December was characterized by a high degree of speculation and irrationality in the Dated Brent crude oil market. S&P Global Platts quantitative analyst, Vito Turitto, reports on how geopolitical tensions between the US and China over trade relationships, a slowdown in Chinese GDP growth, the rise in interest rates by the Federal Reserve, and expected weaker growth in the global economy, are all factors that have played a key role in the downtrend. In addition, oil market volatility is at a 2-year high, but Vito forecasts the situation will likely improve; although short-term price corrections should not be ruled out.
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The month of December, as many market participants put it, was characterized by a high degree of speculation and irrationality. Dated Brent prices moved down and the bearish sentiment remained the predominant one also in the physical market because signs of buying appetite for BFOE grades remained very low.
The weak buying pressure in December is also a consequence of the several destocking operations before the year-end. Furthermore, the arbitrage to the Far East has also been far from good with rising shipping costs, South Korea demand largely absent and only a few Chinese customers active on the market.
Internationally, the geopolitical tensions between US and China over trade relationships, a slowdown in Chinese GDP growth, the rise in interest rates decided by the Fed and an expected weaker growth in the global economy are all factors that have certainly played a key role in the downtrend, which closed the 2018.
Moreover, a higher Russian production, which hit 11.42 million b/d in December, and an increased American shale output, which is expected to reach more than 8.1 million b/d in early January, along with a general sell-off in equities contributed to push prices down.
Nevertheless, it is quite evident that the very intense selling pressure was also due to a high number of speculators who took advantage of these factors to intensify their selling activities.
The Volatility Premium is currently very narrow and it is likely that it will tend to widen over the course of next weeks favoring a slow uptrend in prices and steadier market conditions.
The Probability Distribution analysis suggests that it is very unlikely that the volatility will remain this high and even less probable that it will rise further.
Finally, the Volatility Cones analysis confirms that the fluctuation rate is too high implying that the current volatility curve is likely to soften over next weeks favoring steadier market conditions and a slow price uptrend.
Nevertheless, it is important to point out that short-term retracements are still highly probable because the turbulence degree in the market remains particularly high.
Until next time on the Snapshot—we'll be keeping an eye on the markets.