Backwards Looking

Summary

The extreme backwardation in oil prices during the Iran war is not a conspiracy to suppress the 'real' price but a rational market response to a binary probability-weighted scenario of either a rapid resolution or a prolonged crisis. This implies traders should expect continued high volatility rather than a manipulated market, and must be cautious of social-media-driven narratives.

•Oil price is not singular; it varies by grade, location, and delivery timing—most reporting uses front-month WTI or Brent futures with different expiry schedules.
•The Iran war and Strait of Hormuz closure have pushed backwardation (spot prices exceeding futures) to levels far beyond those seen during the 2022 Ukraine war.
•The spread between Dated Brent (spot proxy) and front-month Brent futures has widened dramatically, triggering accusations of price manipulation.
•The author argues the price action reflects a fair probability-weighting of two unprecedented and polar outcomes, not a grand conspiracy.
•The 'paper vs. physical' divergence cited by conspiracy theorists is actually a normal shortage signal, amplified by the scale of the current conflict and inexperience of new market participants.
•The article includes no specific trade recommendations or positions; the author explicitly states they do not trade oil futures ('no place for amateurs').

Read time 5 min

Length 5,039 chars

Category finance

Ideas

Doomberg Energy & commodities research collective

Short USO due to severe roll decay in a steep, sustained backwardated curve.

The article's core thesis is that the market is rationally pricing a high probability of a swift resolution to the Iran conflict alongside a risk premium for prolonged war, creating extreme backwardation. A fund holding a front-month ETF like USO suffers constant negative roll yield when selling cheaper near-dated contracts to buy more expensive deferred ones. This structural drag is a second-order effect not fully appreciated by retail conflating spot fears with futures prices.

Ideas

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