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Crude volatility subdued despite Middle East supply risks

Last week's oil rally before US-led airstrikes in Syria illustrate the market's sensitivity to potential supply disruptions, but the failure for volatility to spike reveals comfort provided by booming US production.

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* US output offsets geopolitical risk

* US crude stocks likely built slightly last week

* Inventories at deficit to five-year average

ICE Brent saw its biggest weekly increase of 2018, climbing a cumulative $5.47/b over the week to $72.58/b Friday. And while this was the strongest prompt Brent has been since late-2014, indicators of crude volatility remained relatively low.

The loss of Middle East supply at a time of tightening global crude stocks has been a catalyst for higher oil prices. But another significant observation has been the ability for volatility to remain modest, revealing some calm beneath the surface.

This paradigm -- higher flat prices, relatively low volatility -- suggests traders are incorporating supply risk without panicking.



The fluid situation in Syria involving outside powers, and possible unraveling of the 2015 Iran nuclear agreement, have sparked talk of geopolitical risk premium for the first time in years.

One reason why has been the backdrop of tightening of stocks both in the US and globally. US crude stocks stood at 428.64 million barrels the week ending April 6, a deficit of 2.6% to the five-year average, compared with a surplus of 9.3% at the end of 2017 and 32.1% a year ago.

Analysts surveyed Monday by S&P Global Platts expect crude stocks rose 625,000 barrels last week. The five-year average for this time of year shows a build of 3 million barrels.

The monthly oil market report released last week by the International Energy Agency contributed to the sense that the tightening of crude inventories wasn't just a US phenomena.

OECD oil stocks fell by 25.6 million barrels to 2.84 billion barrels in February, the lowest level since April 2015, the IEA said.

Moreover, OECD inventories now sit just 30 million barrels above the five-year average. That surplus could be erased soon, achieving an objective OPEC identified when the group agreed to a coordinated output cut.

REALIZED, IMPLIED VOLATILITY

The limited scope of the US airstrikes in Syria over the weekend was leading the oil complex lower Monday, though crude futures remain just below the three-year highs set last week.

At the same time, realized and implied volatility for NYMEX crude futures both remain modest by historical standards, suggesting the rally has been orderly and traders don't expect significantly more volatility ahead.

Realized volatility for the second-month contract has been around 25% since late March. That is higher than levels seen earlier this year, but are still a far cry from 2015-16 when realized volatility averaged around 41%.

And back in 2011, when oil prices were climbing with the loss of Libyan production amid the Arab Spring, realized volatility averaged 30%.

Implied volatility (M2) has followed the same script. That figure has been around 23% since late March, versus 25% on average in 2017, roughly 39% in 2016 and 2017 and 38.8% in 2011.

RELIEVING PERMIAN BOTTLENECK

The cushion provided by US production has been a major factor capping volatility --- and also limiting the upside for oil prices.

US crude output averaged 10.525 million b/d the week ending April 6, according to Energy Information Administration estimates. That represents a year-on-year increase of 1.29 million b/d, much of which has been shipped overseas to Europe and Asia.

US crude exports have averaged 1.5 million b/d year to date, double the amount from 2017 during the same period. Imports have averaged 7.8 million b/d so far this year, versus 8.1 million b/d in 2017.

A major challenge for oil companies has been building infrastructure fast enough to relieve any bottlenecks forming from the increase in production in the Permian Basin.

Those efforts have mostly focused on creating additional pipeline capacity needed to deliver barrels down to the Gulf Coast.

The Midland-to-Sealy pipeline, which connects the Permian with Houston, has came onstream with flows now above 500,000 b/d.

Other pipelines include the 275,000 b/d Longhorn pipeline, the 400,000 b/d BridgeTex pipeline and the 200,000 b/d Permian Express pipeline.

From the Gulf Coast, crude barrels can be stored, exports or refined. The USGC refinery utilization rate was 94.1% of capacity the week ending April 6.

Total refinery utilization has increased six straight weeks. Analysts expect the utilization rate rose 0.1 percentage point last week to 93.6%, versus a rate of 92.9% a year ago.

Despite higher refinery utilization, analysts are looking for draws in gasoline and distillate stocks last week of 1.9 million barrels and 1.6 million barrels, respectively. --Geoffrey Craig, geoffrey.craig@spglobal.com

--Edited by James Bambino, newsdesk@spglobal.com