(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2mkxpWy
* Chart 2: tmsnrt.rs/2lREFfn
* Chart 3: tmsnrt.rs/2lRtV0h
* Chart 4: tmsnrt.rs/2lRu6st
By John Kemp
LONDON, Feb 24 "Volatility can be neither
created nor destroyed, rather it transforms from one form into
another," is a pretty fair summary of how the oil market works
(with apologies to physicists).
The benchmark price of Brent crude has been unusually stable
since the middle of December, but there has been plenty of
movement in the futures strip and crack spreads.
Hedge funds have amassed an unusually large net long
position in crude futures and options betting on a further
increase in benchmark prices, but the position has not yet
yielded much profit, with prices range bound.
The more interesting and profitable trades for both hedge
funds and physical traders so far in 2017 have been around the
calendar, crack and quality spreads.
Front-month futures prices have traded in a narrow range of
just $3.46 per barrel since Dec. 13, never closing below $53.64
or higher than $57.10 (tmsnrt.rs/2mkxpWy).
The standard deviation of front-month prices over the last
month, which is one way to measure volatility, has fallen to the
lowest level since July 2003 (tmsnrt.rs/2lREFfn).
Some of the reduction in volatility is more apparent than
real: as the dollar price has halved since 2014 so a smaller
dollar move is equivalent to the same daily percentage change.
Volatility is not exceptionally low when daily price changes
measured in either dollars per barrel or percentage terms are
considered rather than just the flat price (tmsnrt.rs/2lRtV0h).
Nonetheless, there is no doubt flat-price volatility has
declined over the last two months and is now at some of the
lowest levels since the oil slump began in 2014 (tmsnrt.rs/2lRu6st).
But while flat prices have been broadly stable, other
elements of the constellation of oil prices have become
There have been sharp moves in time spreads (between futures
prices spreads for crude delivered in different months), crack
spreads (between the price of crude and refined fuels) and
quality spreads (between different crude grades).
Most traders seem convinced the oil market is shifting from
a supply surplus in 2014/15 to a supply deficit in 2017/18.
But most traders are also convinced the rebalancing will
occur in an orderly way, with OPEC ensuring prices do not fall
below $50 while the acceleration of shale production will cap
them below $60.
Between them, the OPEC “put” and the shale “call” define a
floor and ceiling for prices in the short term, a temporary
trading range or what oil economist Paul Stevens has called
“bands of belief”.
Such trading ranges are only ever temporary and are prone to
breaking down, but at least while they endure they create a
powerful anchor for expectations and can be self-stabilising.
If market rebalancing is expected to occur within a
relatively narrow range of flat prices, relative prices are
shifting to make it happen.
The various spreads are shifting to move crude from storage
to the refineries, and from oversupplied markets in North
America to undersupplied markets in Asia.
Speculative traders are increasingly focusing on the
spreads, which likely explains some of the sharp price moves and
reversals seen in them over the last couple of months.
(Editing by Alexander Smith)