The Federal Reserve has published a detailed analysis examining how geopolitical conflict affecting oil supply influences the relationship between crude oil futures prices and future spot prices, with particular focus on the current Middle East disruptions that began in late February 2026. Researchers from the Federal Reserve Board, including Erik Heitfield, Yang-Ho Park, and Erfan Danesh, found that the abrupt reduction in oil supply resulting from the closure of the Strait of Hormuz caused spot oil prices to rise substantially above futures prices, creating a pattern of severe backwardation. The degree of backwardation in oil futures reached temporarily near its highest point in the last quarter century, according to the analysis.
The research indicates that spot prices have fluctuated between $80 and $100 per barrel since early March following the conflict onset on February 28. While significant, current oil price levels remain comparable to early 2022 during Russia's invasion of Ukraine and remain well below levels reached before the global financial crisis. Six-month and one-year futures prices increased to a lesser extent than spot prices and continue to be substantially lower than early 2022 levels.
A key finding concerns risk premiums embedded in oil futures contracts. The Fed's empirical analysis of oil futures data since 2000 indicates that oil risk premiums have likely been negative since March. This occurs because long positions in oil futures may be viewed by market participants as a hedge against near-term macroeconomic risk.
The analysis suggests that oil futures prices typically overstate investors' expectations for future spot prices when futures markets are severely backwardated, as has been the case since the current conflict began. The researchers employed a reduced-form empirical model similar to Fama and French (1987) methodology to estimate time-varying risk premiums. Results from three-, six-, and twelve-month futures contracts show that risk premiums can be expected to be positive when futures markets are in contango and negative when backwardated.
Estimated risk premiums for the Middle East conflict period were substantially more negative than those during the early Ukraine conflict months. Specific risk premium estimates using average futures prices show that for three-month contracts, the risk premium was estimated at negative 5.4 percent during the Middle East conflict period, compared to negative 1.5 percent during early Ukraine conflict. For six-month contracts, the estimates were negative 4.3 percent versus negative 1.3 percent, and for one-year contracts, negative 7.6 percent versus negative 4.5 percent.
Liquidity conditions represent another significant factor affecting the futures-spot price relationship. Market depth measurements, defined as the number of contracts available for trading at best quoted prices, showed a severe and sustained deterioration across all maturity buckets throughout the Middle East conflict. Unlike previous crises that exhibited sharp but relatively brief liquidity shocks with recovery within weeks or months, the current conflict has produced a prolonged period of suppressed liquidity extending over five months with no clear signs of recovery by the end of the analyzed period in July 2026.
The Fed's analysis identifies two theoretical perspectives explaining negative risk premiums during supply-constrained periods. From a markets perspective, when oil supply becomes severely disrupted, the value of hedging against price increases grows relative to hedging against price declines, shifting risk premiums in a negative direction. Effects are exacerbated if dealers and speculators reduce market-making activity in response to increased uncertainty.
The macro-finance perspective suggests that geopolitical risk affecting oil supply may cause oil prices to become negatively correlated with broader macroeconomic conditions. Constrained oil output pushes prices up, increasing costs for productive inputs and potentially harming economic growth, creating a negative correlation between oil prices and future macroeconomic conditions. Supporting this view, the research found that daily WTI spot returns have recently become highly negatively correlated with equity market returns, consistent with oil positions serving as a near-term hedge against broader market risk.
The analysis notes that net convenience yields, which measure backwardation by capturing the extent to which spot prices exceed futures prices after adjusting for capital costs, moved to some of the highest levels in the 26-year data series early in the current conflict. This represents a clear indication of substantial disruption in global oil markets beyond simply high price levels. Researchers emphasize that while economic theory and empirical models point to negative risk premiums, the specific magnitudes for the current conflict should be interpreted cautiously.
The level of backwardation observed from March through May is nearly unprecedented in the historical data, so projected risk premiums reflect extrapolation outside the typical range of data used to fit the models. The Federal Reserve concludes that large adverse physical supply shocks cause oil futures markets to become backwardated because oil consumers highly prize immediate access to the physical commodity when supply is scarce. The same conditions causing market backwardation are likely to cause oil prices to become negatively correlated with broader macroeconomic conditions, resulting in negative risk premiums.
Therefore, oil futures prices can be expected to overstate investors' expectations for future oil prices during periods of geopolitical conflict constraining oil supply. Source: Federal Reserve FEDS Notes, published October 9, 2026. Analysis by Erik Heitfield, Yang-Ho Park, and Erfan Danesh.
Source: federalreserve.gov