Calendar spreads, inventory expectations and softer demand forecasts indicate traders expect the current supply shock to fade over time, limiting the prospects for a sustained oil price spike.
The whipsawing trend seen in the crude oil market continues even as a resolution to the ongoing strife between the U.S. and Iran proves elusive. The energy commodity is currently experiencing headline-driven volatility, with the situation aggravated by the U.S. President Donald Trump’s fast and furious comments that alternated between expressing hopes of a peace deal and taking a more aggressive stance against an enemy, which has kept Washington at bay for 104 days now.
What Has the Conflict Done to Oil Prices?
Oil prices have soared 34% from pre-war levels, although at one point in time, the gains were a much steeper 80%.
Volatile Ride Amid Conflict
Source: TradingView
According to the International Energy Agency (IEA), more than 14 million barrels of oil per day (mb/d) of oil is shut in due to the Strait of Hormuz traffic blockade.
Add to this, the risk of depleted inventory levels, and the narrative gets firmly bullish for oil prices. Global oil inventories will see sharp drawdowns due to the Hormuz disruption causing Middle East oil producers to reduce production, the Energy Information Administration (EIA) warned in its latest Short-Term Energy Outlook report released earlier this week. The agency estimates global oil inventories to drop by 6.2 mb/day in the second quarter and by 7.6 mb/d by the third quarter.
Oil inventories in the OECD nations are set to fall to their lowest levels since 2003, the EIA stated.
The Futures Curve Is Telling a Different Story
Although the Hormuz blockade and inventory disruptions are painting an overwhelmingly bullish picture, a careful parsing of the oil futures curve suggests traders are not fully convinced that the current shortages will evolve into a prolonged supply crisis. The West Texas Intermediate crude remains in steep backwardation, meaning near-term contracts are trading at a substantial premium to those expiring later.
For futures traders, the front month vs. six-month spread chart is the strongest supply to gauge whether it is a short-term disruption or a structural supply crisis. The six-month calendar spread for WTI futures is around $9 currently. Although the spread has narrowed from the April peak of $40, it is still substantially higher than the long-term average of $1.50. The curve is signaling expectations of continued near-term tightness, but also a belief that supply conditions could gradually improve over the coming months.
The spread reflects the aggregate judgment of hundreds of traders pricing in probability-weighted outcomes across the entire forward curve, not just one tweet or one ceasefire rumor. Unlike headlines, the spread can't be manipulated by political rhetoric.
Historically, futures spreads have often adjusted ahead of broader shifts in market sentiment, making them a closely watched indicator during geopolitical disruptions."
So, Why Isn’t Oil Higher?
At the height of the crisis, market chatter centered on the possibility of oil galloping past $150 per barrel. Despite the prolonged disruptions, what is keeping the price rise in check?
A plausible explanation came from a strategist who spoke to MarketFramework this week. Lloyd Financial’s Colin Symons speculates that a peace deal could be on the way. “The way the market works these days, it's easy to imagine some knew about it beforehand, creating the selloff before the news was 'official,’” he said.
The latest on the Middle East crisis does not confirm the view. In an early Thursday Truth Social post, Trump said the U.S. will hit Iran “very hard” and take over Kharg Island and other oil infrastructure points. Kharg Island is a strategically critical location, which handles roughly 90% of Iran’s crude exports.
Trump’s threat comes after a series of events that unfolded over the past week. Israel and Iran exchanged fire in the first major violation of the ceasefire that was announced in April. Shortly after, Iran shot down one of the U.S. Apache patrol helicopters, and in return, the latter launched strikes against the former.
Despite the inflammatory headline, crude oil is only modestly higher. This goes on to reflect the point that trade is driven by inventory data and demand signals, not by whether there's a ceasefire tweet.
Traders Are Also Watching the Demand Side of the Equation
Another factor capping crude's upside is the increasingly fragile demand outlook. Higher oil prices are beginning to raise concerns about demand destruction, particularly in major consuming regions already grappling with slowing economic growth. The longer crude remains elevated, the greater the risk that households and businesses curb fuel consumption, while manufacturers and transport operators cut activity.
The OPEC on Thursday announced another cut to its demand estimates for 2026. In the June monthly Oil Market Report, the alliance stated that global oil demand is expected to grow by 1 mb/d in 2026, down from its previous assessment for 1.2 mb/d increase.
The disconnect between geopolitical headlines and price action suggests traders are looking beyond the immediate disruption. While the market continues to price tight near-term supplies, the narrowing of WTI's six-month spread and growing concerns about demand indicate that participants increasingly expect the supply shock to ease over time. For that reason, the futures curve may prove a more reliable guide to crude's next major move than the latest developments from the Middle East