Crude Oil Futures Backwardation: Investors Bet on Brief Iran Conflict, High Risks Potentially Underpriced

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

According to CCTV News, the White House submitted a 15-point peace proposal to Iran. Upon this news, oil prices fell sharply. However, 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. Global benchmark Brent crude near-month futures are hovering around $99 per barrel, about 36% higher than before the first strike by the US and Israel against Iran on February 28.

However, the crude oil futures curve shows a distinctly different expectation. Under the backwardation structure, the December Brent delivery contract is trading at about $79.70, about 17% lower than near-month contracts, but still about 10% higher than before the conflict broke out.

Indrani De, Global Head of Investment Research at FTSE Russell, noted 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 de-escalates.

Multiple analysts simultaneously cautioned that the current relatively calm market pricing may be underestimating the tail risks of a further deterioration in the situation. Toni Meadows, Chief Investment Officer at BRI Wealth Management, told CNBC, "Given the range of potential outcomes, the market is remarkably calm."

Market Bets on Conflict Being a Phased Event

So-called "backwardation" refers to a situation where near-month futures contracts are priced higher than far-month contracts. This typically signifies tight current supply but expectations of future easing.

Toni Meadows stated, "Backwardation – meaning future prices are lower than current ones – indicates that the market believes the current rise in oil prices is temporary. It's an event, not a normalization factor. Otherwise, due to concerns about supply scarcity, the price of far-month contracts should be higher."

Long-Term Curve Reflects Lasting Costs

Although the backwardation structure suggests short-term shocks, the absolute level of the futures curve reveals the market's true assessment of the long-term impact of the conflict.

Indrani De said that currently, the oil price futures curve shows a distinct inflection point with a significant drop after about four months, returning to "normal" by about 10 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 suggests that even the most impacted markets are pricing in an early solution," she said, "but if you look at the Brent price level 10 months out, it is still about $10 to $12 higher than before the crisis. I believe this can be seen as an embedded risk premium in the market."

Brent's December contract is currently trading at about $79.70. This means that in the eyes of traders, even if the conflict is eventually resolved, geopolitical tensions have left a lasting mark on global oil prices.

Infrastructure Damage and Nuclear Proliferation Concerns

Several analysts believe that current market pricing has not fully reflected scenarios of further deterioration.

Katy Stoves commented, "Even if some form of ceasefire is eventually reached... it will take time to repair these facilities and bring them back online." She specifically pointed out that once liquefied natural gas (LNG) plants are destroyed, reconstruction often takes years.

Toni Meadows expressed skepticism about the feasibility of achieving a "comprehensive downgrade" of Iran's nuclear capabilities through bombing. He added, "It's one scenario if the conflict is brief, both sides can find a de-escalation path, and regional capacity is not substantially damaged – but that is a very fragile combination."