SINGAPORE - The glut in oil inventories should erode further in the first quarter of this year, increasing the risks of a spike in crude prices and a move into backwardation at the end of the second quarter, JPMorgan said in its monthly report. Crude stocks have fallen sharply from their peak at the second quarter of last year, with the Organisation for Economic Cooperation and Development (OECD) land-based storage back to the middle of the five-year range and floating storage possibly as low as 20 million barrels, the bank said in the report. Trading sources said a huge floating stockpile of crude oil in tankers in the North Sea and around Northwest Europe has drained away over the last month, thanks largely to winter heating fuel demand. Only a handful of ships are now storing crude oil in British waters, and the volume of crude oil stored at sea worldwide has declined to below 40 million barrels, from well above 100 million barrels in the middle of last year, shipping sources say. Demand for oil surged over the last month due to a cold snap that swept across Europe and North America, while geopolitical tensions helped push oil prices higher after Russia briefly cut off oil supplies to refineries in neighbouring Belarus in a dispute over pricing. As a result, the spread between prompt crude oil prices and the forward prices -- or contango -- has narrowed to a discount of 52 cents on Wednesday, compared with a discount of $US1.56 at end-November and $US2.83 in mid-September. The last time the spread was in positive territory -- or backwardation -- was July last year, at a premium of five cents. At 1745 AEDT, US crude for March delivery was up eight cents at $US74.79 a barrel. But the persistent glut of refined oil products on floating vessels continues to weigh on the distillate market. Volumes have risen again after falling briefly due to a spell of cold weather in the West. Ship broker ICAP said the number of vessels in floating storage was unchanged in January at 116, with total volumes at 89.4 million barrels. It expected 8.4 million barrels of distillates to unload shortly in locations in Europe, the United States and West Africa and estimated that this would be replaced by around 8.3 million barrels. Five trade and shipping sources asked by Reuters pegged January floating storage volumes at between 70-90 million barrels. JP Morgan also said in the report sent out to clients on Wednesday that global oil demand is expected to return to its historical peak in first-quarter 2011, spurred by strong demand from emerging economies. "From the second half of 2010, this strong demand trend is likely to eat into OPEC spare capacity and put upward pressure on the crude price for as long as economic growth remains resilient," it said.

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