Why the oil price will "fall" $4 on Monday without anything changing

What happened

Brent crude, the main international oil benchmark, was on course on 30 October to end the month with its fourth monthly rise in a row, of more than 10%. On 30 October the December contract rose about 2% to around $117 a barrel during the day, Reuters reported, while the January contract traded around $113.

Two events added to supply fears. The UK Maritime Trade Operations centre said a tanker in the Strait of Hormuz had been hit by explosives attached by a small boat, which maritime sources described as the first successful attack of its kind in the waterway since the war with Iran began in February. The day before, Yemen's Houthis said they had attacked Saudi oil facilities. Diplomatic efforts between the United States and Iran continue, without a deal.

Why the headline price is about to drop

The "oil price" quoted in the news is usually the price of the nearest futures contract: an agreement to buy oil for delivery in a given month. Each contract trades until a set date, then expires, and the headline switches to the next one. The December Brent contract expired on 30 October, so from Monday the headline price will be January's.

Because January was trading about $4 below December, the quoted price should fall by about that much on the switch, even if nothing changes in the market. Comparing Monday's price with Friday's will therefore overstate any fall.

Why oil now has three prices, and what the gap says

In a calm market, oil for later delivery usually costs a little more than oil now, to cover storage and financing. Today it is the opposite: the nearer the delivery, the higher the price. Traders call this backwardation. It means buyers will pay a premium to get oil quickly, which happens when supply is short now and expected to ease later.

The physical price makes the point even more clearly. Dated Brent, the price of real cargoes loading in the coming days, was about $123 a barrel on 27 October, according to US government data, well above the futures. That gap is what a shortage looks like in prices.

Where it sits in the chain

An oil shock enters at the start of the chain, as an external shock to prices (Link 1). It shows up first in fuel and transport costs, then in inflation, and then in central banks' decisions.

What to watch

• The size of the gap between near and later contracts: a narrowing would suggest the shortage is easing.
• Shipping through the Strait of Hormuz, and any progress in US–Iran talks.
• Euro-area inflation for October on 4 November, the first big reading since oil passed $115.