Brent crude oil volatility: April outlook
By Vito Turitto, manager, quantitative analysis
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.
The Brent crude market went through a difficult month. A lot of crude was stored on floating tankers in the North Sea waiting to be sold to clients in the Far East.
Specifically, around mid-March there were approximately 7.2 million barrels of BFOE crude in stationary tankers in the North Sea and that number grew to 9 million on March 22 because many refineries in the Far East are undergoing maintenance and, consequently, their demand for sweet crude is very weak.
AMERICAN CRUDE OIL PRODUCTION KEEPS RISING
These unsold floating barrels acted as a cap on Brent prices that lost more than $5 in only 10 trading days also thanks to many hedge funds that started to sell their long Brent positions on the futures market.
Globally, a further increase in US shale oil production, American crude stock levels still at their 5 year high and US rig count reaching 652 in late March, are all factors that contributed to the price crash.
The situation started to improve over the last 4 days of March when some cargoes managed to be sold to Asian clients removing the cap on North Sea sweet grade crudes.
Brent prices have also been pushed up by the fact that Libya’s National Oil Corporation was forced to shut down the Sharara and Wafa fields because of rebel militias.
The drop in Brent prices pushed the monthly volatility from 23.93% on March 1 to 27.63% on March 31 but, despite the 15.43% rise, the fluctuation rate is still trading at very low levels implying there is still room for a further increase.
Let’s now focus on the volatility premium analysis. Implied volatility has been consistently higher than the realized one for the whole month of March and the average spread between the two was around 25%. However, the differential has now dropped to 5.44% and that is a warning signal because a too narrow volatility premium means that market stability is not that high.
The actual level of the volatility premium suggests that selling put options and volatility could be quite risky at the moment.
The current volatility curve remains significantly lower than the medium range one although the figures for the monthly and bimonthly volatility have slightly reduced their divergence with respect to the long term median.
Nevertheless, the divergence is still greater for the quarterly volatility figure implying that market participants are pricing more risk in the period between the end-of-May and the beginning of June, which is exactly when the OPEC will have to decide whether to continue or not with the its production cuts, than in the short term.
BRENT VOLATILITY COULD SLIGHLY INCREASE
The rest of the current volatility curve shows that in the long term, the market is pricing a fairly moderated amount of market risk. Overall, Brent’s volatility is likely to increase in coming weeks but the uptrend of the fluctuation rate is likely to be slow and far from violent.
BRENT PRICES TO TRADE SIDEWAYS
The monthly volatility should reach the 30%-32% interval and probably it will tend to stabilize around this level implying that prices might lose some ground in the first trading days of the month but will predominantly tend to remain stable, everything else being equal.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.