Oil prices have experienced significant volatility since the United States and Iran entered into conflict nearly four weeks ago. However, analysts indicate that the market has now entered a state of "contango," suggesting that while traders expect a rapid resolution to the conflict, a risk premium has already been priced into energy costs.
Reports emerged on Wednesday that the White House submitted a 15-point peace plan to Iran aimed at ending hostilities, leading to a sharp decline in oil prices as investors reacted. Despite this, prices remain elevated due to mixed signals from Washington and Tehran regarding peace negotiations, ongoing missile attacks in the Middle East, and continued congestion in the Strait of Hormuz.
The global benchmark Brent crude futures for near-month delivery continue to hover around $99 per barrel, representing an increase of nearly 36% compared to levels before the U.S. and Israel launched airstrikes against Iran on February 28. Similarly, West Texas Intermediate crude for April delivery is trading around $87.76 per barrel, up approximately 30% from pre-conflict prices.
However, a different picture emerges when examining the entire futures curve. The oil market is currently in contango, where near-term futures contracts are priced higher than those for later delivery. Toni Meadows, Head of Investments at BRI Wealth Management, noted in a video call, “This contango—where future prices are lower than current prices—suggests the market views the current oil price surge as temporary.”
He added, “Therefore, this is a phenomenon driven by sudden events rather than sustained factors. Otherwise, due to supply shortages, prices for later delivery should be higher. So yes, the immediate issue stems from the conflict, but the market anticipates some form of resolution eventually.”
Meadows acknowledged the difficulty in determining whether this is a reasonable conclusion, stating, “We don’t have the full picture. Trump is clearly seeking an exit from the war, as he has been all week. But Iran says it will not negotiate with the U.S.—what is the truth? For now, I think the market is just treading cautiously.”
He pointed out that European natural gas prices have not surged as they did following the outbreak of the Russia-Ukraine conflict in 2022. However, congestion in the Strait of Hormuz remains unresolved, and the market may not have priced in all potential developments.
Meadows remarked, “At the moment, this may just be a price spike that will recede if the situation is resolved in some way, but it's difficult to foresee what that resolution path might look like.” He added, “If the conflict is short-lived, if they can find an exit, and if regional capacity remains undamaged, that’s one scenario. But the situation is very fragile. A single missile could change everything. It’s not just about negotiations. Destroyed LNG facilities could take years to restore.”
He further noted the challenges the U.S. would face in completely dismantling Iran’s nuclear ambitions through airstrikes. Meadows said, “Iran still has 400 kilograms of uranium enriched to 60%—it wouldn’t take much to increase that to 90%. The Iranians have the technology and could easily go underground. I think the market’s reaction has been relatively calm considering the range of potential outcomes.”
Katy Stoves, Investment Manager at Mattioli Woods, described the contango in oil markets as “quite normal under such shocks.” She stated, “I believe the market is anticipating some de-escalation, and contango reflects that. However, on the other hand, it could also signal weakening demand, which may be more concerning.”
In the nearly four weeks since the initial airstrikes, U.S. gasoline and airfare prices have risen sharply. Stoves commented, “Even if the conflict is resolved, it’s crucial to note that significant energy infrastructure has been damaged. Even with a ceasefire... repairs and restoration will take time—I’m not entirely sure the market has priced this in.”
Indrani De, Global Head of Investment Research at FTSE Russell, emphasized that while the market expects lower oil prices in the long term, volatility and risk are still being factored into pricing. She explained, “If you look at the crude futures curve, which reflects market expectations for future prices, it is highly volatile. The curve is constantly shifting, but its shape remains very consistent.”
De continued, “The market is in deep contango, with prices dropping sharply around four months out and again around ten months out. This implies that by the end of the year, oil prices will largely normalize—with ‘normal’ meaning about $10 higher than pre-conflict levels.”
Brent crude futures for December delivery are currently priced around $79.70 per barrel. This is 17% lower than near-month contracts but 10% higher than pre-war prices. De concluded, “So, this deep contango indicates that even the most affected markets are pricing in an early resolution. However, if you look ten months ahead, Brent prices will still be about $10 to $12 per barrel higher than pre-crisis levels. I believe this can be seen as the risk premium currently embedded in the market.”
