High inventories are likely to keep oil markets mostly in contango throughout 2011, extending into a third year a structure once considered unusual but now seen as standard.

The market has been in contango for more than two years - with the front-month US contract cheaper than contracts for later delivery - surpassing the previous record from 2005 to 2007.

High inventories mean there is little need to pay a premium for prompt delivery contracts.

Goldman Sachs, the biggest bank in commodities, has stood apart in predicting the oil market will revert to the opposite condition of backwardation, although saying the United States will have to work off its inventory levels in the coming months.

'We don't expect strong backwardation (in the near term),' said David Greely, head of energy research at Goldman Sachs.

'To get more significant backwardation would probably require moving into late next year. We would need to be drawing down Opec spare capacity.'

For some, even that view is too bullish. Many do not see demand significantly outstripping supplies next year and are betting on contango for at least another 12 months.

'We expect steep contango to persist for the foreseeable future,' said Patrick Armstrong of London-based Armstrong Investment Managers, which has shorted the front of the curve and bought the oil contract four months further out. Contango will endure until supply falls towards the 10-year average, he predicted.

Analysts at Credit Suisse said total oil product inventories in the United States, Europe, Singapore and Japan have started to show the first year-on-year declines since the peak of the financial crisis two years ago, but they remained 6 per cent above the five-year average.

'I don't see a normal scenario where we will move into backwardation in at least the next 12-14 months,' said Ed Morse, managing director of commodities research at Credit Suisse, adding there was no evidence to suggest backwardation was the norm to which the market would naturally revert.

Backwardation was prevalent in the oil market in the 1980s and 1990s because of the difficulty and cost of storing crude.

Some analysts say a wave of investment money that began entering the oil market around 2004 has resulted in a structural shift.

Since then, oil prices have traded in contango two-thirds of the time and have only traded in backwardation during the rapid spike towards the record of nearly $150 a barrel in July 2008.

Financial players initially bought into indexes, such as the S&P GSCI, which offer returns in a backwardated market by rolling contracts from the more expensive front-month contract into the cheaper second-month.

But as demand and prices fell sharply during the financial crisis, some investors moved their money further down the futures curve, arguably raising the price of longer-dated contracts and perpetuating the contango structure.

'Previously, you could say backwardation was normal. Contango is going to be the new normality,' said Eugen Weinberg of Commerzbank.

'We don't expect any deficits in the market, and investors have become the new important factor. That might be for many years to come as long as the paradigm shift in commodities goes on with them considered as a new asset class.'

Goldman Sachs says the role of financial investors has been overstated and that traders have only responded to the large rise in inventories witnessed during the recession.

'We don't think there has been a structural change; inventories are still the primary driver,' said Greely.

'As inventories draw down, that will flatten the curve out. Globally, inventories have largely normalised outside the United States. Floating storage has come out because the curve no longer supports it.'

The curve has flattened as the front-month contract has risen above $80 a barrel, bringing short-term prices closer into line with long-term projections. But many are still sceptical that oil will move back towards $100, which could flip the market into backwardation, while much of the developed world is still struggling to stoke a robust economic recovery.

'Many people are predicting oil prices will go to $90-$95 a barrel next year, but what is really notable is how restrained the predictions are,' said Edward Meir, senior commodities analyst in New York at brokers MF Global.

'The mood is not especially bullish. With so much inventory still around, I don't see anything dramatic forming in the nearby months. We're still swimming in oil.'-Reuters