Welcome to the Snapshot a series that examines the factors driving and shaping global commodity markets today.
Brent crude prices have traded between $54/b and $56/b for an extended period of time because of the great uncertainty in the fundamentals. The market is particularly well supplied as far as sweet crude grades are concerned and an increase in imports coming from Libya and West Africa helped keeping Brent prices low.
The availability of sweet crude was so relevant that prices did not soar despite a rather good Asian appetite for North Sea crude grades; Brent, Forties and Ekofisk above all. On the physical side, it looks like a lot of current available cargoes will actually be destined to satisfy Asian demand.
International outlookGlobally, the increased US shale oil production has largely counterbalanced the drop in OPEC output and OPEC Secretary General Mohammed Barkindo has recently stated that non-OPEC countries, which pledged to wipe out some 600,000 b/d from the market, will need more time to comply with the mutually agreed production cuts. Moreover, Russia managed to curb “only” 117,000 b/d in the month of January but its energy minister Alexander Novak has recently said the 300,000 b/d cut promised by Moscow will be achieved by May.
As far as market risk is concerned, it is important to point out Dated Brent’s monthly volatility is still trading around its two-year low. Furthermore, the 2 months volatility curve is now overlapping the monthly one creating a partial contraction process which implies that more market instability should be expected in following weeks. The mixed signals coming from the Brent market are even more evident in the “physical vs paper” analysis.
ICE Brent futures’ fluctuation rate, at the end of February, dropped to 17.67% meaning that it was 5.48 points lower than Dated Brent’s volatility. This divergence is rather unusual for two reasons: Brent futures’ volatility tends to be consistently higher than Dated Brent’s one and the actual deviation is almost its widest since January 2014. Actually, also Brent futures’ monthly volatility has now touched its lowest level in 2 years and it is crucial to note that each time Brent futures’ fluctuation rate has been around the current levels the market has experienced a retracement. The mean reverting pressure of volatility is very high at this point and the outlook on Brent prices remains negative because the oscillation rate, now that the divergence between physical and paper market has reached a very high level, should go up in coming weeks.
The probability distribution analysis shows that Brent’s volatility, at the end of February, was within the 20%-25% range but the chances for it to remain within that interval are as low as 5.12%. The fluctuation rate is more likely to move towards the 25%-30% volatility interval, almost 13% chance, but the probability to reach the 30%-35% range is even higher than 23%.
The volatility cones analysis is again displaying an extreme scenario: the monthly and bimonthly volatility figures are the ones showing the largest divergence as compared to the medium range one implying that the largest spikes in volatility could extend to more than just four weeks, everything else being equal. The risk profile priced into the remaining part of the current volatility curve is actually lower but market participants are expecting a good amount of market volatility in the near future. Overall, the outlook on both physical and Brent futures prices remains negative. Until next time on the Snapshot—we’ll be keeping an eye on the markets.