Dated Brent crude oil prices rose in May, pushed by a healthy demand in the Far East, particularly from China and South Korea, despite US barrels -- favored by a wide Brent/WTI spread -- continuing to arrive into Europe. However, in June, the demand/supply dynamics will likely not take center stage as all eyes will be on the upcoming OPEC meeting to be held June 22. The Brent market may experience a high level of volatility in the last trading days of June and a good hedging strategy will be essential to avoid unwelcome surprises.
2018 Brent crude oil volatility: June outlook
By Vito Turitto, manager, quantitative analysis
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.
Dated Brent prices went up during the month of May pushed by a healthy demand from the Far East, in fact, North Sea grades have been clearing towards Asia fairly quickly despite the augmented competition from American barrels which were and still are greatly favored by a Brent/WTI spread oscillating between $8 and $10/b.
American barrels have now become so easy to find in Europe that WTI Midland oil is as strong a competitor to BFOE grades as Saharan or CPC oil. Internationally, geopolitical risk remained a fairly big concern for market participants with oil losses caused by Venezuela and Iran driving Brent prices higher and higher.
Furthermore, global demand for crude oil seemed to be rather healthy in May, in fact, the Energy Information Administration reported that US crude exports jumped to 2.56 million b/d, which is a record high, and that US crude oil production, in order to meet both domestic and international demand, got higher than 10.7 million b/d.
However, the Brent market was dramatically shaken on May 25 when the Saudi Arabia energy minister Khalid al-Falih, during the Saint Petersburg Economic Forum, said that OPEC members would be considering gradually increasing oil production quotas in their next meeting on June 22.
All eyes are pointed towards the OPEC meeting because it is likely to have a long-lasting impact on Brent crude prices. The Volatility Premium is still significantly higher than its 3-month value which implies that it will likely tend to narrow down in coming weeks causing a re-adjustment of Brent prices in the short term while the Probability Distribution analysis shows that the monthly volatility is moving around a fairly stable environment.
In fact, Dated Brent’s monthly oscillation rate will likely soften and tend to move towards the 20-25% range in coming weeks. The plummeting volatility is likely to favor an uptrend in prices which should move up until June 22, despite some short term retracements.
Finally, the Volatility Cones analysis shows that market participants expect more volatility in the short-to-medium term, probably due to geopolitical risk and the outcome of June’s OPEC meeting, than in the long one. Overall, Brent volatility is likely to move down in coming weeks implying a market uptrend which is likely to last until June 22.
Nevertheless, prices might still experience some short-lived retracements and the last trading days of June could be more volatile because market participants will try to adjust their position to whatever is going to be the final outcome of the OPEC meeting.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.