According to Petroleum Economist magazine, oil supply in Saudi Arabia is growing. The Saudis claim they have another 2.5 million barrels per day of spare production ready to come on line.

We're up to our ears in oil...

Even while the benchmark U.S. oil price remains over $100 per barrel, commercial crude oil inventories are hitting 353.4 million barrels.

That's about 24.4 days of supply for refiners. And it's at the top of the range for this time of year.

Now, the glut is creating the right conditions for a big drop in oil prices.

You can see how much oversupply we have in the chart below...

The current inventory is 10% above the 10-year average for this time of year.

In short, we have an enormous supply of oil right now... And we're not the only ones. According to Petroleum Economist magazine, oil supply in Saudi Arabia is growing. The Saudis claim they have another 2.5 million barrels per day of spare production ready to come on line.

Supplies are high... But demand is falling. U.S. oil demand peaked in 2007 at over 20 million barrels per day. Demand has fallen 13% since then. Our demand for foreign oil imports is also down 15% from its peak in 2005.

The International Energy Agency (IEA) cut its forecast for global oil demand growth to 0.9% this year.

The only reason prices are still high is continued tension in the Middle East. The market is concerned that come July 1, 2012, the oil sanctions on Iran will cause shortages around the world.

And as long as the market is worried about the outcome, prices can stay high. But as soon as tensions ease, the conditions are right for a big drop in oil prices.

It happened last year...

In March 2011, we had 362 million barrels of oil in storage. It was far too much oil for demand. The price peaked in April at $113 per barrel then fell over 36% to bottom in September.

We could see the same happen this year.

I don't believe that fear can sustain this oil rally much longer. There is simply too much oil piling up, especially in the U.S.

If you are long oil producers now, tighten your trailing stops and prepare to take profits. For the rest of us, I see the coming crash in oil prices as a buying opportunity.