There is a rare situation in the oil market that has not happened in the last 30 years. Analysts note that the price curve for Brent crude futures, that is, current prices for deliveries on different dates, has taken the form of a smile or the so-called "oil smile."
This suggests that the market is in a state of extreme imbalance. At first glance, the situation seems to be a technical problem, but in fact it can have a real impact on investors, traders and ordinary consumers.
The futures market allows you to trade futures contracts for oil with delivery at various times. Usually the price curve takes one of the following two forms. The first form is called "contango", which means that futures prices are higher than current spot prices. This usually indicates either weak demand at the moment, or sufficient supply in the market. Contango is considered a common condition for this market, since the price of a futures contract includes not only the spot price, but also the costs associated with transportation and storage. Analysts explain that for this reason futures prices tend to be higher than spot prices, with the difference varying depending on the delivery time.
The second form — "backwardation" — occurs when futures prices are lower than current spot prices. This indicates a busy market and is much less common than contango. Traders can take positions in backwardation conditions, waiting for the price to decrease. Such a scenario is possible with an increase in supply and constant demand. However, currently the market does not demonstrate any of these classic scenarios.
According to analysts, the "oil smile" reflects the strong pressure on current supply combined with the expected surplus in the coming years. According to estimates, global oil production could increase by more than 4 million barrels per day by 2026, with the sharpest increase expected in the first quarter of the year.