Backwardation "vortex" fueling oil's rally

By Richard Valdmanis and Robert Campbell - Analysis

NEW YORK (Reuters) - Falling crude inventories and the shape of the futures curve will likely continue to feed back into each other and boost oil prices further until there is a meaningful change in the global supply picture.

Since July the market has been "backwardated," where the price of oil that is about to be delivered is higher than for later deliveries. Backwardation encourages the sell-off of stocks and is seen as a sign of supply tightness or even shortages, which further boosts prompt prices.

The current rally will likely go on until oil supplies rise or demand falls enough to reduce the incentive to sell off oil in storage, energy experts said on Wednesday.

"Given the economics of storing oil, it makes no sense to hold on to inventory right now. Storage owners are taking the economically prudent step and dumping inventories," said Stephen Schork, editor of the Schork Report.

U.S. crude futures for delivery in December hit a record of $94.74 a barrel on Wednesday and were running more than a dollar higher than those for delivery in January and more than $5 higher than those for delivery in May.

"We're in a hamster wheel right now," Schork said. "This can only end when there is not enough prompt demand to sop up supply on the spot market."

U.S. commercial crude oil inventories fell nearly 4 million barrels last week, spurring another rally in crude prices which hit a record above $94 a barrel. Much of the drop came at the delivery point for the New York Mercantile Exchange's (NYMEX) crude oil futures contract at Cushing, Oklahoma.

"Backwardation in the NYMEX futures curve remains steep, and today's eye-catching decline in crude stocks held at Cushing will help to entrench the current curve structure in the near term," said Harry Tchilinguirian of BNP Paribas.