As global crude supplies tighten, oil buyers are paying significantly more for immediate delivery

Oil buyers are scrambling and paying more to get barrels soon as the Iran conflict risks broadening out.

Global crude buyers are now paying a lot more to get a barrel of crude oil immediately, rather than locking in lower prices for delivery in the coming weeks and months.

That's a warning sign that energy markets might struggle to keep up with demand, especially as the recent escalation in the Middle East conflict threatens to further tighten global oil supplies.

U.S. drivers also might want to brace for gas prices to rise in the weeks ahead from their current average of $4.32 a gallon at the pump. The record was nearly $5.02 a gallon in June 2022, following the oil shock unleashed by Russia's invasion of Ukraine.

Higher prices for a barrel of oil take time to filter down to retail gas prices, but a look at the oil market's "prompt spread" shows bigger gas bills look likely. The spread measures the difference in price for a barrel of oil for immediate delivery versus what it costs to buy a barrel a few weeks down the road.

The spread narrowed over the summer as a ceasefire and a short-lived diplomatic deal between the U.S. and Iran raised hopes that the worst of the conflict might be over. But now, the gap has widened again.

Brent crude for November delivery (BRN00) (BRNX26), the nearest-term contract for the global benchmark, on Monday traded as high as $109.80 a barrel, according to FactSet data, before easing back to about $105.30, at last check.

That compared with oil that can be delivered a month later in December (BRNZ26), which was at $100.54 a barrel. The difference between the two prices was about $5.58 a barrel, its largest gap since July 23, according to FactSet (see chart below).

Similarly, West Texas Intermediate crude for October delivery (CL00) (CL.1) (CLV26), the nearest-term contract, was hovering above $103 a barrel Monday. But that was about $4.79 a barrel more than the following month's contract (CLX26), also putting the so-called prompt spread on track for its widest level in nearly two months.

That gap points to growing concerns over global crude supplies, as well as jitters about the physical oil supply immediately available to the market.

China's hidden domestic reserves and its dramatic throttling back of oil imports earlier during the Iran war surprised global markets by keeping crude prices broadly in check. However, the conflict has now far exceeded earlier estimates of its scope and duration.

The recent escalation between Saudi Arabia and Yemen's Iran-backed Houthis rebels has put further pressure on global oil supplies. That's reflected in both the global and U.S. oil benchmarks climbing toward their highest levels in four months.

Saudi's key East-West pipeline to the Red Sea remained shut down Monday after multiple drone attacks, while the capture of the Red Sea port of Mokha and a strategic island by Iranian proxy groups brings their forces to the Bab el-Mandeb Strait - the very waterway Saudi Arabia had been relying on to reroute crude around the blockaded Strait of Hormuz.

Now, both key maritime chokepoints are under Iranian and Houthi control.

"A short outage is manageable, but a prolonged shutdown is different because crude can only back up for so long before logistic constraints begin to limit production - that is where calculus stops being an inconvenience and starts removing barrels from the market," said Stephen Innes, managing partner at SPI Asset Management.

The widening gap between the two nearest Brent contracts is reflecting that concern, and telling you that "buyers are paying increasingly more for barrels they can get their hands on now," Innes said.

In the view of Adam Turnquist, chief technical strategist at LPL Financial, it all points to further upside for oil prices.

There's almost been "no progress at all on anything with Iran," Turnquist said - pointing to a lack of clarity on how long the conflict will last, when crude supplies might normalize, which party could end up controlling the Strait of Hormuz and "at what cost."

And from a technical perspective, Brent crude cleared the summer highs of around $100 a barrel last week, which opens up the door to the next major resistance being toward the spring highs of over $120 a barrel, Turnquist said. "Anywhere from the $112 to $125 range for Brent would be the next area of major resistance," he told MarketWatch.

A resistance level on a chart is where an upward price trend could hit a ceiling. Yet the lack of progress toward ending the war, now in its seventh month, has market participants back to repricing much higher risks for supplies and oil prices. "There are a lot of boxes checked for upside risk in oil," Turnquist added.

U.S. stocks closed lower Monday, with the benchmark 10-year Treasury yield BX:TMUBMUSD10Y around 5% after it reached its highest intraday level since July 2007, according to FactSet data.

The Dow Jones Industrial Average DJIA shed 0.3%, while the tech-heavy S&P 500 SPX and Nasdaq Composite COMP fell 0.5% and 0.6%, respectively. This came after top U.S. tech leaders cited safety risks and called for a slowdown in the ?development of artificial-intelligence models.

-Isabel Wang