Brent's futures curve flipped back into backwardation on Tuesday as traders priced in fresh risks to Middle East supply and Strait of Hormuz shipping. The prompt contract's premium over later-dated oil hit its widest since June 10, signaling expectations of tight near-term crude.
The near-term Brent crude contract traded $8.92 a barrel above the sixth-month contract on Tuesday, its largest premium since June 10. That structure — where prompt oil costs more than oil for later delivery — is known as backwardation and typically points to tight supply in the weeks ahead.
The shift followed a sharp escalation between the U.S. and Iran. Renewed military strikes and attacks on vessels near the strait reignited concerns over the security of Middle East oil supplies, according to Reuters. As a result, traders moved to reprice the risk of near-term disruption.
From contango back to backwardation
The curve looked very different in early July, when prompt Brent traded below later contracts — a structure called contango that usually reflects ample near-term supply. Recovering flows through the strait had eased worries then. According to Saxo Bank's Ole Hansen, the return to backwardation shows "the market expects crude availability to remain constrained in the weeks ahead."
Other Middle East benchmarks moved the same way. Oman, Dubai and Murban swung from discounts to premiums, signaling growing supply concerns. Meanwhile, oil and gas tanker traffic fell to its lowest level since May 25, according to Kpler data cited on Monday.
Paper move for now, physical risk later
Neil Crosby of Sparta Commodities cautioned that the repricing is so far a financial one, calling it largely a paper move. He said flows out of Hormuz are slowing, which could affect the physical market incrementally over the coming weeks if disruptions persist.
The tension also feeds into the inflation picture. Even as June U.S. CPI rose 3.5% year-on-year, below the 3.8% expected, TradingKey noted that a further supply shock could lift Brent, with one analyst scenario pointing to the $125 level if the U.S.-Iran conflict escalates.
Sources: The Mighty 790 KFGO, TradingKey
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