The spot oil market is barking loudly. Last week it rallied to an all-time high of $144.46/barrel — levels not seen even during the frenzied rally of 2007-08 or the spike during the Russia-Ukraine war. Ideally that should scare stock market investors as too high an oil price, even if only over medium-term durations, can eventually lead to demand destruction and slow economic growth.

However, at the same time, the tail in the form of the oil futures market is wagging strong, signalling an optimistic picture. Decoding this tale of contrasts holds the key to the direction of stock markets from hereon.

Last week, the market sentiment improved after the announcement of a ceasefire in the US-Israel and Iran conflict. Benchmark Nifty 50 rallied 6 per cent — its biggest weekly gain since February 2021. In the US, the S&P 500 and Dow Jones rose over 3 per cent each, marking their strongest weekly performance since November last year. This was in direct response to oil futures correcting sharply through the course of last week. The front-month Brent crude futures ($95.20/barrel) fell nearly 13 per cent last week and is now down about 20 per cent from the March 9 peak of $119.50. The decline reflects hopes of easing supply disruptions, particularly around the Strait of Hormuz.

For now, the markets seem to be trusting the wag. But are they making the risk of ignoring the ground realities?

Optimism vs operational reality

Dated Brent, the primary benchmark for physical crude, surged to a lifetime high of $144.46/barrel on April 7 before moderating to around $125.88 (compared with $137.67 during the onset of the Russia-Ukraine war in March 2022).

The divergence between Dated Brent and Brent futures has widened significantly since March 20, when futures began to soften. The spread (Dated Brent minus June Brent futures) hit a record high of $35.87 on April 9, signalling a disconnect between expectations and current conditions

At the core of this divergence is a classic mismatch — futures price expectations and hope, while Dated Brent reflects immediate supply realities.

The disruption around the Strait of Hormuz has created severe tightness in prompt supply. Buyers are scrambling for immediately deliverable cargoes, “prompt barrels”, keeping Dated Brent elevated.

On the other hand, ceasefire-related optimism has compressed the geopolitical risk premium in futures. The reality, however, is far more complex, which the Dated Brent seems to be reflecting.

About 20 million barrels per day (bpd), which is nearly 20 per cent of global crude supply, passes through the Strait of Hormuz. Even with alternate routes such as Saudi Arabia’s East-West pipeline, a shortfall of over 10 million bpd could persist, leaving a significant supply gap.

Adding to this, Middle East producers shut in about 7.5 million bpd in March due to storage constraints, with outages projected to rise to 9.1 million bpd in April, according to the Energy Information Administration — highlighting the scale of supply disruptions.

With exports disrupted as the inability to move the oil out of the Persian Gulf has resulted in the energy commodity piling up at storage hubs, reaching in what is referred to as “tank top”. This raises the risk of production shut-ins, further tightening prompt supply.

Crucially, even if Hormuz reopens fully, supply cannot normalise instantly. Damage to infrastructure, elevated insurance costs and logistical bottlenecks could delay stabilisation by 2-4 weeks. Bringing idled oil production facilities back on stream can take anywhere from four weeks or longer depending on how modernised or not the facility is.

Even where flows resume, execution remains difficult. War-risk insurance premiums have reportedly surged up to 1,000 per cent, while tanker freight rates have spiked.

All these factors ensure that immediate supply remains scarce, keeping Dated Brent at a premium. This also suggests that spot prices could remain higher for longer, than what the futures markets are expecting right now.

The key reason futures are not fully reflecting this stress is timing. Dated Brent reflects cargoes deliverable within 10 days to a month, whereas the front-month Brent futures contract represents June delivery — further out on the curve.

That said, both markets agree on one thing – the structure remains in backwardation, where near-term prices are higher than longer-dated contracts — a classic signal of tight supply. However, small shift in the futures curve (refer chart) suggest markets may be beginning to price in a more prolonged disruption.

Broadly, while futures are pricing a potential easing of disruptions, Dated Brent captures the reality of current constraints.

Stock vs flow

This dynamic can be understood through what Steve Liesman of CNBC terms the “stock versus flow” problem. The “flow” issue refers to residual supplies still arriving from shipments that crossed before disruptions. The “stock” issue emerges if Hormuz remains shut for longer, causing flows to decline and inventories to deplete.

This transition from flow to stock stress will be critical over the next few weeks.

And that is when investors may begin to fear the bark more than take comfort in the wagging tail.

Published on April 11, 2026