The premium of the first-month Brent crude futures contract to that for delivery six months later traded on Monday near its highest in almost two years as investors priced in an increased prospect of disruption to Middle East supply.
The spread between the first Brent contract for August and the February 2026 contract (LCOc1-LCOc7), traded as high as $6.00 a barrel on Monday, not far from the $6.95 high on Friday, which was the highest since October 2023.
Just a few weeks ago at the start of May, the spread traded at its lowest since December 2023 at a 29 cent discount.
The shift in the structure since Friday came as investors priced in a greater geopolitical risk premium on prompt oil contracts after Israel launched strikes at targets across Iran on Friday.
“The change in the structure is a necessary result of the front end spike,” Vortexa’s chief economist David Wech said.
An intensified regional conflict between Israel and Iran increases the risk of disruption to the flow of 18-19 million barrels per day (bpd) of oil through the Strait of Hormuz.
“Up to 15 million bpd of crude exports and 4-5 million bpd of product exports is at risk if the Strait is squeezed, which in the current seasonal demand growth period, could tighten front-month balances into a further deficit,” said Rystad Energy’s vice president of commodity markets Janiv Shah.
Prompt contract trading above those for future delivery is often referred to as “backwardation” and is typically a sign of a tight oil market, whereas its opposite state of “contango” signals a weaker short-term market.
The front end of the Brent curve had been exhibiting tightness already heading into the northern hemisphere summer, albeit a shallower backwardated structure, as market participants were anticipating strong peak fuel demand before a weakening later this year as OPEC and non-OPEC supply rises and demand falls.
“The fact that the back end has barely moved suggests to me that market participants do not believe the market will change in the longer term,” Vortexa’s Wech said, adding that healthy fuel demand in the Atlantic Basin had also contributed to a stronger oil price structure.
Source: Reuters