Oil Volatility Increases

by Andreas Exarheas
click here to read the original article at Rigzone.com
*this article was not written by Roseland Oil & Gas

Oil volatility has increased at the front of the curve, with 30-day realized annualized front-month Brent volatility gaining 2.1 percentage points week on week to 31.7 percent.

That’s what analysts at Standard Chartered Bank, including Commodities Research Head Paul Horsnell, noted in a report sent to Rigzone by Horsnell late Tuesday. The analysts highlighted the volatility percentage was the highest since January 9.

“While current volatility is high relative to the rest of 2024, it is in the middle of its 10-year distribution and in only the 58th percentile of the all-time (i.e. since 1988) distribution of Brent futures price volatility,” the analysts pointed out in the report.

“It is debatable whether the extra volatility over the past month has primarily been due to more information and greater price discovery on the one hand or the influence of rates-related and algorithmic trading on the other; we favor the latter interpretation,” they added.

The analysts highlighted in the report that the past month “has seen some sharp price swings but no sustained momentum”.

“Brent settled at $81.13 per barrel on 26 July, traded down to $75.05 per barrel on 5 August, moved back up to $81.04 per barrel on 15 August then back down to $75.65 per barrel on 21 August before rallying to settle at $81.43 per barrel on 26 August,” they pointed out.

“Front-month Brent is just $0.30 per barrel higher than a month ago, having been through a $24 per barrel journey over two full cycles of a fall of $6 per barrel followed by a rise of $6 per barrel,” they added.

There has been a lot of movement, but no overall change and a distinct question mark over the quality of price discovery involved in the cycles, the analysts stated in the report.

“We think both price cycles over the past month are primarily due to spillovers from rates markets and a seasonal dominance of algorithmic trading,” they said.

“We do not think there have been enough changes in oil market fundamentals over the past month to have justified even a single ‘$6 per barrel down, $6 per barrel up’ cycle, let alone two,” they added.

The analysts noted in the report that the recent cycles in Brent prices have also been reflected in speculative positioning.

“Our money-manager positioning indices reflect significant bearishness across all the main crude oil and oil product categories, while copper positioning is neutral and gold positioning is close to maximum bullishness,” they said.

“Money-manager longs across the four main Brent and WTI contracts fell 11.15 million barrels week on week to 395.34 million barrels, just 0.11 million barrels above the 11-year low reached two weeks ago,” they added.

In the report, the Standard Chartered analysts said they think the negative positioning on oil relative to neutral positioning on copper reflects heightened fears of a hard landing in the U.S. economy and a view on 2025 global oil demand which is significantly more bearish than that of the main forecasting agencies.

“We also think it reflects a greater than usual degree of momentum-following algorithmic trading over the course of a northern hemisphere summer period when many fundamental traders have stayed on the sidelines,” they said.

In a research note sent to Rigzone late Tuesday by the JPM Commodities Research team, J.P. Morgan analysts stated that, across energy markets, the estimated value of open interest ebbed lower for a consecutive week to a three-week low of $624 billion. The analysts outlined in the report that this was “largely driven by weaker prices, despite risk premium being added late in the week”.

“Contract driven flows across all trader types exceeded $1.9 billion week on week (as of 23 Aug), led by crude oil and natural gas markets, while outflows were noted across petroleum product markets,” they J.P. Morgan analysts added.

“Our oil strategists note that global oil demand in August is averaging 300,000 barrels per day above our estimates, while global observable liquids inventories drew by 1.2 million barrels per day month-to-date,” they continued. 

A Rystad Energy oil macro update from Senior Rystad Analyst Svetlana Tretyakova, which was also sent to Rigzone on Tuesday, noted that, according to Rystad’s outlook for the short-term, both crude and total liquids balances are expected to tighten between now and December.

“Consequently, Brent prices are projected to gradually rise toward the upper $80s per barrel, with a steepening backwardation,” the update added.

“Brent ‘fair value’ in September, i.e. the price that corresponds to the forecast inventory levels in September, is $83 per barrel, rising to $85 per barrel in October,” it continued.

“Yet, it is worth remembering that oil market balances are heavily dependent on OPEC+ compliance,” it went on to state.

by Andreas Exarheas
click here to read the original article at Rigzone.com
*this article was not written by Roseland Oil & Gas