2018 Brent Crude Oil Volatility: March Outlook

The Dated Brent market experienced two different trends in the month of February: it dropped in the first half while it recovered in the second one. In the North Sea market an overhang of crude oil had formed as a result of both muted domestic demand and a sluggish South Korean and Chinese appetite for BFOE grades.

Needless to say that, in the first 2 weeks of February, this acted as a cap on prices. The Dated Brent CFD forward curve has significantly changed its shape over the month of February and perfectly mirrored the different developments in the market.

In fact, in the first half of the month, with Dated Brent prices falling, the CFD forward curve had its first tenors in contango while in the second one, with Brent prices recovering, the forward curve moved back in backwardation.

Internationally, in the week ending on February 9, according to the Energy Information Administration, the production of crude oil in the United States had reached the record high level of 10.27 million b/d and this was a factor that has certainly contributed to increase the selling pressure at the beginning of February.

However, the depreciation of the US dollar, in the second half of the month, managed to favor a recovery in Brent prices. The Volatility Premium analysis shows that the differential between implied and realized volatilities is very narrow. In particular, the volatility premium dropped sharply over the last trading days of February and managed to close the month around 1.26%.

The low Volatility Premium indicates that a short term increase in volatility should be expected. The probability distribution analysis indicates that Dated Brent’s volatility was trading, at the end of February, within the 20-25% range.

However, the analysis suggests that the fluctuation rate is more likely to uptrend in coming weeks and reach the 25-30% range where its probability to settle are slightly higher than 17%. The initial increase in volatility is likely to cause a short-lived retracement in prices but, overall, the Dated Brent market should slowly move up in coming weeks.

The Volatility Cones analysis shows that the current volatility curve is very close to the low range one implying that, at least in the short term, an increase in market turbulence and a market correction should be expected.

Nevertheless, the relative closeness to the equilibrium point indicates that it is unlikely that the crude oil market will experience violent volatility spikes.

Overall, the Brent market is likely to trade sideways, at first, and then slowly go up.

Source: Platts

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