A Volatile Year for Oil Markets

AT A GLANCE

• The futures curves for crude oil, gasoline and ultra-low sulfur diesel are in backwardation

• CME Group’s CVOLTM Index for crude, gasoline and ULSD is showing that implied volatility is roughly twice its pre-pandemic level, suggesting that traders aren’t too confident in the scenario of lower prices

One month ago, with inventories of diesel fuel and gasoline abnormally low, OPEC+ slashed production of crude oil by 2 million barrels per day. So, oil prices must have soared, right?  

Hardly! In the past month, oil prices have barely moved. They jumped briefly from $81 to $93 on OPEC news, but they have since lost most of their gains and are trading over $30 per barrel less than they were in June.

Moreover, if you look at the futures curves for crude oil, gasoline and ultra-low sulfur diesel, those curves are all in backwardation – suggesting that traders think that spot prices are more likely to be lower in the future. Apparently, traders think that continuing COVID-19 restrictions in China and slowing growth globally will hamper demand and more than offset the impact of low inventories and less OPEC+ production.

This, however, is not the full story. If one looks at CME’s CVOL^TM for crude, gasoline and ULSD, one finds that the implied volatility on these products’ options trades at around 50%. That’s roughly twice the pre-pandemic level, and it suggests that traders aren’t too confident in the scenario of lower prices. 

Further, if one looks at the skewness of CVOL^TM on crude and product options, one finds that traders price a higher risk of extreme upside moves in prices than extreme downside. 

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