The Dated Brent market moved sideways during August with crude oil prices oscillating within a trading channel between $50/b and $53/b. Short volatility positions should not be entered in the market because the fluctuation rate is likely to experience an uptrend in this month causing prices to downtrend.
Probability distribution analysis shows that Brent’s monthly fluctuation rate is trading within one of the lowest volatility intervals in the last two years, indicating that a mean reverting movement will likely happen in the coming weeks. Analyst Vito Turitto reports.
Video Transcript
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.
The Dated Brent market moved sideways in the month of August with prices oscillating within a trading channel between fifty and fifty-three dollar per barrel.
The Dated Brent CFD forward curve has been in backwardation for the whole month indicating a relatively healthy demand for BFOE and North Sea grades.
In particular, good but not aggressive demand from China and the Far East as well as domestic demand helped keep prices above the fifty dollar per barrel threshold despite fears that the widening WTI/Brent spread would push American barrels into the North Sea.
Internationally, Libya’s National Oil Corporation, around the end of August, was forced to declare force majeure because the Sharara oil field was again attacked by militants while data coming from the Middle East shows that last month’s OPEC output was 32.65 million b/d, which is 6 hundred and 30 thousand barrel per day above the stated ceiling.
The cartel’s compliance to production cuts was 93% in July and 114% year-to-date. On the other side of the Atlantic, the US crude oil stocks dropped by 5% between the end of July and the end of August while American crude production reached nine-point-fifty-two million barrel per day on August 24.
On August 29, twenty-five per cent of the total gulf Coast refining capacity was down, equivalent to 13% of total US capacity, because of Hurricane Harvey and such a phenomenon had a big impact on petroleum products in both US and Europe.
A first look at the volatility curves, calculated on both the paper and physical markets, suggests that all the time the volatilities touched this level, Brent prices were on the brink of a retracement.
The analysis seems to be confirmed by the fact that the current Volatility Premium is negative because the realized volatility managed to get higher than the implied one which is an indication for market weakness.
Consequently, short volatility positions should not be entered in the market because the fluctuation rate is likely to experience an uptrend in coming weeks causing prices to downtrend.
The Probability Distribution analysis highlights that Dated Brent’s monthly fluctuation rate is trading within one of the lowest volatility intervals in the last two years indicating that a mean reverting movement will likely happen in coming weeks.
In all likelihood, the volatility will tend to go up and reach the 30-35 per cent intervals where it has an estimated 22.7% chance to remain.
Finally, the Volatility Cones analysis indicates that the current volatility is much lower than its average because of the recent channel trading conditions implying that the actual uptrend is unlikely to last long because the probability for the fluctuation rate to get even lower than it currently is, are very low.
Overall, prices might tend to move higher in the very short term but, over the coming weeks, the volatility will likely to go up while prices will tend to retrace.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.