Highlights:
Global oil markets have entered a period of sharp volatility, with near-term crude prices surging to record levels following escalating geopolitical tensions involving Donald Trump and Iran. Traders rushed to secure immediate oil supplies after Trump vowed to intensify attacks, driving a significant gap between short-term and future oil contracts.
This market condition, known as backwardation, occurs when oil for immediate delivery trades at a premium compared to later-dated contracts. It signals expectations of tight supply in the short term. On Thursday (2), US benchmark crude showed its strongest-ever backwardation, with West Texas Intermediate (WTI) crude for May delivery trading as much as $16.70 per barrel higher than the June contract.
WTI crude futures for May delivery climbed to a session high of $113.97 per barrel before settling at $111.42 per barrel, reflecting heightened demand for immediate supply. The surge comes amid an ongoing US-Israeli conflict with Iran that has entered its fifth week, significantly disrupting global oil flows.
The conflict has removed millions of barrels per day from the global market, contributing to supply shortages, particularly in countries dependent on shipments through the Strait of Hormuz. This critical passage typically handles around 20 per cent of the world’s oil supply but is now largely blocked, intensifying fears of prolonged disruption.
In a national address, Trump pledged to strike Iran 'extremely hard' in the coming weeks but did not outline a clear strategy to reopen the strait. He also suggested that other nations should take responsibility for restoring shipping access, adding further uncertainty to global markets.
While short-term oil prices have surged sharply, longer-term contracts have seen more modest increases. Oil for October delivery—a key benchmark for producers considering new drilling- rose to about $73.64 per barrel, representing a 13 per cent increase compared to levels before the conflict began in late February.
Despite rising prices, US oil producers remain cautious about ramping up output. Industry leaders indicate that sustained higher prices over several months are necessary before committing to increased drilling activity. Andy Hendricks, CEO of Patterson-UTI, noted that decisions depend more on price expectations six to nine months ahead rather than current spikes.
Similarly, smaller producers such as Latigo Petroleum suggest that oil prices must remain above $75 per barrel through the rest of the year and into 2027 to justify new drilling investments. However, long-term price signals remain weak. Crude for May 2027 delivery is trading at approximately $68.43 per barrel, creating a gap of more than $40 per barrel compared to current prices.
This steep discount in future prices is discouraging producers from expanding operations. Bryan Sheffield of Formentera Partners described the wide price spread as a major obstacle to planning drilling programs.
Meanwhile, US oil rig activity has seen only a modest increase, with the number of active rigs rising by two to 411, according to industry data.
Federal Reserve Bank of Dallas President Lorie Logan emphasized that producers are unlikely to significantly boost output in the near term, as they remain uncertain whether elevated prices will persist.
As a result, consumers may face rising gasoline prices, while energy markets continue to react to geopolitical uncertainty and constrained supply conditions.
