Crude oil futures for both near-month and far-month contracts rose collectively, as the market prices in the "long-term Middle East conflict"?

At the moment when Israeli missiles pierced the night sky of Tehran, a subtle yet significant change occurred in the global oil futures curve—the "smile" pattern that had persisted for months instantly vanished, replaced by a sharply rising curve, indicating that the market no longer believes that geopolitical risks will subside quickly.

According to CCTV News, on June 12th local time, Israel launched airstrikes against dozens of nuclear facilities and military targets in Iran. This news led to a sharp escalation of regional tensions, triggering a massive shock in the crude oil market.

During the Asian trading session on June 13th Beijing time, Brent crude oil futures not only saw near-month contracts soar over 13%, but long-term contracts also rose strongly, resulting in a fundamental change in the futures curve structure. According to ICE data, the Brent crude oil futures curve structure underwent a dramatic reversal, with key time spread indicators recording the largest intraday volatility since 2022. Accompanied by an unusual increase in trading volume, market panic quickly spread. ING warned that if shipping through the Strait of Hormuz is disrupted, the global daily supply of 14 million barrels of crude oil could face interruption risks, and oil prices could soar to $120 per barrel.

This change conveyed a clear signal to the market: investors are pricing in the long-term nature of the Middle East conflict. Currently, concerns about an oversupply of oil have been replaced by calls for rising oil prices. The subsequent oil price trend will largely depend on Iran's response and whether key energy assets in the Middle East or tanker transportation through the region are affected.

The "Face Change" of the Crude Oil Futures Curve

Data from the Intercontinental Exchange (ICE) shows that the crude oil futures curve had previously displayed a "smile" or "hockey stick" shape for several months—where long-term contract prices were lower than near-term contracts, indicating a loose long-term supply—has now almost completely disappeared.

Data shows that the price spread of Brent crude oil near-month contracts has rapidly widened. The "Prompt Spread," which measures the price difference between the two nearest months' contracts, surged to $4 per barrel, marking the highest intraday level since 2022. This indicates that market concerns about extremely short-term supply tightness have sharply intensified.

Additionally, the price spread between Brent crude oil December contracts and the following year's December contracts, which best reflects the market's long-term expectations, turned into a backward market structure with spot premiums of about $2.30 per barrel during the Singapore session. This represents a complete reversal from the "contango" structure (where long-term prices are higher than near-term prices) that had persisted for the past two months to a "backwardation" state. This marks a break in the market's expectations of long-term supply surplus, shifting to a bet that supply may tighten in the long term.

Mid-term spreads have also strengthened simultaneously. The spreads for three/six-month mid-term contracts have significantly widened, reinforcing the overall tightening signal of the curve. Meanwhile, trading volume during the Asian trading session surged over 50% compared to the average daily level, reflecting unusually active panic buying and position adjustment activities.

Strait of Hormuz: The "Sword of Damocles" of 14 Million Barrels

Another factor keeping the market on edge is the potential risk in the Strait of Hormuz. Warren Patterson, head of commodity strategy at ING Groep NV, warned in an interview that if the conflict escalates and disrupts shipping in the Strait of Hormuz, the daily supply of approximately 14 million barrels of crude oil will be at risk.

Patterson stated:

A significant supply disruption could push oil prices up to $120 per barrel. If the disruption lasts until the end of the year, we may see Brent crude oil reach new record highs, surpassing the historical peak of nearly $150 in 2008.

If Iran's midstream and downstream assets become targets, the daily export supply of 1.7 million barrels could be threatened, "enough to shift the crude oil market from surplus in the second half of this year to a shortage."

Diverging Analyst Opinions: Short-term Surge vs Long-term Decline

Analysts have differing views on the market's direction. Charu Chanana, chief investment strategist at Saxo Markets, believes that if tensions in the Middle East escalate and supply risks materialize, oil could surge to around $80, but increased production from OPEC+ may limit the upside.

However, Robert Rennie, head of commodity research at Westpac, remains cautiously optimistic, suggesting that the U.S. not participating in this strike indicates it is more of a "preemptive strike rather than a sustained military conflict." He expects oil prices to still test the $60-65 range in the third quarter.

MST Marquee energy analyst Saul Kavonic pointed out that the conflict would need to escalate to the point where Iran retaliates against the region's oil infrastructure for oil supply to be materially affected. In extreme scenarios, Iran could impact daily oil supplies of 20 million barrels by attacking infrastructure or restricting passage through the Strait of Hormuz.

Currently, Brent crude futures are trading close to $75 per barrel, with the market holding its breath for Iran's response