Dated Brent dropped significantly in the month of October and the Dated Brent CFD forward curve moved from a steep backwardation in the first trading days of the month to almost a contango around October 31.
Geopolitical risk and increased Saudi crude production are among the factors that have heavily influenced global crude prices and that contributed to the spike in market volatility happened in October. Vito Turitto, quantitative analysis manager at S&P Global Platts, says overall the fundamentals are still weak and the market will probably stay volatile also in the coming weeks.
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Dated Brent dropped significantly in the month of October, in fact, the downtrend managed to wipe out almost $10/b in just 23 trading days. The physical Brent market was trading around $85/b in the first days of October but the high prices for BFOE grades pushed many refiners towards medium sour grades like Urals crude diminishing the demand for North Sea grades.
On the other hand, the Asian demand, particularly in the first half of October, was rather good with quite a few cargoes of Forties moving towards China and South Korea. It is important to point out that the healthy flow of North Sea grades towards Asia helped the market to stay above $80/b until the end of the month.
The Dated Brent CFD forward curve remained in a steep backwardation in the first trading days of October, nevertheless, things deteriorated quickly. In particular, the forward curve was in steep backwardation until October 19, it then started to flatten out but was almost in contango around October 31.
Internationally, geopolitical risk has heavily influenced, once again, global crude prices. Specifically, market participants focused their attention on the rising tensions between US and China, Iran sanctions, the deteriorating relationship between Saudi Arabia and the United States due to the murder of the journalist Jamal Khashoggi and on Saudi Arabia's decision to bring the oil output of the Kingdom to 11 million b/d.
Moreover, the increase in Russian crude production as well as American crude stocks climbing to 426 million barrels are all factors that have certainly contributed to push prices further down.
The Volatility Premium dropped dramatically throughout the month of October and the fact that its value is currently so low indicates that the market outlook, for the coming weeks, is bearish. Also, the Probability Distribution analysis suggests that the Dated Brent monthly volatility plunged to 19.11% at the end of October implying that it is now oscillating again within the lowest volatility range over the last 2 years. The Volatility Cones analysis confirms what has been observed in the previous analysis. In fact, it shows that the monthly, bimonthly and quarterly figures, on the current volatility curve, are very low and that a mean reverting movement is likely to happen in coming weeks.
Overall, the probable increase in volatility is likely to accompany a price downtrend, which should be followed by a sideways trading environment.
Until next time on the Snapshot—we'll be keeping an eye on the markets.