Crude oil futures discount: Investors bet on brief Iran conflict, high risks may not be fully priced in

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Crude oil futures have entered a backwardation structure, with traders generally betting that the US-Iran conflict will be short-lived. However, analysts warn that the potential destruction of energy infrastructure, high uncertainty in negotiation prospects, and the deep complexity of the Iranian nuclear issue mean that the market may be far from fully pricing in all potential risks.

According to CCTV News, the White House submitted a peace proposal containing 15 items to Iran; upon release of the news, oil prices plummeted. Yet conflicting statements between Washington and Tehran, ongoing missile attacks in the Middle East, and shipping congestion in the Strait of Hormuz have kept prices elevated. Global benchmark Brent crude oil nearby futures are hovering around $99/barrel, which is about 36% higher than before the first round of strikes by the US and Israel against Iran on February 28.

However, crude oil futures curves show sharply different expectations. Under the backwardation structure, the Brent December settlement contract is quoted at about $79.70, roughly 17% lower than the nearby contract, but still about 10% higher than before the conflict erupted.

Indrani De, Head of Global Investment Research at FTSE Russell, pointed out that the curve indicates the market has internalized a long-term risk premium of about $10–12 into its pricing baseline, while also anticipating that short-term shocks will gradually fade as the situation cools down.

Several analysts also remind that the current relatively calm market pricing may underestimate the tail risks of further escalation. Toni Meadows, Investment Director at BRI Wealth Management, told CNBC: "Given the range of potential outcomes, the market is behaving relatively calmly."

Market Bets on Conflict as a Phase Event

The so-called "backwardation" refers to near-month futures prices being higher than those for later months, usually indicating tight supply at present, but expectations for an easing in the future.

Toni Meadows stated: "Backwardation—where future prices are lower than current—shows the market sees the current surge in oil prices as temporary. It is an event, not a normalized factor. Otherwise, if there were worries about persistent supply shortages, later contracts would be priced higher."

Long-End Curve Already Reflects Enduring Costs

Although backwardation suggests a short-term shock, the absolute level of the futures curve reveals the market's true judgment of the conflict's long-tail impact.

Indrani De said that the oil price futures curve currently presents a marked downward turning point after about four months, and basically returns to “normal” at around ten months (the end of the year)—but that “normal” level remains about $10 higher than before the conflict. "Deep backwardation shows that even the most impacted markets are pricing in an early solution," she said, "but if you look at Brent’s level in ten months, it still stands about $10–12 above pre-crisis. I think this can be regarded as the risk premium already embedded in the market."

The Brent December contract is currently quoted at about $79.70. This means that, in traders' view, even if the conflict is ultimately resolved, geopolitical tensions have left a lasting imprint on global oil prices.

Concerns About Infrastructure Damage and Nuclear Proliferation

Several analysts think current market pricing has not fully reflected scenarios where the situation further deteriorates.

Katy Stoves asserted, "Even if some kind of ceasefire is ultimately reached… repairing these facilities and bringing them back online takes time." She especially pointed out that once liquefied natural gas (LNG) plants are destroyed, rebuilding often takes years.

Toni Meadows expressed skepticism regarding the feasibility of "comprehensive downgrade" of Iran's nuclear capability via bombing. He added: "If the conflict is brief, both sides find a way to step back, and regional capacity hasn't suffered substantial damage, that's one scenario—but this is a very fragile combination."

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