Will Oil Traders Get Squeezed?

Source:

"Oil traders are dumping their near-term contracts because they have nowhere to store the oil."

Since yesterday morning, oil has recovered over 10% as other traders (I assume) rush in to cover their positions.

Reading the oil news through the day has me wondering whether oil traders are setting themselves up for a big squeeze. Let me lay out the facts as I see them:
  • Worldwide oil consumption has fallen about 500,000 barrels per day from the levels of last year.
  • The contango in the oil futures has producers of oil selling it in forward contracts. The 6 month futures were $17 to $18 /barrel higher than the current spot last time I looked and end of 2009 contracts were $20 better than current prices.
  • Oil in storage for future delivery is starting to take up all available storage space.
  • If there is not enough storage or demand where will current and near term production go? Prices will have to drop to the point where producers reduce production to something less than current demand.
  • If production does not contract significantly, in a few months there will be futures contract holders buying $55 oil that is worth less than $40.
  • Somebody will be going broke!
I know OPEC has committed to significant cuts in production and that is the reason for the oil price contango (so I read). But there seems to be a problem if the oil industry runs out of storage for oil sold into future contracts. I do not know what the effects of this can be, and it appears that somewhere there is going to be a big squeeze!

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