The yield curve — basically, comparing the interest rates for short-, medium-, and long-term government bonds — can tell a lot about what investors expect to happen across each of those time frames.
Oil futures work in a similar way. These are bets that the price of oil will be a certain amount at the end of a certain month. That could be next month, next year, or even a little over a decade from now.
The market for actual physical barrels of oil is complicated. There are different grades of oil that can’t be substituted for each other. And nobody really knows what anybody’s paying, because transactions are private.
But oil futures contracts are a totally different matter. They are standardized and traded on public exchanges.
“That makes it a much easier, transparent way to form a proxy for what’s happening in this very diverse, complicated global marketplace,” said Mark Finley, nonresident fellow with Rice University’s Baker Institute.
Finley said futures contracts for one month from now give you a pretty good sense of current oil prices. But contracts are also sold for basically any month in the future.
“The only limit is where there’s trading activity,” Finley said. “How far out do people want to trade.”
Finley said some people buy oil futures to lock in prices, in order to hedge against uncertainty. Others trade them to speculate. Either way, the price of oil that’s baked into those contracts reveals people’s expectations about the future, said Anna Mikulska, head of analytics at CGCN Group.
“It basically builds up on where we’re thinking the market is going,” Mikulska said.
For instance, if the market thinks demand for oil will slow down in the near future, futures prices could reflect that expectation.
“That means in maybe two to three months we will see the oil prices going down, hence we’re not going to be pricing the oil at what it is right now,” Mikulska said. “We will discount it by another five dollars, 10 dollars.”
But right now, futures markets are reflecting a very different expectation: that prices will remain high over the next few months, as long as the Strait of Hormuz remains closed.
“That’s telling us that the market is extremely tight,” said Matt Smith, director of commodity research at the data and analytics firm Kpler.
Even a year from now the futures market is betting that prices will still be higher than they were before the war. Smith said that’s because once hostilities end, demand for oil will pick up — especially from countries that depend on the Middle East for their oil.
“They’re going to build these inventories, that they have a bigger buffer, so they’re not left dependent and scrambling on other countries to get barrels from,” Smith said.
When you go even farther out on the curve, say, five years from now or even longer, prices fall to $60 a barrel, or even less.
Dylan White, an oil market analyst with Wood Mackenzie, said that means by then, the market is expecting a glut of oil.
“That obviously puts downward pressure on oil prices, especially compared to 2026, where we have a major undersupply due to the Strait of Hormuz closure,” White said.
White said oil producing countries, including the U.S., have been ramping up production. And demand for oil may well plateau in the next decade.
“And that’s a number of factors, but one of them has certainly been increasing electrification and EV penetration,” White said.
A recent report from Wood Mackenzie said the war in the Middle East could cause oil and gas importing countries to intensify their embrace of renewables.
“So how the world responds to the Middle East conflict will help define the energy transition moving forward,” White said.
And that would have implications for oil demand, along with oil prices.