Oil surged above $116 as supply risks arising from the Iran war intensified, supported by a weaker dollar, tight physical markets, strong backwardation, and rising speculative positions.
Crude continued to push higher on Tuesday as traders nervously looked ahead to the Wednesday night deadline issued by U.S. President Donald Trump to Iran. The West Texas Intermediate (WTI) grade crude oil futures contract (CL) spiked more than 3% in early New York session, topping the $116-a-barrel mark.
Oil’s climb was also facilitated by a slight dip in the U.S. dollar. The Dollar Index futures slipped further below the 100 mark.
Through a Truth Social post early Tuesday, Trump reiterated a threat he issued Sunday to bombard Iran’s energy and power infrastructure, stirring up fears that the Strait of Hormuz, a major chokepoint, would remain constrained for longer.
Oil’s Meteoric Ascent: The WTI crude futures hit $119.48-a-barrel intraday on March 9, the highest since mid-2022 but closed below $100. After trading at sub-$100 level for much of March, the CL contract has been seeing renewed upward thrust since the final two trading sessions of March.
WTI Crude Futures (1-Year Chart)
Source: TradingView
In the process, the CL contract began trading at a premium over the InterContinental Exchange (ICE)-traded Brent crude futures contract (LCO).
Brent Vs WTI Crude Futures
Source: TradingView
Tight Physical Market: According to Saxo Head of Commodity Strategy Ole Hansen, WTI’s current premium reflected contract timing and a very tight near-term physical market, where immediate supply is scarce relative to demand. In such a scenario buyers are willing to pay a premium for front-month delivery and there is a strong backwardation, i.e. the front-month contract is pricier than the later months’.
The strategist does not view the development as due to a clean benchmark reversal.
ING Commodity Strategists Ewa Manthey and Warren Patterson also made note of the NYMEX WTI crude futures prompt spread (the price difference between the nearest delivery and the next-month contract) widening to a backwardation of $16.19/ barrel versus $8.22/barrel at the end of March.
The strategists also noted that the latest Commitment of Traders report showed elevated speculative interest. “Money managers increased net longs in ICE Brent by 22,728 lots to 429,853 lots as of last Tuesday, marking the most bullish positioning since October 2018, as geopolitical risks and supply concerns continue to underpin sentiment in the oil market.”
Saxo noted that Saudi Arabia has raised its May official selling price to a record premium of $19.5 over regional benchmarks, underlining the tightening supply.
The firm sees any signs of a deal or another deadline extension as developments that could ease the risk premium and weigh on futures prices.