A barrel of Brent crude oil currently goes for about $112, while a barrel of West Texas Intermediate (WTI) crude oil fetches just over $94. Over the past 20 years, WTI has traded at an average premium of about $1 per barrel to Brent because the light, sweet crude oil is of a slightly higher quality than Brent crude oil. The current price spread between WTI and Brent crude oil is a historical anomaly. Nevertheless, the current $18 price gap between a barrel of WTI and a barrel of Brent crude oil falls well short of the 2011 high of $30 per barrel.

Why has the traditional price relationship between WTI and Brent crude oil deteriorated over the past year? For one, a surge in production from unconventional fields such as North Dakota’s Bakken Shale and the Canadian oil sands has enabled North America to grow its annual output for the first time in decades. Much of this oil has found its way to Cushing, Okla.–the delivery point for oil futures that trade on the New York Mercantile Exchange–artificially depressing the price of WTI relative to other benchmarks.

Our forecast still calls for WTI crude oil to trade at discount to Brent for the foreseeable future. But we expect the price of WTI to climb through year-end and narrow the gap with Brent crude oil.

As I pointed out in the last issue of The Energy Strategist, US inventories of crude oil and refined products recently dipped below their five-year average for the first time since 2008. Whereas many nations have dealt with relatively skimpy oil stockpiles for some time, US inventories have been glutted because of local supply-demand conditions.

But the domestic oil market has tightened. Eager to boost profit margins by lowering their input costs, refiners in the mid-continent portion of the US have stepped up their purchases of WTI crude oil. Meanwhile, US oil imports have remained relatively low–in part because oil prices are higher in nations suffering acute shortages of oil. A decline in US imports tightens the supply side of the equation.

In fact, the oversupply of oil at Cushing has declined substantially. At the end of August (the most recent data from the Energy Information Administration), the volume of oil stored at Cushing had declined more than 11 percent from year ago levels. The drawdown in US oil inventories between the end of July and the end of October was more than four times the five-year average. If we exclude the region of the US that includes Cushing, US crude oil inventories are near a seven-year seasonal low.

Tightening on the supply side has pushed the market for WTI crude-oil futures into backwardation, a situation that usually occurs when there’s a shortage of the physical commodity. A market is in backwardation when near-month contracts trade at a premium to those that expire further into the future. In this situation, traders pay a higher price to have their oil delivered sooner.

Conversely, the oil market is in contango when the front-month contract trades at a lower price than contracts expiring further into the future. A bit of contango is natural in a balanced market; contracts expiring months into the future add in the cost of storing the oil.

After a long period of contango, the WTI crude oil curve recently flipped into backwardation. For example, the December 2011 contract currently fetches at $94.59 per barrel, while the January 2012 contract goes for $94.52 per barrel and the November 2012 contract is $93.60 per barrel. This marks quite a reversal from a year ago, when December 2010 WTI futures sold for $86.85 per barrel and December 2011 contracts fetched about $91 per barrel.

Periods of backwardation tend to coincide with rising oil prices–another reason I’m bullish on WTI’s near-term prospects.

WTI crude oil has also formed a solid base at a level that’s below its 200-day moving average. Technical analysts tend to look at the height of a basing pattern to project a security or commodity’s likely upside. With the current base at over $15 per barrel, the pattern indicates an upside to about $110 barrel. Although many investors regard technical analysis as hoodoo, many traders base their short-term moves on these patterns. Ignoring these indicators can cost you a lot of money on shorter-term trades.

United States Oil Fund (NYSE: USO), an exchange-traded fund (ETF) that track the price of WTI crude-oil futures, owns near-month oil futures contracts and rolls them according to a fixed schedule. Between Dec. 6 and Dec. 9, the ETF will sell all of its December 2011 crude-oil futures and buy the equivalent amount of January 2012 futures.

This is a problem when the crude oil market is in contango because the fund is essentially selling cheaper near-month contracts and buying more expensive contracts that expire one month in the future. But when the oil market is in backwardation, the ETF sells more expensive near-term contracts and rolls into cheaper next-month contracts.

United States Oil Fund isn’t an appropriate bet for investors with a longer time horizon. However, the ETF represents the best way to bet on any near-term upside in crude oil prices. We will hold this trade in the Gushers Portfolio for no more than two months.

United States Oil Fund is also considered a limited partnership (LP) meaning that the ETF is taxed like a master limited partnership (MLP) and issues a K-1 form at tax time. You probably won’t receive your K-1 until March. Filing a K-1 form also takes a bit of extra effort at tax time. In practice, however, any gains you make in this trade will be taxed as short-term capital gains.

Buy United States Oil Fund under 37.75. My upside target for the ETF is $42 to $43.