By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panel agrees that the current steep backwardation in oil prices signals tight near-term supply and benefits long rollers. However, they disagree on the sustainability of this structure, with some arguing that it could lead to demand destruction or geopolitical resolution, while others believe it may persist due to refinery bottlenecks or political constraints on SPR releases.
Risk: Prolonged disruption of the Strait of Hormuz could lead to demand destruction or geopolitical resolution, flattening the backwardation and potentially leading to lower long-term prices.
Opportunity: The current extreme backwardation presents a positive roll yield for near-term holders, benefiting those who can take advantage of the market's focus on immediate supply-side fragility.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
What is Backwardation in the Crude Oil Futures Market Telling Us?
Andrew Hecht
5 min read
I concluded an April 16, 2026, Barchart article on the crude oil futures market with the following:
Expect volatility in crude oil prices over the coming days, weeks, and perhaps months, depending on developments in the Middle East. While historical trading patterns suggest an eventual implosive move, prices could rise before then. Moreover, the current environment supports wide price ranges with prices closely following the daily news cycle. Trading crude oil is optimal in the current environment.
Nearby NYMEX crude oil futures were at $92.57 per barrel on April 15, while nearby Brent futures were at $95.40 per barrel. Prices have been volatile over the past month, but the WTI and Brent futures were higher than the April 15 level on May 18.
Choppy price action in WTI and Brent futures
On February 27, 2026, the day before the U.S. and Israel launched attacks in Iran, nearby NYMEX crude oil futures settled at $67.02 per barrel. On December 16, 2025, the price reached a low of $54.89 per barrel.
The daily continuous NYMEX WTI futures chart shows that the price spiked to a high of $119.48 on March 9, 2026, and while the energy commodity has made lower highs since the high on March 9, the price was above $107 on May 18, and has been trading around the $100 pivot point since mid-March.
On February 27, 2026, nearby ICE Brent crude oil futures settled at $72.87 per barrel. On December 16, 2025, the price reached a low of $58.72 per barrel.
The daily continuous ICE Brent futures chart shows that the price spiked to a high of $119.40 on March 9, 2026, and while the energy commodity has made lower highs since the high on March 9, the price was near $111 on May 18, and has been trading around the $105 pivot point since mid-March.
Backwardations in forward curves
Backwardation is a condition in which the term structure of a commodity market is inverted, meaning that prices for deferred delivery are lower than those for nearby delivery. Backwardation signals short-term supply fears, but they believe that the higher prices will lead to increased production and lower prices in the long term.
The forward curve shows that NYMEX WTI crude oil for June 2026 delivery is trading at a $20.65 premium to June 2027 delivery and a $34.47 premium to June 2028 delivery.
The forward curve shows that ICE Brent crude oil for July 2026 delivery was at a $29.34 premium to July 2027 delivery and a $33.84 premium to July 2028 delivery.
Both WTI and Brent futures are in steep backwardation due to events in the Middle East that are affecting petroleum flows through the Strait of Hormuz.
Backwardation favors the longs
Speculators tend to trade nearby or active-month commodity futures due to their higher open interest and volume, which increases liquidity. Investors and speculators who are long crude oil futures and rolling their risk positions to the next active month are benefiting from backwardation, as they sell the nearby contract to close the existing position at a premium and replace it with the next active month at a discount. The July-August Brent spread traded over $4.60 per barrel on May 18, while the WTI June-July spread traded over $4.00 per barrel. The longer backwardation persists, the more those rolling long positions will profit from selling the nearby and buying the next active month, making the long position a cash machine even if crude oil prices remain around current levels of $100 per barrel. If prices spike higher amid heightened Middle Eastern hostilities, the nearby WTI and Brent contracts will likely rally the most, benefiting long positions. The risk is that a sudden price plunge would result in losses on the long positions. Meanwhile, falling oil prices will likely cause backwardation to decline or shift to contango, a condition in which deferred prices are higher than nearby prices, indicating an oversupply in the oil market.
Backwardation tells us something about market sentiment
The current backwardation in WTI and Brent crude oil futures tells us a few things about market sentiment:
Backwardation signals tight nearby supplies.
Lower long-term prices signal that the market expects higher nearby prices to lead to increased production.
Backwardation could signal that producers are hedging long-term output.
Since most activity occurs in nearby futures contracts, backwardation signals bullish sentiment, as speculators and investors buy nearby crude oil futures.
For bulls who hold nearby long positions, there is beauty in backwardation. When markets shift into contango, it can be a curse for those with long positions, as they have to pay to roll rather than receive a premium. For hedgers, the opposite is true: backwardation involves a cost of rolling short positions, while contango can result in a credit.
Some signs point lower, but it could be a rocky road ahead
The following factors support lower WTI and Brent crude oil prices over the coming months and years:
Backwardation signals that the current high prices will foster increased production, weighing on prices over the coming months.
While Iran and the U.S. remain far apart on issues that would end the conflict, rising oil prices are having a global impact, prompting countries worldwide to become involved in efforts to reopen the Strait of Hormuz.
The U.S. is energy-independent and could ramp up its petroleum output to increase exports and relieve some of the pressure created by the Middle Eastern conflict.
An end to the conflict that removes some of the Middle Eastern risk factors could send crude oil prices appreciably lower.
While these factors favor an eventual decline in crude oil prices, the risk of sudden spikes remains high in May 2026. If the U.S. destroys Iranian oil production and refining infrastructure, and Iran retaliates by doing the same to its neighbors in the region, oil prices could spike to record highs, with many analysts forecasting a worst-case scenario of $200 per barrel or higher. In that case, expect the backwardation to widen significantly.
The bottom line is that we should expect lots of volatility in crude oil prices over the coming weeks and months. While the short-term path of least resistance is uncertain, with the potential for a spike or a plunge, the forward curve suggests crude oil prices are most likely to fall over the long term.
Crude oil could reach a new high, but that would only encourage increased production and alternative logistical routes to the Strait of Hormuz and other passages impacted by Iran and its proxies.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
Four leading AI models discuss this article
"Persistent Hormuz-related backwardation in WTI is likely to keep prices elevated longer than the article's long-term bearish forecast implies."
The article highlights steep backwardation in WTI and Brent curves, with June 2026 WTI at a $20.65 premium to 2027 and $34.47 to 2028, driven by Strait of Hormuz risks. This structure rewards rolling longs by $4-plus per barrel monthly while signaling tight near-term supply. Yet the piece underplays how sustained Middle East disruptions could keep inventories low for quarters, delaying any production response. U.S. energy independence is noted but ignores that ramping exports takes time and may not offset lost Iranian flows quickly enough to prevent further spikes.
A swift diplomatic reopening of the Strait could erase the $20-plus backwardation within weeks, shifting the curve to contango and forcing longs to pay to roll rather than collect premiums.
"Backwardation correctly signals supply tightness but does NOT prove mean reversion to $70–$80; the path to normalization depends entirely on whether the Strait reopens or stays choked for years."
The article conflates two separate signals. Yes, backwardation ($20–$34/bbl WTI spreads) signals tight near-term supply and benefits long rollers—that's mechanical and true. But the article then claims this proves prices will eventually fall because 'high prices foster increased production.' That's a demand-destruction argument, not a supply argument. The real risk: if Strait of Hormuz transit remains disrupted for 12+ months, production can't simply ramp fast enough to fill the gap. OPEC spare capacity is ~3M bbl/day; a sustained 5M bbl/day outage (worst case) wouldn't normalize via backwardation flattening—it would normalize via demand destruction or geopolitical resolution. The article underweights how long infrastructure repair takes post-conflict.
If the U.S. and allies genuinely broker a ceasefire within 6 months and Hormuz reopens, the backwardation collapses overnight and WTI could fall $30–$40/bbl in weeks, making current long positions toxic despite the roll premium.
"The steep backwardation reflects a temporary geopolitical panic that ignores the long-term demand destruction and structural capital constraints that will ultimately force a mean reversion."
The current extreme backwardation in WTI and Brent suggests a market hyper-focused on immediate supply-side fragility at the Strait of Hormuz, pricing in a massive 'geopolitical risk premium.' However, the article assumes that higher prices will inevitably trigger a supply response. This ignores current capital discipline among U.S. shale producers and the long lead times for new upstream projects. If the market is pricing in a $30+ premium for immediate delivery, it is betting on a very short-lived crisis. If the conflict persists, the 'roll yield' benefit for longs will be offset by the destruction of demand from global economic cooling, making the current $100 pivot point unsustainable.
If the geopolitical risk is structural rather than transient, the backwardation may not collapse but rather flatten as long-term supply expectations are permanently repriced higher.
"Backwardation signals near-term risk and roll benefits, not a reliable guide to long-run oil prices."
Backwardation as framed here suggests a bullish tilt for near-term holders and a positive roll yield; but the claim that a persistent backwardation implies lower long-term prices is overstated. The strongest driver of the curve is risk premia and storage economics, not a guaranteed demand-supply rebalancing. If Iran tensions escalate or resolve, the curve can re-steepen or flatten in either direction; US shale could expand capacity, potentially capping upside even as near-term pricing remains tight; OPEC+ decisions and capex cycles will shape the curve more than headlines imply. Also, macro slowdown or USD strength could erode demand, flattening backwardation faster than expected. Net: stay cautious on long-term bets despite current backwardation.
The strongest counterpoint is that a spike or a relief in Middle East tensions could invert the curve quickly, turning positive roll yields into headwinds, and a sustained demand shock could erase any near-term pricing premium.
"Strategic petroleum reserve draws are a faster-acting buffer than production ramps or demand shocks and could flatten the curve without Hormuz reopening."
Claude flags the mismatch between OPEC spare capacity and a potential 5M bbl/day outage, but this understates how quickly IEA-coordinated SPR releases from OECD members could blunt the backwardation. Those inventories sit at multi-year highs and can be mobilized in weeks, not quarters, eroding the $4-plus monthly roll yield before any demand destruction or shale response materializes.
"SPR releases are a tactical buffer, not a structural solution to sustained Hormuz disruption."
Grok's SPR release argument is mechanically sound but misses timing. IEA coordination takes 2–3 weeks minimum; markets move faster. More critically: SPR releases are finite (~180M barrels usable cushion) and politically constrained—no administration burns reserves for a 12-month crisis without domestic pushback. Claude's infrastructure repair timeline is the real constraint. A Hormuz closure lasting 6+ months can't be solved by SPR alone; you need either geopolitical resolution or demand destruction. Grok conflates availability with political willingness.
"Refining capacity constraints will amplify price volatility regardless of crude supply availability."
Claude, you are right about the political constraints on SPR, but both you and Grok are ignoring the refinery bottleneck. Even if the Strait of Hormuz stays open, global refining capacity is structurally tight. A disruption won't just hit crude pricing; it will create a massive crack spread blowout. The market isn't just pricing geopolitical risk; it is pricing the inability of downstream facilities to process non-Middle Eastern, heavier sour grades if supply chains shift.
"A sustained Hormuz disruption could trigger a durable crude-slate shift toward heavier sour grades, keeping backwardation steep longer than expected even if SPRs or diplomacy ease near-term pressures."
Gemini is right about refinery bottlenecks, but the overlooked hinge is a potential durable shift in the crude slate under prolonged Hormuz disruption. Heavy sour barrels could bid up refiners upgrading costs and extend backwardation as upgrading timelines bite; demand may deflate slower than price signals suggest, but product markets trail crude pricing. If upgrades lag, the curve stays steep even with SPRs or diplomacy, complicating any quick roll-down.
The panel agrees that the current steep backwardation in oil prices signals tight near-term supply and benefits long rollers. However, they disagree on the sustainability of this structure, with some arguing that it could lead to demand destruction or geopolitical resolution, while others believe it may persist due to refinery bottlenecks or political constraints on SPR releases.
The current extreme backwardation presents a positive roll yield for near-term holders, benefiting those who can take advantage of the market's focus on immediate supply-side fragility.
Prolonged disruption of the Strait of Hormuz could lead to demand destruction or geopolitical resolution, flattening the backwardation and potentially leading to lower long-term prices.