The oil market is in ‘backwardation’ — what it means for energy prices

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” that suggests a risk premium has been baked into energy prices, despite traders anticipating a swift resolution to the conflict.

As investors reacted to reports on Wednesday that the White House had sent Iran a 15-point peace plan intended to bring an end to the conflict, oil prices fell sharply.

But 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 ensured prices remain elevated.

Front-month global benchmark Brent crude futures are still hovering around the $99-a-barrel mark, almost 36% higher than where they stood before the U.S. and Israel’s first strikes on Iran on Feb. 28.

Meanwhile, U.S. West Texas Intermediate futures for April delivery were last seen trading around $87.76 — roughly 30% higher than before the war began.

Across the futures curve, however, prices tell another story. The oil market is in backwardation: a phenomenon where futures contracts with immediate or near-term deliveries sell at a premium over later deliveries.

“That backwardation — lower prices in the future compared to now — is indicating that the market thinks this current uplift in the oil price is transitory,” Toni Meadows, head of investment at BRI Wealth Management, told CNBC on a video call.

“So it’s an event, rather than something that stays with us. Otherwise, you’d be paying more for future deliveries because of scarcity of supply. So, yes, there’s an issue now due to the fighting, but the expectation is that there will be some resolution.”

Meadows said it was difficult to judge whether this was a reasonable conclusion.

“We don’t know the full story of what’s happening,” he told CNBC. “Trump is definitely looking for an off-ramp, he’s been doing that all week. But the Iranians said they aren’t talking [to the U.S.] — where does the truth lie? At the moment, I think markets are just playing it cautiously.”

He noted European gas prices have not surged to the extent they did after Russia’s 2022 full-scale invasion of Ukraine, but said there was also still a backlog of traffic in the Strait of Hormuz — and markets may not be pricing in all the potential ways the situation could unfold.

“At the moment, it can just be a price spike that abates if there is some sort of resolution, but it’s difficult to see what that path might be,” he said.

“If it is short-lived, if they can find an off-ramp and capacity in the region hasn’t been destroyed, that’s one thing, [but] It’s a very fragile mix. One missile changes the equation. It’s not just about the negotiations. LNG plants, once…