Investors believe that the oil price shock is only temporary

On March 25, oil prices dropped sharply after news that the White House sent Iran a 15-point peace plan to end the conflict. However, conflicting messages and actions from Washington and Tehran still caused prices to move up again.

Currently, each barrel of Brent oil remains around 105 USD, while WTI oil trades above 92 USD, an increase of about 2%. “Optimism about a ceasefire has faded,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

However, in the futures market, oil prices decrease with farther delivery terms. Specifically, Brent and WTI oil prices for delivery next month are nearly 92 USD and 87 USD per barrel, respectively. The price trend is getting cheaper month by month, down to less than 80 USD and 75 USD for contracts delivered at the end of the year.

This is a state of “backwardation” – the phenomenon in which short-term contracts are traded at higher prices than long-term ones. According to Toni Meadows, Head of Investment at BRI Wealth Management, “backwardation” shows that the market evaluates the current oil price shock as temporary. “Otherwise, you will have to pay more for future deliveries, due to tight supply,” he said.

He said that it is difficult to evaluate the reasonableness of this expectation, when information about negotiations between the US and Iran is still contradictory and the situation is still very fragile. “We don’t know the whole story of what’s going on. I think the market is just being cautious,” he said.

Ms. Katy Stoves, Investment Manager at Mattioli Woods, believes that “backwardation” is a normal reaction. “I think people are expecting a reduction in hostilities. But at the same time, on the other side, what’s more worrying is that ‘backwardation’ could also be a forecast of falling demand,” she noted.

The oil futures market is setting a “risk premium” of about 10-12 USD per barrel. For example, the price of Brent oil contract for delivery in December is currently 79.7 USD per barrel, 17% lower than currently but still about 10% higher than before the war.

However, experts say that fluctuations and risks have not been fully reflected, such as congestion in the Strait of Hormuz or the risk of energy infrastructure being destroyed. Just one major attack could completely change the situation, especially since restoring LNG facilities can take years.

Mr. Toni Meadows at BRI Wealth Management said that a rocket could also change the situation. According to him, the problem is not only negotiations, but once destroyed infrastructure will take many years to restore operation.

Sharing the same opinion, Ms. Katy Stove noted that much energy infrastructure has been destroyed. “Even if some kind of ceasefire is reached, repairing and getting those facilities back up and running will take time. I’m not sure the market has taken that into account,” she said.