Dated Brent, despite trading between $54 and $55 for several days, has continued to go up whilst volatility has significantly dropped as anticipated in our last Volatility Analysis report, as S&P Platts analyst Vito Turitto explains.
For our recent Volatility Analysis for EMEA, download the following report:
The EMEA report goes through the quantitative analysis of volatility fluctuations for the most important crude and petroleum products in Europe: Brent, Eurobob, ULSD ARA, Jet CIF NWE, and Rotterdam Fuel Oil 3.5%. The current analysis is based on January data.
Video Transcript
Transcript
Strapline: Vito Turitto, quantitative analysis
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.
Dated Brent, despite trading between $54 and $55 for several days, has continued to go up whilst volatility has significantly dropped as anticipated in our last Volatility Analysis report. The priceduring the month of January, has been supported by 2 main factors: a strong Asian demand and a decrease in global crude oil production.
In particular, OPEC members, according to the latest Platts survey, are showing compliance to the agreed quotas and they have produced only 32.16 million barrels - 690,000 barrels down from December and 1.14 million barrels down from October.
Chart 1: Dated Brent
Iraq, OPEC’s second largest member, has still got 129,000 barrels to cut whist United Arab Emirates and Venezuela need to limit their outputs by 56 and 38 thousand barrels respectively. Nevertheless, the 91% of the agreed production cuts have already been achieved in the first month of 2017.
Strapline: Iraq needs to cut 129,000 barrels
Dated Brent’s monthly volatility kept going down in January and if it was low in December, it can now be said to be dramatically low.
Chart 2: Dated Brent Volatility
The fluctuation rate moved from 40.25% on the third of January to a shocking 22.88% on January thirty-first implying that the volatility dropped by more than 43% since the beginning of the year and more than 55% since December first.
Furthermore, it is crucial to point out that Dated Brent’s monthly volatility recently touched its lowest level in more than 2 years.
Strapline: Dated Brent’s volatility touched its 2 years low
Specifically, the last time Dated Brent’s volatility was lower than 22% was in October 2014. This implies that the monthly volatility is much more likely to bounce back up than it is to move further down
In fact, the probability distribution analysissuggests that the fluctuation rate has a 37.82% aggregated probability to increase and only 1.52% chance to stay where it is which means that Dated Brent prices are more likely to decrease over the coming weeks.
Strapline: Volatility has a 37.82% probability to increase and 1.52% chance to stay where it is
The volatility cones analysis which compares the actual volatility with its past distribution, shows an extremely low monthly volatility which almost totally overlaps the lowest point ever achieved by the fluctuation rate over the last 2 years.
It is clear that the mean reverting pressure, which is the tendency of volatility to spike back up once it reaches an equilibrium point and vice versa, at least in the short term, is as high as it can get.
Image3: Volatility Cones
Consequently, it is very likely that the monthly volatility will tend to move up in coming days pushing Dated Brent prices down.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.