Signs of distress are flashing in the futures market for crude oil as traders jostle to lock in barrels early rather than wait for later, as the West Asia conflict escalates. World oil futures for the far months are now trading at a steep discount to the near month, upending the normal behaviour of oil markets during periods of comfortable supply, when far-off month prices trade at a premium to the near month price. Near month prices trade closer to the spot price.
On London-based ICE Europe, the June contract for crude oil was trading at a $6.86 per barrel discount to the May contract of $104.53 at the time of writing. On 27 February, a day before the war began, it was just the opposite: the June contract was at a slight premium of 39 cents to the May contract, which quoted at $72.48, as per Bloomberg.
Such flipping of discounts between near and far months—backwardation or inversion in technical parlance—points to supply disruptions due to the West Asia war. The May and June contracts are currently the most actively traded oil futures contracts on ICE Europe. In a normal market with ample supplies, the far-month futures trade at a premium to the near-month contract, as the former takes into account storage and insurance charges.
Strait of distress
"The steep discount on ICE clearly indicates the supply distress due to the effective closure of Hormuz," said Sudhir Joshi, former director- finance of Bharat Petroleum Corp. Ltd (BPCL), who is credited with setting up the state-owned refiner's oil trading desk in the early 2000s. Joshi explained that the market tends to move into discount amid sharp supply disruptions. At such times, far-month futures trade at a discount to the near month, which tends to trade closer to the spot price.
Brent crude shot past the $100 mark overnight after Iran chose Mojtaba Khamenei as Supreme Leader to succeed his slain father Ayatollah Ali Khamenei, raising the chances of a protracted conflict. The US has described the selection as "unacceptable," while Israel has labelled him an "unequivocal target for elimination." A dragged-out war threatens to keep oil supply chains blocked for longer, boosting futures prices.
After soaring 29% to approach a four-year-high of $119.50 earlier in the day, oil slipped to $104.53, after the group of seven (G-7) finance ministers led by France said it would consider releasing emergency stocks to ease the oil shortage.
Since the war began, tankers, fuel depots and refineries across the region have been hit by Iran and Israel. Iran has also threatened to target ships laden with oil passing through the narrow waterway known as the Strait of Hormuz, which sees a fifth of global crude transiting annually.
Expectations
Analysts remain divided on the price outlook. While Naveen Mathur, director (commodities and currencies) at Anand Rathi group expects crude to stabilize around $95 shortly due to likely emergency supplies by G-7 and "likely forbearance by the US for Russian supplies due to the war", Gnanasekar Thiagarajan, director Commtrendz expects crude to test $135 over a few days due to a "protraction of the conflict impacting production."
Interestingly, active Brent options expiring on 26 March show the highest outstanding positions—40,868 contracts—at the $100 call strike, with the premium at $12 a contract as of press time. This implies that the sellers, for now, are baking in a maximum price of $112 until expiry. If crude expires at or below $112 by 26 March, they get to keep the $12 premium paid by the call buyers. If, however, volatility spikes and crude crosses $112, the option seller will face losses, explained Joshi.
The US Energy Information Administration in February pegged global crude supply at 106.77 million barrels per day against consumption of 103.45 mmbpd in the first quarter of 2026 , Anand Rathi's Mathur said.