The immediate outlook for oil prices is increasingly bleak.
President Trump pledged to attack bridges and power plants in response to Iranian attacks in the Strait of Hormuz. The Iranian-backed Houthi militia in Yemen has declared a blockade of the Red Sea to prevent Saudi Arabian oil exports. Domestic oil reserves have fallen to their lowest levels since the early 1980s. In response, international oil prices touched $100 per barrel Thursday morning.
Yet investors appear sanguine about the path ahead. They have continued to bet that, in the end, the current escalation in the war with Iran will be short-lived and that oil prices, which have jumped in recent weeks, will fall in the coming months.
Oil trading largely takes place in the futures market, where prices to buy or sell the commodity at a future date are fixed. The most often cited oil prices are those that are closest to the present day, reflecting traders’ immediate concerns for the market.
The current futures contract for Brent crude, the international oil benchmark, has risen almost 40 percent this month, hitting $100 per barrel. That is a huge move that has reversed much of the decline in prices that followed the initial war-induced spike in March.
But peering further out at the expected price of Brent for the rest of the year reveals a more muted reaction to the current hostilities. The expected price in December has less than 20 percent over the same period, to around $86 per barrel.
That is including a sharp rise on Thursday when the current futures contract rose over 6 percent in response to further escalation between the United States and Iran. The price for December moved just 2.4 percent higher.
Investors and analysts said the difference between current market prices and those later in the year reflected an expectation that the current bout of fighting — and therefore the blockade of oil leaving the region — would not last.
“I think there is an assumption that one if not both sides really don’t want this to go hyperbolic if they can avoid it,” said Stuart Kaiser, head of equity trading strategy at Citi.
Even current oil prices have risen this month by a little over half of what they did when the war started at the end of February. At that time, they jumped over 60 percent, peaking at the end of March. Analysts and investors believe that low oil inventories and the midterm elections are likely to push the Trump administration to try to ease tensions, as it did in April.
If investors start to perceive that the war has spiraled and cannot be de-escalated, however, oil futures contracts are likely to increase sharply again.
For now, the fact that longer-dated oil prices remain more muted has helped stock investors remain sanguine, too. They have continued to focus attention on the more positive trends in the market, such as a fresh round of quarterly financial results showing continued strong growth from publicly listed companies, particularly those related to the build-out of artificial intelligence.
“At the end of the day, the only thing that will truly matter to investors is how earnings results unfold,” said JJ Kinahan, head of retail expansion and alternative investment products at Cboe Global Markets.
The S&P 500 has risen roughly 8 percent since the war started, recouping its initial losses in March and rising to a record high.
Even as worries around the war with Iran re-intensified in recent weeks, some investors said they noticed that many were averse to selling their stocks for fear of missing out on potential gains.
“Greed is a powerful force in the stock market,” said Michael Purves, the founder of Tallbacken Capital.
