An Important Clue from Crude Oil Futures

Key points:

• Crude oil futures broke sharply higher last week as fear spiked over the flow of oil tankers through the Straits of Hormuz.
• At the same time, the price of near-term crude oil futures soared far above that of longer-term contracts, a condition known as severe "backwardation."
• Historical performance for crude oil and several other related markets following previous instances suggests crude oil will ultimately break sharply lower. Still, the big question is, "Will that happen sooner or much later - and from what level?"

The price of crude oil spikes

In response to the attack by Israel and the U.S. on the Iranian government, the remnants of that government have threatened to attack ships that attempt to pass through the Straits of Hormuz. This led large insurers - including Lloyd's of London - to raise maritime insurance costs to prohibitive levels, resulting in a virtual standstill in tanker traffic through the Straits. In response, crude oil futures prices soared by more than 35% in one week and are now 60% above their December 2025 lows.

Speculation is rampant that a prolonged closure of this key oil transport route will drive up crude oil prices. However, the concurrent spike in our Crude Oil Term Structure indicator suggest