Near-term oil prices hit record premium over later deliveries after Trump vows more attacks on Iran

By Georgina McCartney and Arathy Somasekhar

HOUSTON, April 2 (Reuters) - U.S. crude oil futures for immediate delivery next month hit their largest-ever premium over the second-month contract on Thursday, as traders scrambled to secure barrels after U.S. President Donald Trump vowed to continue attacking Iran.

The activity, known as backwardation - when immediate deliveries trade at a premium over barrels scheduled for delivery in later months - suggests traders expect supplies to be tighter in the near-term rather than down the road.

WTI crude futures for May delivery traded as much as $16.70 per barrel higher than the June contract during the session. The contract hit a session high of $113.97 a barrel on Thursday before settling at $111.42 a barrel.

The U.S.-Israeli war on Iran, nearing the end of its fifth week, has removed millions of barrels per day of oil from the global market, driving energy prices to multi-year highs and causing fuel shortages in countries reliant on oil and gas delivered from the now-blocked Strait of Hormuz.

Around 20% of the world's oil typically flows through that critical chokepoint. Trump, in a Wednesday evening speech, vowed to hit Iran "extremely hard" in coming weeks, but did not lay out a plan to open the strait. He has suggested other nations should take the lead in clearing the strait for shipping traffic.

HIGHER PRICES COULD SPUR DRILLING

While oil for immediate delivery has risen sharply, oil for delivery in six months and one year out has also risen, albeit less dramatically. Still, the higher price increases the chances of producers restarting rigs.

Oil for October delivery, a key indicator for companies deciding whether to increase drilling, is trading around $73.64, 13% higher than before the war began in late February.

"You will likely see some U.S. operators start to drill and complete more wells later this year," said Andy Hendricks, CEO of Patterson-UTI PTEN.O, one of the largest land-based drilling contractors in the U.S.

"What is happening today in oil prices is not really the driver for the U.S. You have got to know what the price of oil will be in six to nine months' time," he added.

Latigo Petroleum, a small producer in Odessa, Texas, is cautiously optimistic about new drilling later this year, but cautioned that prices will need to be higher than $75 a barrel for the rest of the year and in 2027, its president Kirk Edwards said.

Oil rigs in the U.S. rose by two to 411 this week, energy service company Baker Hughes said on Thursday.

CONSUMERS FACE RISING GASOLINE PRICES

However, Dallas Federal Reserve President Lorie Logan said on Thursday that U.S. oil producers are unlikely to boost output yet, as they need to "have a sense that those higher prices are going to stay around for a while." She said she is not hearing about a "dramatic increase in production here in the short run."

Crude prices for May 2027 delivery are only about $68.43 a barrel, a more-than-$40 discount to front-month crude futures, which will cause drillers to hesitate, said Bryan Sheffield, founder of privately held Formentera Partners.

"The minus-$40 spread is a head-scratcher and it is holding us back," said Sheffield, previously head of publicly traded Parsley Energy. He is thinking of adding a rig and extending rig contracts, though "it feels like the back months will not move, and it is frustrating to underwrite drilling programs," he said.