Oil Volatility

Oil has become too volatile for traders | OilPrice.com

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Price volatility is a trader’s bread and butter, but in oil, volatility is becoming excessive, driving traders away and making life difficult for many companies that normally use oil hedges to ensure some price stability. which is vital to your operations. This is according to a Reuters analysis which points out that oil prices have become so wild in their daily swings that the usual suspects such as hedge funds are leaving the oil market en masse, with activity there falling to the lowest level in seven years.

It seems, then, that volatility is only a good thing up to a point, and this point appears to be a daily price range five times higher than usual. According to Reuters analysis, between February 24 and August 15 of this year, the daily range for Brent crude oil averaged $5.64 per barrel. This compares to $1.99 a barrel last year.

The withdrawal of speculators is only one of the problems of such high volatility in oil prices. The fact that companies in the food industry, for example, do not dare to protect themselves against new price fluctuations is affecting their business. And it is also affecting the business of the oil industry itself.

An analyst quoted by Reuters explained that oil companies are wary of capital spending due to excessive volatility in oil markets. And because they are being cautious, these companies are delaying projects that could help bring the oil market back into balance, Arjun Murti told Reuters.

Speaking of the oil industry, it is not just the current volatility that interferes with the potential growth of production. It is also the uncertainty about future demand as the transition move accelerates.

In a recent article for the Houston Chronicle, James Osborne wrote that predicting oil demand was becoming increasingly difficult amid developments like the now-notorious Inflation Reduction Act that Congress passed earlier this month.

With all these incentives for the electrification of transportation and the switch to renewable electricity generation, the future of oil demand has grown dim, he argued, even according to Big Oil.

Related: The price of gas in Europe is now equivalent to $410 per barrel of oil

It could be argued that most of the oil majors are getting too involved in the energy transition, which could cast a shadow over the credibility of their oil demand predictions. However, the fact is that many governments are hell-bent on having a transition, no matter how much it costs, and that is bearish for oil demand.

The latest transitional push in both Europe and the US probably worsened a bad volatility situation by clouding the demand outlook, while everyone can see at a glance that oil demand, right now, is more stronger than many expected, especially as some utilities in Europe switch from gas to oil due to prices.

This has proved too much not only for speculators but also for industry players in the oil market, according to Reuters analysis. Open interest in the oil futures market has shrunk by a fifth since Russia invaded Ukraine, with traders apparently tired of price swings from tight supply and inflation fears.

What the future holds is, as always, impossible to say, but it is quite unlikely that the price situation will change anytime soon. This means that the negative effect this price volatility is having on businesses across all industries will continue, fueling the aforementioned oil price swing.

Businesses will continue to need scarce energy, but high energy prices will continue to threaten their growth prospects and the growth prospects of their respective economies. Meanwhile, governments will continue to pour money and legislate into the energy transition, further discouraging the oil industry from doing anything meaningful about supply.

By Irina Slav for Oilprice.com

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