The Dated Brent crude oil market could experience a higher degree of market volatility in the coming weeks: a wide Brent/WTI spread, which will continue to incentivize American barrels to enter Europe and compete against BFOE grades; higher American crude oil production; and a good Asian demand and a sustained geopolitical risk, are all factors that will significantly impact market prices.
2018 Brent crude oil volatility: May 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 has been driven by a higher buying pressure generated by 2 main factors: growing arbitrage opportunities to clear North Sea sweet crude grades to Far East and a healthy domestic demand.
The fixtures towards the Far East were several throughout the whole month of April and market participants tried to take advantage of good arbitrage economics as much as they could because, in Europe, the wide Brent/WTI spread increased the competition between BFOE grades and American barrels, WTI Midland and Eagle Ford above all, making it more difficult to find buyers.
This trend will probably continue in coming weeks, in fact, market participants have estimated that nearly 25 million barrels of American oil would enter the Old Continent in the month of May. Internationally, the most important factor that has boosted crude oil prices up across the globe is geopolitical risk.
In fact, the US-led strike against the Syrian regime, uncertainty around Trump’s decision to renew US sanction relief against Iran and the Venezuelan election due on May 20, which could trigger even more US sanctions against the Maduro regime, are all elements that increased investors’ concerns. In fact, it is not a case if the net long positions on ICE Brent futures, in the month of April, achieved an all-time high.
The Volatility Premium analysis suggests that its April value is a lot higher than its quarterly and semiannual averages meaning that it will tend to narrow in coming weeks causing some short-lived turbulence which should be followed by a slow uptrend. Besides, the probability Distribution analysis shows that the fluctuation rate is moving within a fairly stable area implying that Dated Brent prices are likely to trade within a channel, at first, and subsequently move higher.
Finally, the Volatility Cones analysis indicates that the market might still experience some short-lived retracements but overall it looks fairly well balanced implying that Brent prices are likely to slowly uptrend and then stabilize.
Until next time on the Snapshot—we’ll be keeping an eye on the markets.