The price of Brent oil reached less than $110 per barrel at the beginning of the new month, and this drop of more than $8 in oil prices has attracted a lot of attention. However, this fact is only part of the story, and a closer examination is needed to identify the real factors behind this decrease.
Price and Contract Analysis
The price of $118 observed before the holidays was related to the December 2026 delivery contract. Meanwhile, the new rate of $109.95 is displayed for the January 2027 delivery contract. This price difference indicates a shift in the delivery month of the base contract and cannot be interpreted as a real drop in oil prices during a trading session.
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In oil futures markets, the prices of delivery contracts in different months are not uniform, and near-term delivery oil may be more expensive than oil delivered in later months due to concerns about short-term supply shortages. This situation is referred to as "backwardation" in commodity markets.
Future Expectations and Geopolitical Impacts
Furthermore, the price difference between short-term and long-term contracts may indicate traders' expectations regarding the future state of oil supply and demand, transportation disruptions, and geopolitical developments. In such circumstances, changing the base contract from a closer month to the next month can lead to a decrease in the displayed price on the board, without all this difference being due to widespread selling or a real drop in the price of a specific contract.
Ultimately, the return of Brent oil prices to below $110 should not be viewed solely as a sign of a real decrease of more than $8 in global oil prices. For a more accurate understanding, comparing the prices of two contracts with the same maturity is essential, and overlooking these details can lead to misinterpretations.
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