The volatility of Dated Brent has followed a leverage effect process and such a phenomenon signals market stability and the potential for Brent prices to move higher in coming weeks, as S&P Platts anlayst Vito Turitto explains.
For the latest Volatility Analysis for EMEA or Americas download the following reports:
The EMEA report goes through the quantitative analysis of volatility fluctuations for the most important crude and petroleum products in Europe: Brent, Eurobob, ULSD ARA, Jet CIF NWE, and Rotterdam Fuel Oil 3.5%. The current analysis is based on December data.
The Americas report goes through the quantitative analysis of volatility fluctuations for the most important crude and petroleum products in Americas: WTI, RBOB, ULSD USGC, Jet USGC and Fuel Oil 3% USGC. The current analysis is based on December data.
Strap: Vito Turitto, quantitative analysis
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.
The price of Dated Brent has fluctuated between $53 and $55 since the month of December so far but its volatility has, over the same period of time, significantly dropped and now it is even lower than its long term mean. The volatility has actually followed a leverage effect process, which is the asymmetric movement between the price and volatility, and such a phenomenon signals market stability and the potential for Brent prices to move higher in coming weeks.
Image 1: Dated Brent’s Volatility
Specifically, Dated Brent’s monthly volatility dropped from 40.2% at the beginning of January and it has recently touched the 26.9% level which is one of the lowest ever achieved since December 2014.
Volatility fluctuations measure the level of risk priced in the market and our quantitative studies show that lower volatility is normally associated with up trending prices. OPEC’s decision to cut its output by 1.2 million b/d supported by Non-OPEC producers, that pledged to curb their oil production by 600,000 b/d, is clearly the fundamental reason that pushed the oscillation rate down.
The probability distribution analysis shows that Dated Brent’s volatility is now moving within the 25%-30% range. The actual volatility level is so low that it will likely tend to move slightly up again in coming days. Precisely, the oscillation rate has a 13% probability to stay where it is and more than 25% chance to go up and reach the 30-35% volatility range.
Image 2: Probability Distribution
This implies that there could be a little bit of turbulence ahead, particularly with the recently delivered speech by Theresa May on Brexit and Trump’s presidency, but overall Brent prices are unlikely to drop below $53.
Let’s now focus on the volatility cones. The volatility cones tell if volatility is expensive or cheap relatively to its previous fluctuations and quantify the degree of market risk that the market is pricing in the short, medium and long terms.
Image3: Volatility Cones
The volatility cones analysis proves our point: the current price uptrend is supported by an extremely low fluctuation rate. However, the cones analysis also displays that the monthly volatility is much lower than normal and it will be probably tend to slightly increase in coming weeks.
It is also worth noting that the rest of the current volatility curve is just below the medium range one implying that market participants, as of now, are expecting to see higher crude prices also in the medium to long term.
Overall, the outlook on the Brent market looks good and prices should remain high.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.