Bimodal Probability Pricing¶
Category: Framework
Source: Doomberg, "Backwards Looking," June 4, 2026
Description¶
When markets face two extreme, mutually exclusive outcomes with very different implications, the futures price becomes a probability-weighted average of both — not a reflection of "the real price" in either scenario. This framework explains why paper oil prices can remain at $90-100 while physical crude trades at $150+: the futures price embeds both the deal/reopening scenario AND the prolonged closure scenario.
The Two Outcomes (Hormuz Case)¶
| Outcome | Probability (market-implied) | Price Implication |
|---|---|---|
| Deal / Hormuz reopens | ~40-50% (implied) | Brent falls to $70-90, possibly lower |
| Prolonged closure / escalation | ~50-60% (implied) | Brent rises to $120-200+ |
The "expected value" of these two scenarios produces a futures price that looks moderate — but it doesn't represent the actual current physical price in either world.
Why This Matters¶
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Explains the paper-physical disconnect. The $51/bbl gap between futures (~$99) and physical crude (~$150) isn't manipulation — it's the market pricing in a ~40-50% chance of normalization.
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Refutes conspiracy narratives. Claims of "government-constructed fiction" confuse probability-weighting with suppression. The simpler explanation is more consistent with observed behavior.
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Predicts volatility. When one outcome becomes more likely (e.g., ceasefire progress or escalation), prices will gap violently — because the market is reweighting between two very different worlds.
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Historical uniqueness. Prior oil shocks (1990 Gulf War, 2022 Russia-Ukraine) had more predictable resolution paths. The Hormuz crisis has no clear historical analog for modeling the bimodal distribution.
Implications for Analysis¶
- Do not use futures prices as a proxy for current physical stress. Physical prices reflect the scarcity scenario; futures reflect the average.
- Track probability shifts, not just price levels. A move from $95 to $105 could mean the market is shifting from 50/50 to 45/55 on deal probability — a much bigger deal than the $10 price move suggests.
- Volatility is structural, not noise. As long as both outcomes remain plausible, violent swings are expected — not evidence of manipulation.
Related KB Entries¶
- backwardation — The physical manifestation of supply stress
- physical-brent-price-spike — What happens in the prolonged-closure scenario
- demand-destruction-dual-risk — Goldman's dual risk framework (demand-side complement)
- hormuz-scenario-tree — The scenario structure this pricing embeds