Quantitative analyst Vito Turitto explains how the increase in WTI/Brent differential has favored the flow of US crude oil barrels into Europe and Asia, and how this has changed the shape of the Dated Brent CFD forward curve. The increased competition among crude grades has put pressure on BFOE grades but healthy Chinese demand has seen high prices maintained.
OPEC revised up its forecast for global oil demand for both 2017 and 2018, while US crude exports hit a record high level of 2.1 million b/d. The volatility in the oil market is expected to continue to have a significant impact on trading and hedging activities.
Learn more in the: November 2017 Volatility Analysis -- EMEA
Brent crude oil volatility: November outlook
By Vito Turitto, manager, quantitative analysis
Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.
The Dated Brent market went through a significant structural change in the month of October. The large discount WTI crude kept trading at against Brent opened up arbitrage opportunities in both Europe and the Far East.
In fact, a lot of European and Asian refiners started to look at American sweet crudes, like WTI Midland or Eagle Ford, as a cheap alternative to BFOE grades putting pressure on both the North Sea and Mediterranean markets.
The Brent CFD forward curve began changing shape, as a consequence of this pressure, and by October 10 its first three tenors moved in contango while the rest of the curve remained in backwardation.
In the second half of the month, the entire CFD curve switched back to backwardation, thanks to a good Chinese demand and profitable refining margins, and such term structure strengthened even further providing an incentive for market participants to sell prompt the front end of the curve and unload storage.
Internationally, US crude export reached the record high level of 2.1 million b/d, American inventories declined for the whole month of October, Saudi Arabia stated that it would limit its exports to international customers to 560 thousand b/d below their requests while OPEC revised up its forecast for total global oil demand in 2017 and 2018 which, according to their analysts, should touch 96.8 and 98.1 million b/d respectively.
The Volatility Premium averaged 15.7% in the month of October which is higher than its three-month and year-to-date values while it is almost twice as high as the two-year average which implies that it will tend to normalize over the coming weeks.
The Volatility Premium will tend to narrow over coming weeks meaning that the market is likely to experience higher turbulence in the short term but, overall, the premium will tend to stabilize favoring an uptrend in Brent prices.
Dated Brent’s monthly volatility closed the month of October trading at 22.8% which means that it falls within the 20-25% volatility range and it has 11.8% probability to remain there.
Nevertheless, the Probability Distribution analysis indicates that the volatility is more likely to increase and reach the 25-30% interval where it has 19.2% chance to remain. However, it is important to note that the increase in volatility may cause some short term retracements.
The Volatility Cones analysis clearly suggests that the current Brent’s volatility curve is well below the medium and low range ones, its monthly and bimonthly figures are slightly lower than the minimum curve and their positions are evidently suggesting that the fluctuation rate is fluctuating around its two-year low.
The Volatility Cones analysis implies that the fluctuation rate will likely increase in the short term, while prices will tend to downtrend, but overall the volatility will tend to stabilize favoring a progressive price uptrend.
Until next time on the Snapshot — we’ll be keeping an eye on the markets.