The first half of April saw Brent crude oil prices soaring because of geopolitical tensions between the US and North Korea and disruptions to oil terminals in Libya due to rebel militias. Nevertheless, the market uptrend did not last for long; in fact, it started to tremble in mid-April when BFOE grades began to drop as a consequence of uncertainty in Asian demand.
Analyst Vito Turitto sees Dated Brent's and ICE Brent futures' volatilities increasing in the very short term, followed by a period of stabilization over the coming weeks.
Video Transcript
Brent crude oil volatility: May 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 first half of April saw Brent prices soaring because of geopolitical tensions between the United States and North Korea and disruptions to oil terminals in Libya due to rebel militias.
Nevertheless, the market uptrend did not last much, in fact, it started to tremble around April 18 when BFOE grades began to drop as a consequence of uncertainty in Asian demand.
The weak buying interest in the North Sea, despite advantageous arbitrage economics, is due to the fact that the Asian market, at the moment, does not really need additional oil from the North Sea because, around Singapore and China’s ports, a large volume on floating tankers is waiting to be sold.
Internationally, the US crude oil production achieved 9.9 million b/d, the OPEC output touched 31.85 million b/d at the end of April whilst the Saudi minister Khalid Al-Falih stated that OPEC members, in their next meeting at the end of May, are likely to extend the production cuts to 6, 9 or even 12 months, if necessary.
Dated Brent’s April average price equaled $52.5/b while ICE Brent futures averaged $53.7/b during the same period implying an average price differential of $1.19 in favor of futures over physical but the most interesting divergence comes from volatility.
The volatility of the Brent physical market closed the month of April at a 16.4% premium over ICE Brent futures, however, the overall monthly differential equaled 11.5% which is substantially far from the long term mean of 1%.
The large volatility differential is due to Dated Brent’s monthly volatility being constantly higher than that of Brent futures implying that some changes in the fundamentals might be on the horizon.
The “physical vs paper” analysis shows that both physical and futures volatilities, although still very low, are now fluctuating around a new equilibrium level so it is likely that Dated Brent’s and ICE Brent futures’ volatilities will tend to increase in the very short term but will stabilize in the coming weeks.
This implies that some market turbulence should be expected but, overall, the market should also make some gains in the run up to May 25.
Nevertheless, the uptrend in Brent prices should be slow and it is highly unlikely that the $54-$55/b range will be breached.
The volatility premium spiked tremendously in the month of April and moved from 20.8% on the 3rd of April to 104% on the 13th of April and dropped back down to 27.4% at the end of the month.
The volatility premium averaged 56.4% in April while its year-to-date value is 26.8% which implies that the differential between the two volatilities will tend to reduce over the next weeks.
The drop in the volatility premium signals that market conditions will probably tend to get back to normal in the coming four to five weeks but the fact that it is still trading at a high level compared to its two-year average of 8.27% indicates that the market could still experience some turbulence in the very short term.
The volatility cones analysis shows that the current volatility curve is still trading below the medium and low range curves implying that the mean reverting pressure, in the very short term, is fairly sustained and that a higher degree of market volatility should be expected.
The increment in the oscillation rate in the very short term will cause some turbulence and market instability but, overall, the volatility spike should be far from violent and the price trend should stabilize in coming weeks.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.