The Dated Brent crude oil market was oversupplied in mid-August, capping prices; however, there were signs of improvement in H2 August with the Far East arbitrage pushing Brent prices up. Globally, market players remain focused on geopolitical risk as escalating tensions between the US and China, imminent US sanctions against Iran and US President Donald Trump's threats to leave the WTO -- and imposing $200 billion worth of new tariffs on Chinese imports -- look set to increase price volatility.
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The Dated Brent market was oversupplied around the middle of the month and that capped prices and favored an increase in the selling pressure, in fact, the physical market plunged to $68/b on August 15. In particular, good and profitable margins have greatly favored medium/heavy grades over sweet ones and the influx of US crude into Europe has certainly contributed to put pressure on BFOE grades and push them below the $70/b threshold.
Things started to get better in the second half of the month when a lower Brent/Dubai EFS and some Chinese refiners, coming back from the maintenance period, favored the arbitrage to the Far East pushing Brent prices up. Internationally, market players remained focused on the escalating tensions between US and China trade talks and the instable situation in many emerging markets.
Furthermore, the political risk coming from the impending US sanctions against Iran incentivized Saudi Arabia to cut the price of its Arab Light crude for Asian clients in an attempt to increase its market share and counterbalance losses coming from Iran. Teheran remained under the spotlight for the whole month, in fact, on August 30, global crude prices rose significantly when Iran's Supreme Leader threatened to withdraw from the Joint Comprehensive Plan of Action.
The geopolitical scenario worsened when Iran's leader stated he would not negotiate with the US a new deal. Nevertheless, the final spike in Brent prices was not due just to Iran but also to the fact that Trump threatened to pull out from the WTO and to impose $200 billion worth of new tariffs on Chinese imports. Let us now focus on volatility.
The August's Volatility Premium closing value is among the highest recorded over the last two years implying that a mean reverting movement is likely to happen over coming weeks. Besides, the Probability Distribution analysis shows that the Dated Brent monthly volatility is fluctuating right within its equilibrium range but the mean reverting pressure is building up meaning a price retracement is more likely to happen.
Finally, the Volatility Cones analysis implies that the Dated Brent volatility will likely move higher in coming weeks while prices will tend to retrace. However, once the volatility spikes is over the market is likely to stabilize. Whether Brent prices will start move higher, after their drop, will largely depend on the magnitude of the correction.
Until next time on the Snapshot—we'll be keeping an eye on the markets.