A war may continue, risks may remain, and oil tankers may still struggle to reach their destinations—yet crude prices can fall on global markets. How does that happen? The answer lies in the nature of financial markets: they respond not only to what is happening today, but also to what investors expect to happen tomorrow.

Imagine you run an airline and need to buy large quantities of fuel over the coming months. Suddenly, a military crisis escalates in a region through which important oil shipments pass.

Supplies may not stop immediately, but the possibility of disruption becomes a concern. If you expect fuel prices to rise, you may look for a way to lock in the cost of future purchases and protect your company from a sudden increase.

At the same time, investors may try to profit from a potential rise in oil prices, while producers and shipping companies reassess the risks to the continuity of supplies.

These decisions play out in the markets, and prices may start rising before the amount of oil actually available changes.

But what if signs emerge that a political agreement may be reached? Or shipping routes become safer?

Prices may start to fall, even if the crisis has not yet ended.

To understand this paradox, we need to look at how oil prices are determined and at the relationship between events, expectations, and risks.

Why doesn’t the price of oil reflect only what is happening today?

The price of oil, like that of most commodities, is determined by the relationship between supply and demand.

Supply is the amount of oil available for sale, while demand represents the quantities buyers want to obtain at different price levels.

When demand for oil rises beyond producers’ ability to supply it, prices come under upward pressure. If supply increases relative to demand, prices may fall.

But oil differs from many consumer goods because it is used in transportation, manufacturing, chemical production, and many other economic activities. It can also take time to significantly increase production or reduce consumption.

As a result, supply and demand tend to respond relatively slowly to price changes in the short term.

So if the price of oil rises today, not every company can immediately cut its consumption, and producers may not be able to increase output as quickly as needed.

This characteristic, known in economics as low price elasticity, helps explain why oil prices can fluctuate sharply when sudden disruptions occur.

However, prices are not determined by current quantities alone. They are also influenced by what producers, consumers, and investors expect to be available in the future.

That brings us to a central idea:

Today’s oil price is affected by what is happening now and by what market participants believe may happen later.

How does fear drive oil prices up?

Suppose a barrel of oil costs $80 under stable conditions.

Then a crisis escalates in an important oil-producing or transit region, and market participants begin to worry that supplies could be disrupted.

The price may rise to $90, even though actual production has not yet fallen.

Why?

Some buyers may be more willing to pay a higher price to secure the supplies they need, while investors may expect supplies to tighten in the coming period.

The price impact associated with the possibility of a disruption is known as the geopolitical risk premium.

Geopolitical risks are risks arising from wars, international tensions, sanctions, and conflicts that may affect economic activity and trade.

In the context of oil, the risk premium is the potential extra amount in the price associated with the expectation of such risks and the uncertainty surrounding them.

This premium does not mean that a fixed amount is automatically added to every barrel.

In practice, it is difficult to determine its size precisely because prices are affected at the same time by supply, demand, inventories, expectations, and other factors.

The U.S. Energy Information Administration notes that concerns about supply disruptions can push prices above the levels that current supply and demand conditions alone might justify.

In this way, the possibility of an event can affect prices before the event occurs.

How can oil prices fall when the war isn’t over?

Suppose the price of a barrel rises to $100 after market participants anticipate that a large share of supplies could be halted.

A few days later, new signs suggest that the likelihood of this disruption has decreased, or that alternative routes are available to deliver oil to buyers.

The price may fall to $90.

Does that mean the war is over?

Of course not.

What has changed is how market participants assess future risks.

The earlier price reflected certain concerns. Then new information emerged, making some of those concerns less severe.

Here, it is important to distinguish between two things:

The end of a risk means that the source of the threat has actually disappeared.

A decline in expected risk means the market now sees the likelihood or scale of potential harm as lower than it previously did.

Prices may respond to the second before the first happens.

These numerical examples are hypothetical and illustrate the economic mechanism; they are not actual prices tied to a specific crisis.

But they reveal an important principle: markets do not have to wait for a crisis to end before reassessing the prices of assets and commodities.

New information alone may be enough to change expectations, even while political and military conditions remain complex.

Why can good news cause prices to fall?

We are accustomed to thinking of positive news as something that pushes markets up.

But what if the high price of a particular commodity is driven by fears that it will become scarce?

In that case, positive news may cause its price to fall.

If markets expect oil supplies to be disrupted and signs then emerge that shipping is improving or tensions are easing, prices may fall as fears of a supply shortage recede.

That does not mean a lower price is a bad outcome.

It may instead reflect expectations that supplies will become more readily available.

The reverse is also true: oil prices may rise after negative news about the possibility of production or shipping disruptions.

So whether a price movement is described as positive or negative depends on whose perspective we take.

Lower oil prices may help airlines, transport companies, and energy-intensive industries reduce their costs in the future.

But they may cut revenues for oil producers if the increase in volumes sold does not make up for the lower prices.

The same news can have different economic effects, depending on where a company or country stands in the market.

What are futures contracts, and why do they move ahead of events?

To understand the relationship between prices and the future, we need to look at one of the most important tools in commodity markets: futures contracts.

An oil futures contract is a standardized agreement traded on an organized exchange to buy or sell a specified quantity of oil under terms that include a future delivery or settlement date.

An airline, for example, can use financial instruments linked to oil prices to hedge against rising fuel costs.

An oil producer, meanwhile, may use futures contracts to protect itself against the possibility of lower prices in the future.

This practice is known as hedging: using financial instruments to reduce the impact of price fluctuations on revenue or costs.

Alongside producers and consumers, investors and financial institutions also trade these contracts to manage risk or benefit from price movements.

Suppose markets expect oil supplies to fall short in three months.

The price of a contract for that date may rise as demand for it increases and market participants reassess the situation.

But if new information reduces the likelihood of a shortage, the contract price may fall before the delivery date arrives.

Futures markets thus become a place where expectations about the future interact with current trading decisions.

Still, it is important to remember that a futures price is not a guaranteed prediction of the future price of oil; it is also affected by storage and financing costs, market conditions, and risk.

Why do oil inventories matter?

Another factor that helps explain price movements is oil inventories.

Inventories are quantities of oil that have been produced or purchased but not yet consumed, and are held in storage facilities or other locations.

Inventories play an important role in balancing supply and demand.

If production temporarily falls short, some oil can be drawn from inventories to meet part of the market’s needs.

If supplies exceed consumption, inventories may grow as surplus oil is stored.

Suppose a crisis threatens to reduce global supplies.

If available inventories are high, markets may be able to cope with some of the shortfall for a limited period.

But if inventories are already low, the impact of any additional disruption may be more severe.

That is why knowing how much oil is produced each day is not enough to understand prices.

We also need to know the size of inventories, how much of them can be used, where they are located, and how quickly they can reach consumers.

The U.S. Energy Information Administration explains that inventories help cushion imbalances between supply and demand and also affect the relationship between current and future prices.

Does a drop in oil prices mean global demand has weakened?

Not necessarily.

Oil prices may fall because expected supply has increased, supply risks have eased, or markets expect demand to slow.

Each case has a different economic explanation.

If prices fall because supplies are expected to improve after a prolonged disruption, this may be related to the easing of restrictions on the movement of oil.

But if they fall because the global economy is expected to slow, markets may be concerned about a decline in industrial activity, transportation, and consumption.

This is where economic growth comes in.

When economic activity expands, companies and consumers usually need more energy, particularly for transportation and industry.

When economic activity slows, growth in demand for oil may weaken.

But the relationship is not entirely fixed; it is also affected by energy efficiency, technological change, and government policies.

Therefore, not every drop in oil prices is evidence that political risks have eased, nor can it always be explained by weakness in the global economy.

Price is the result of multiple interacting factors, not an independent indicator that reveals a single cause.

Why do prices rise quickly and then fall sharply?

During some crises, oil prices rise over a short period as fears intensify.

They may also fall quickly if new information differs from previous expectations.

An economic concept called repricing expectations helps explain this movement.

Investors do not simply compare new information with the previous situation; they compare it with what they expected to happen.

If markets expect a severe crisis and a less severe one then unfolds, prices may fall even though conditions remain unstable.

But if markets expect a rapid improvement and recovery turns out to be slower, prices may rise again.

That is why prices can move sharply even when there has been no comparable change in actual production that same day.

However, a rapid change does not necessarily mean that markets were wrong every time.

Markets work with incomplete information and continually reassess it.

That information may change as new data on inventories, production, and demand are released, or as political and economic conditions shift.

Can markets predict when crises will end?

Although prices depend on expectations, markets do not have certain knowledge of the future.

Investors use available information to estimate probabilities, and those estimates may change significantly when new information emerges.

Oil prices may fall in anticipation of a resolution to a particular crisis, then rise again if negotiations falter or an unexpected disruption occurs.

This is why price trends alone cannot be relied on to determine when a war will end or whether political negotiations will succeed.

The market does not deliver a final judgment about the future; it reflects the interplay of buyers’ and sellers’ decisions in light of available information and expectations.

This is why it is important to distinguish between an expectation and a confirmed event.

An expectation expresses a possibility, while a confirmed event is a reality that has been verified.

The more these two concepts are conflated when reading economic news, the greater the chance of reaching inaccurate conclusions.

How can we read oil news more carefully?

When we read a report saying that oil prices fell because of the possibility of de-escalation, we should not necessarily take it to mean that the crisis is over or that supplies have actually returned to previous levels.

Instead, we can ask questions that help us understand the bigger picture.

Have expected risks fallen, or have actual supplies improved? Have expectations for global demand changed? What is the state of oil inventories? Do prices reflect new information or a correction to earlier expectations?

These questions turn oil coverage from daily price-watching into an understanding of the factors driving markets.

In economics, prices do not move in response to events alone; they are also influenced by expectations, the likelihood of those events, and how willing market participants are to bear the risks.

That is why oil prices may fall before a war ends, just as they may rise before an actual supply disruption occurs.

The most important lesson is that markets do not wait for the future to arrive before it affects prices. They constantly try to assess what it may bring and revise their calculations whenever the information changes.

Prices tell us not only what is happening now, but also how market participants view the possibilities of what may happen next.