The volatility on the Dated Brent crude oil market at the end of January was moving around its lowest level in 2 years and a higher degree of market turbulence had to be expected. The high selling pressure, particularly in the Brent physical market, is also a consequence of a lack of arbitrage opportunities towards the Far East, a sluggish European domestic demand and the increased competition between BFOE grades and American sweet crude grades, which have been entering the North Sea market favored by a wide Brent/WTI spread. February looks like a very volatile month.
2018 Brent crude oil volatility: February 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 Dated Brent market went up in the first ten days of January and tested the $71/b threshold at least 3 times before dropping back to $68/b at the end of January.
The Brent physical market has recently encountered quite a lot of competition from American sweet grades which, thanks to a favorable Brent/WTI spread, entered the North Sea market and the number of American barrels getting in Europe is expected to touch 350,000 b/d in February.
Furthermore, the high premium, at which Dated Brent kept trading at against WTI and Dubai, pushed many Chinese and South Korean refiners to purchase Middle East and American sweet crude oils rather than BFOE grades.
Internationally, American crude oil stocks dropped by 1.44%, from the end of December to the end of January, while OPEC members, during the same period of time, managed to pump 32.46 million b/d of oil, which is 60,000 b/d higher than their December’s output, according to a recent S&P Global Platts Survey.
The net long position on ICE Brent futures, at the beginning of January, touched the record high level of more than 567,000 contracts and the fact that there were so many speculative positions in the market increased the propensity of crude prices to drop as a result of massive profit takings.
The Volatility Premium was as high as 36.5% on the 31st of January, which is a level that has been touched only another 5 times since 2015, and that implied that a significant adjustment was likely to happen at the beginning of February.
The realized volatility, which dropped by a staggering 39.18% in January, was likely to move up and get closer to the implied volatility, which, instead, moved down only by 2.86%. However, the fact that the realized volatility is still likely to increase suggests that the higher degree of market turbulence and retracements in Brent prices might also continue in coming weeks.
The distribution analysis shows that the Dated Brent’s monthly volatility ended, the month of January, trading in the lowest volatility range touched by the fluctuation rate over the last 2 years so the increase in the fluctuation rate, happened at the beginning of February, was very likely to happen.
The Volatility Cones analysis shows that the volatility curve, at the end of January, was basically trading around its 2-year lowest. The fluctuation rate was just too low and, statistically speaking, the aggressive sell-off, happened during the 1st week of February, had to be expected.
Overall, the volatility will likely remain high in coming days and Brent prices might still experience short-lived but fast retracements.
Nevertheless, the selling pressure will eventually diminish, the volatility will probably soften and Brent crude prices, over the coming weeks, should, at first, move sideways and then slowly recover.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.