Recently, a sharp decline in oil prices resulted in narrower time spreads along the forward curves. The gap between the next due Brent contract and the one maturing in a year was briefly over $1, lower than a December 2023 figure. By the end of March, the gap was close to $5.
The reduced premium for short-term oil delivery indicates a potentially more relaxed oil market. Despite this, the price difference increased again to over $2 by late last week. The price gap between the initial two Brent contracts returned to 75 US cents, similar to the end of March.
Brent Forward Curve Outlook
A contango structure in Brent’s forward curve, signalling a rise, appears only from spring 2026. This occurrence could have been anticipated earlier due to the emerging oversupply.
What we are seeing here is a softening in the urgency to secure immediate-barrel oil, which often tells us that physical demand is easing or that supply is starting to outpace consumption. When the gap between current and future oil prices tightens, as it did in early June, that’s a strong indicator that near-term needs may be adequately met—possibly even oversupplied for some regions.
By looking at how that spread rebounded, bouncing back to more than $2 in just a few days, we start to see hesitation re-entering the market. This suggests that while the broader curve may show some lengthening comfort into next year, there’s still price support in the front months, and it isn’t fading completely. The reappearance of a 75-cent difference between the front two Brent contracts, next-term and prompt, tells us that traders haven’t fully relinquished expectations of short-term tightness.
Now, when the forward curve logs a slight contango only from spring of 2026, that’s not particularly common unless there’s a long stretch of anticipated surplus ahead. What this suggests—when examined against the movement from a roughly $5 spread back in March to just over $1 recently—is that the market may have been too optimistic earlier in the year about tightness sticking around. The shift is sharp enough to prompt a rethink of positioning. We know from history that such flips in time spreads tend to precede deeper volatility.
Adjustments In Trading Strategies
From the derivatives desk, this warrants some adjustment. Options strategies that were structured around steep backwardation may now need to unwind or rotate towards flatter structures. Traders relying on calendar spreads for profit will want to tread carefully, especially in the nearer months where the signals are more contradictory. We may find better risk-reward setups in deferred months, beyond 2025, where the slope of the curve begins to lean more predictably upward.
It’s also worth accounting for the reactions we’ve already seen. For example, several passive flows might return under compressing spreads, especially with ETFs adjusting rolling costs as contango builds out past 2026. This changes the way we model cash-and-carry trades—especially if storage becomes more financially viable again.
The financial incentive to defer delivery, a key signpost in guiding short gamma trades, altered rapidly over a matter of days. That increases the challenge for executing systematic strategies based on spread decay. If that segment in the middle of the curve—say, contracts for 2025—remains relatively anchored while the front and back ends shift, it would introduce wide opportunities across the curve for relative value positioning.
Ultimately, what we’re grappling with is a forward market hinting at excess later but still reacting to sporadic tightness today. Long-only strategies that lean heavily on short-term supply fears could begin underperforming, particularly as the curve continues to flatten in the short end. Meanwhile, delta-neutral structures may find success if they can absorb the minor contango shifts without needing directional bias. Traders would do well to focus less on front month speculation and more on shape-aware tactics that reflect this new ordering.
