The oil market is in backwardation: a phenomenon where futures with near-term deliveries are marketed at a premium over longer-dated contracts.
Oil prices have been gripped by volatility since the U.S.-Iran war began nearly four weeks ago.
But analysts say the market has now entered a state of “backwardation,” with some suggesting a risk premium has been baked into energy prices despite traders anticipating a swift resolution to the conflict.
Oil prices jumped on Thursday, amid mixed messages from Washington and Tehran on the state of peace negotiations. Ongoing missile strikes in the Middle East and the continued backlog of traffic in the Strait of Hormuz are keeping prices elevated.
Front-month global benchmark Brent crude futures were last seen nearly 4% higher at $106.18 a barrel, almost 47% higher than where they stood before the U.S. and Israel’s first strikes on Iran on Feb. 28.
RIP_Soulja_Slim on
FYI, oil markets were in backwardation for some decent stretches in the mid 2010s as well, what it effectively means is the futures market think oil is expensive today but will be cheaper in the future.
Backwardation is a non normal condition, as generally speaking futures markets sit in a state of Contango, which just means that if you’re buying futures for that commodity farther in the future they’re more expensive than closer. This is just a normal time premium, with time comes uncertainty, so you pay a little more. Backwardation is basically the market pricing in a strong expectation of falling prices.
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From the article:
The oil market is in backwardation: a phenomenon where futures with near-term deliveries are marketed at a premium over longer-dated contracts.
Oil prices have been gripped by volatility since the U.S.-Iran war began nearly four weeks ago.
But analysts say the market has now entered a state of “backwardation,” with some suggesting a risk premium has been baked into energy prices despite traders anticipating a swift resolution to the conflict.
Oil prices jumped on Thursday, amid mixed messages from Washington and Tehran on the state of peace negotiations. Ongoing missile strikes in the Middle East and the continued backlog of traffic in the Strait of Hormuz are keeping prices elevated.
Front-month global benchmark Brent crude futures were last seen nearly 4% higher at $106.18 a barrel, almost 47% higher than where they stood before the U.S. and Israel’s first strikes on Iran on Feb. 28.
FYI, oil markets were in backwardation for some decent stretches in the mid 2010s as well, what it effectively means is the futures market think oil is expensive today but will be cheaper in the future.
Backwardation is a non normal condition, as generally speaking futures markets sit in a state of Contango, which just means that if you’re buying futures for that commodity farther in the future they’re more expensive than closer. This is just a normal time premium, with time comes uncertainty, so you pay a little more. Backwardation is basically the market pricing in a strong expectation of falling prices.
If anyone wants to read more:
https://www.cmegroup.com/education/courses/introduction-to-ferrous-metals/what-is-contango-and-backwardation
https://www.schwab.com/learn/story/contango-and-backwardation-explained