Federal Reserve FEDS Notes·Oct 9, 2026, 1:30 PM ET

Convenience Yields, Risk Premiums, and the Interpretation of Oil Futures Prices During Times of Geopolitical Conflict

The Middle East conflict triggered a historic oil supply shock following the closure of the Strait of Hormuz, causing spot prices to rise sharply above futures prices.
Oil futures markets have experienced severe backwardation, with the current degree of this condition reaching near-record highs for the last quarter-century.
Empirical analysis indicates that oil risk premiums have likely been negative since March, as long futures positions are viewed as hedges against near-term macroeconomic risks.
Low market liquidity throughout the conflict has reduced top-of-book market depth across all contract maturities, increasing liquidity premiums.
Net convenience yields, a direct measure of backwardation, have reached levels among the highest in the 26-year data series, signaling substantial market disruption.
Geopolitical supply constraints have caused daily WTI spot returns to become highly negatively correlated with equity market returns, reinforcing the view of oil as a hedge against broader market risk.
Regression models confirm that risk premiums tend to be negative when futures markets are severely backwardated, implying futures prices overstate expected future spot prices.
Estimated risk premiums during the current Middle East conflict are substantially more negative than those observed during the early months of the Ukraine conflict.
Historical structural shifts in oil markets, including China's integration, the U.S. shale boom, and market financialization, necessitate the use of exponential weighting in empirical models to reflect recent conditions.
The study concludes that during supply-constrained geopolitical conflicts, oil futures prices are likely to embed negative risk premiums, leading to an overestimation of future spot prices.