The gap between crude oil spot and futures prices has widened to historic levels, drawing attention to the underlying causes.
As of April 13, Dated Brent—physical Brent crude cargo with a specific delivery date—was priced at $132.74 per barrel. Meanwhile, the front-month June Brent futures contract closed at $99.36, creating a spread of more than $30.
"Disruption of this magnitude in the oil market and uncertainty about what lies ahead is unprecedented," said Gary Ross, CEO of Black Gold Investors.
The Wall Street Journal pointed to three factors behind this divergence.
First, a shortage of physical crude is cited as the primary cause. Generally, when supply is tight, spot prices surge, widening the gap with futures prices. Dave Ernsberger, president of S&P Global Energy, explained, "The front-month futures price is quite disconnected from actual crude supply. Futures prices don't necessarily converge with spot prices."
This phenomenon is particularly pronounced in Brent crude. The Brent front-month contract is for June delivery, meaning time remains until actual delivery, and the futures themselves are settled against an index based on the physical market rather than through physical delivery. In contrast, West Texas Intermediate (WTI) front-month contracts are for May delivery and are settled through actual physical delivery.
The second factor is extreme volatility. Recent heightened price swings have made traders reluctant to take aggressive positions in the futures market, analysts say. Ilia Bouchouev, partner at Pentathlon Investment, said, "Hedge funds and algorithmic traders currently hold relatively small positions in the futures market."
When market volatility is excessive, investors tend to reduce their exposure considering risk-adjusted returns. This is compounded by the expansion of the options market, which has further amplified price volatility.
The third factor is the difference in supply-demand dynamics between spot and futures markets. In the physical market, demand for crude has surged due to supply disruptions from the Middle East, while in the futures market, oil producers are participating as sellers, partially suppressing price increases. Producers are selling futures to lock in prices at current highs, according to analysts.
The U.S. government's method of releasing Strategic Petroleum Reserve (SPR) oil has also played a role. Traders who received reserve oil as "loans" have adopted a strategy of selling short-term futures while buying long-term futures, helping maintain supply-demand balance within the futures market.
