2018 Brent Crude Oil Volatility: January Outlook

Quantitative analyst Vito Turitto explains why Brent crude oil market volatility is likely to increase in the short-term.The OPEC/non-OPEC technical committee estimated that, at the beginning of November, compliance with crude production cuts was 122%, the highest level recorded, and this undoubtedly contributed to stabilization of the market in December. Nevertheless, there are signs that some degree of price correction is imminent.

The Dated Brent market experienced a big uptrend in the month of December.

The increase in the buying pressure was due to several different factors such as the OPEC decision to extend the production cuts, the higher demand for fuel caused by the holiday season and the problems with the Forties pipeline in the North Sea.

The crack discovered in the Forties pipeline, that transports almost 45% of UK’s North Sea oil and gas from 85 fields, has definitely played a key role in pushing Brent prices up.

The Dated Brent CFD forward curve has perfectly mirrored the changes in market conditions because the backwardated shape got particularly steep after December the 11th, which is when the news related to the problems at the Forties pipeline started to spread out.

However, as soon the market became less volatile, because of the holiday season, the Brent CFD forward curve went significantly down.

Internationally, the most influential factor that has impacted the global market, other than the estimated 112% compliance among OPEC and non-OPEC members to the production cuts, was the steady drop in American crude oil inventories which went down by 4.8% since the end of November.

It is important to point out that the reduction in American crude oil stocks was mainly due to a net increase in the export which, in turn, was favored by a still wide Brent/WTI differential.

The Volatility Premium closed the month of December at negative 0.16 which indicates that the actual scenario is unsustainable.

In fact, the Volatility Premium does not usually stay negative for long meaning that it will soon tend to get back to its medium term average.

The probable widening of the Volatility Premium, in coming weeks, implies that the market is likely to undergo a period of correction, that a higher volatility should be expected and that the market is likely to experience a medium-sized retracement.

Dated Brent’s monthly volatility is now trading within the 20-25% range, however, the Probability Distribution analysis shows that, in all likelihood, the volatility will tend to move up and reach the 25-30% interval where it has more than 18% chance to settle.

The Volatility Cones analysis suggests that the fluctuation rate is likely to increase in the short-term.

Clearly, the increase in the monthly volatility is likely to cause more turbulence and a retracement in Brent prices, however, in coming weeks, the market is likely to recover and move slowly up as soon as the volatility stabilizes.

Source: Platts

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