

The reason for this stems from conditions in the oil market last December when the futures strip for West Texas Intermediate crude first started trading in a "super-contango." Contango is when front-month contracts trade at a discount to contracts further out. Crude's futures strip is being called a super contango because the price difference between the spot contract and contracts expiring next summer is so big.

These conditions encouraged oil traders to buy December crude on the cheap and simultaneously sell January crude for a higher price. This trade committed participants to deliver crude oil to a storage facility at the Cushing, Oklahoma, hub sometime in the month of January.

It appears that a lot of traders took advantage of crude's December contango, because storage tanks at the Cushing hub are filling up fast. The consensus estimate for Cushing's operable capacity is about 35.5 million barrels. The EIA reported last week that storage at Cushing was 32 million barrels and climbing. The figure was the highest ever reported since the EIA first began citing Cushing's storage number in 2004.

Jim Williams, analyst at WTRG Economics, says that chances are good that capacity will be reached by the time the EIA reports its figures on Wednesday at 10:35 a.m. EST. "I certainly expect for the Cushing hub to reach capacity before the month of January closes out," Williams said.

Oil traders at the Nymex frequently react to new inventory data from Cushing -- buying spot crude when inventories are low and selling spot crude when inventories are high. The Energy Department's data will likely continue to support this trend.

If the price of oil takes a major hit following Wednesday's data release by the EIA, securities that are closely aligned to the price of oil, such as

Exxon Mobil

(XOM) - Get Report

,

ConocoPhillips

(COP) - Get Report

and the

U.S Oil Fund

(USO) - Get Report

ETF would face downward trading pressure.