What's Driving Surprisingly Low Volatility in Energy Markets?

April 11, 2024 |
2 minute read
|
What's Driving Surprisingly Low Volatility in Energy Markets?
3:09

In the current geopolitical environment, we would have historically expected much more volatility in the energy complex. Oddly, that has not been the case over the last 6 months. In fact, crude oil volatility is at markedly low levels given the precarious situations in the Middle East and Europe. The current levels of oil volatility are akin to those at the end of 2019, a time of relative stability in the geopolitical and economic environment.

Unlike the current situation, the low volatility levels in 2019 were not surprising. At that time the global economy was relatively stable. Central banks embraced a more accommodative monetary policy to help stimulate activity in response to concerns of slow growth and below-target inflation. Five years later, the narrative has flipped, as central banks have implemented restrictive monetary policy in response to well-above-target inflation numbers in a higher growth environment.

Along with a stable global economy, 2019 was a time of relatively low geopolitical risk. Aside from slight tensions in the Middle East, there were no significant events that would substantively disrupt the oil supply. Russia and the Middle East account for 6 percent and 48 percent of the global oil market share, respectively. Both regions are currently experiencing geopolitical unrest. Two major oil-producing regions involved in conflicts would intuitively suggest an extreme rise in volatility in the oil markets over supply concerns, but this has not been the case. There was also optimism surrounding a trade deal between the U.S. and China in 2019. The expectation of a trade deal between the two largest economies led to stability in financial markets. Conversely, China and U.S. relations have suffered in recent years due to restrictive tariffs, divergent stances on Ukraine and Taiwan, and U.S. sanctions on Chinese chip manufacturers.

A subsequent result of this geopolitical unrest is the increase in the non-dollar oil trade. In 2019, approximately 88 percent of global oil trade was conducted in U.S. dollars. The non-dollar oil trade figure has nearly doubled since, with only 80 percent of the global oil trade being dollar denominated. Non-dollar oil trade can lead to liquidity concerns, inconsistent pricing, and exchange rate fluctuations, all of which should contribute to volatility in the energy complex, but this is not the case today.

The only consistency between 2019 and 2024 environments is OPEC’s implementation of production cuts to regulate supply. Throughout 2019, OPEC implemented production cuts to manage prices. While OPEC+ has announced supply cuts for 2024, they continue to extend the deadline to support prices at the $80 level. Despite the many factors implying that the oil markets should be extremely volatile right now the chart of the month seems to suggest that OPEC+’s actions have tamed volatility in the energy complex, at least in the short term.

Expected 30-Day Volatility of Crude Oil Chart

 

Arjun Sawai

Author

Arjun Sawai

Associate

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.