Crude oil futures backwardation: Investors bet on a short-lived Iran conflict, with high risks possibly not fully priced in

How does the structure of crude oil futures in backwardation reveal the market’s long-term pricing of risk?

Crude oil futures have fallen into a backwardation structure, with traders generally betting that the U.S.-Iran conflict will be short-lived. However, analysts warn that potential damage to energy infrastructure, the high uncertainty of negotiation prospects, and the deep complexity of Iran’s nuclear issues mean that the market may not have fully priced in all potential risks.

According to CCTV News, the White House has submitted a peace proposal with 15 points to Iran, and as soon as the news broke, oil prices dropped sharply. However, the contradictory statements between Washington and Tehran, ongoing missile strikes in the Middle East, and shipping congestion in the Strait of Hormuz have kept prices elevated. The global benchmark Brent crude oil for near-month futures hovers around $99 per barrel, about 36% higher than before the first U.S.-Israel strikes against Iran on February 28.

However, the crude oil futures curve presents a markedly different expectation. In backwardation, the Brent December contract is priced at about $79.70, approximately 17% lower than the near-month contract, but still about 10% higher than before the conflict began.

Indrani De, Head of Global Investment Research at FTSE Russell, points out that the curve shape indicates the market has internalized a long-term risk premium of about $10 to $12 into the pricing benchmark, while expecting short-term shocks to gradually dissipate as the situation eases.

Several analysts also caution that the current relatively calm market pricing may underestimate the tail risks of a worsening situation. Toni Meadows, Head of Investments at BRI Wealth Management, told CNBC: “Considering the range of potential outcomes, the market is relatively calm.”

Market bets that the conflict is a temporary event

The so-called “backwardation” refers to a situation where the price of near-month futures contracts is higher than that of later contracts, which typically indicates tight current supply but market expectations of future easing.

Toni Meadows states: “Backwardation—where future prices are lower than current prices—suggests that the market believes the current rise in oil prices is temporary. This is an event, not a normalization factor. Otherwise, due to concerns about supply scarcity, the prices of later contracts should be higher.”

Long-end curve reflects lasting costs

Although the backwardation structure implies short-term shocks, the absolute level of the futures curve reveals the market’s true judgment of the long-tail impact of the conflict.

Indrani De notes that the current oil price futures curve shows a clear downward inflection point about four months out, returning to a “normal” level by around ten months (i.e., by the end of the year)—but this “normal” level is about $10 higher than before the conflict. “The deep backwardation structure indicates that even the most impacted markets are pricing in an early resolution,” she says, “but looking at the price level of Brent ten months out, it is still about $10 to $12 higher than prior to the crisis. I believe this can be viewed as the risk premium embedded in the market.”

The Brent December contract is currently priced at about $79.70. This means that in the eyes of traders, even if the conflict is ultimately resolved, the geopolitical tensions have left a lasting imprint on global oil prices.

Infrastructure damage and nuclear proliferation concerns

Multiple analysts believe that the current market pricing has not fully reflected the scenario of further deterioration in the situation.

Katy Stoves argues, “Even if a ceasefire is eventually reached… repairing these facilities and bringing them back online takes time.” She specifically points out that if liquefied natural gas (LNG) plants are destroyed, reconstruction often takes years.

Toni Meadows expresses skepticism about the feasibility of achieving a “comprehensive downgrade” of Iran’s nuclear capabilities through bombing. He adds: “If the conflict is brief, both sides can find a way to de-escalate, and regional capacity is not significantly damaged, that is one scenario—but it is a very fragile combination.”