U.S. oil storage depots near capacity

An Energy Department report today showed U.S. supplies of oil were at their highest level in 80 years.

West Texas Intermediate crude, the most common North American contract, initially fell on the news, but by the close of the day was up $1.09 to $51.61US a barrel. WTI has fallen by half since June of last year.

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Brent crude, the international contract traded in London, fell 45 centsto $60.56 a barrel, despite reports that the conflict in Libya had resulted in attacks on that countrys oilfields.

Western Canada Select, a Canadian oil contract,was up $1.36to $37.63. Canadian oil sells at a discount to WTI because of the difficulty of getting it to market.

The Canadian Energy Research Institute says Canadian oil production has been rising steadily since the global oversupply became apparent last summer. It predicts production in Canada will peak in the first quarter of 2015 and decline in the following two quarters as companies respond to falling oil prices.

The U.S. produces or imports 1.1 million barrels a day of oil every day over and above what it uses.

Tanks filling up in Cushing

The surplus is going into storage tanks, especially inCushing, Okla., one of the transit points for shale oil from the U.S. Midwest.

U.S. crude supplies rose 10.3 million barrels last week, the government said Wednesday,the largest jump so far this year.

Market data providerGenscape, which flies helicoptersequipped with infrared cameras and other technology overCushingtwice a week to measure storage levels, estimatesCushingis two-thirdsfull.

Hillary Stevenson, who manages storage, pipeline and refinery monitoring for Genscape, estimates Cushing storage tankscould be full by mid-April.

That has the potential to drive oil prices lower over the next six months. Ed Morse, head of commodities research at Citibank, is predicting oil could dip $20 a barrel before the industry cuts its production levels.

Much of the new oil being produced is light, sweet crude, which is a type many U.S. refineries are not designed to process. Oil companies can't get rid of it by sending it abroad, because crude exports to destinations outside North America are restricted by U.S. law.

No Keystone

Pressure to relax U.S. rules on oil export However there is pressure on the U.S. government to relax the rules on oil exports, which have been in place since the 1970s.

At the same time, U.S. refineries on the Gulf Coast are designed to process heavy oil, and access for Canadian heavy oil is not yet possible because the Keystone pipeline hasnt been built. This has prompted refiners to continue importing foreign oil despite the U.S. glut.

There is an incentive for oil investors to keep oil in storage under the current market system. An investor can buy oil at $50 today and enter into a contract to sell it for $59 in December, locking in aprofit even after paying for storage during those months.

Oil supplies are not expected to diminish until the driving season in summer, when gasoline is in higher demand.

Militants from the Islamic State attacked a Libyan oil field on Wednesday, halting supply from the OPEC nation. However the news did not have an impact on the price of Brent crude, because Libyan supply has been intermittent for almost a year amid the conflict.