The oil market has been decidedly volatile in recent weeks.
Although the market is not overly stable on average, volatility is often quite low. There is some, but it is not at the level of that of other assets.
For example, after rising from the financial market crash of March 2020, the price of US Brent oil lateralized for a full six months in a narrow range of $34 to $49.
Even from February 2021 to January 2020 it actually lateralized in a range between $56 and $84. So while it is by no means a highly stable market, it is also not accustomed to huge swings over the short term.
With the outbreak of war in Ukraine in February 2022, volatility obviously spiked, but between March and August, it then lateralized in a somewhat wider-than-usual range of $94 to $124.
After falling back up to $76 in late September, some volatility returned in October.
From 28 September to 10 October, in just twelve days, the price rose 21%, climbing to over $93. Over the next seven days, it then fell 9%.
Such a fast hike has not happened since February, and apparently always seems to be linked to fear of the consequences of the war in Ukraine.
The oil market and its relationship to the geopolitical environment
Indeed, if one of the main drivers in the financial markets in recent weeks has been the fear of recession, this in theory should have driven down the price of Brent crude, and certainly not driven it up 21 % in twelve days.
It is worth noting that during the same period the price of European gas fell, so it is very difficult to imagine that such a rapid rise in the price of oil was due to an actual shortage of supply.
There is also another aspect that makes the situation even more complex. On 5 October, Opec announced an oil production cut, but the price of Brent crude rose only slightly that day. The two largest increases occurred on 28 September and 7 October.
On the other hand, there seem to be some inverse correlations with the value of the US dollar, i.e., the so-called Dollar Index. These inverse correlations came to a halt precisely on 5 October, when the Dollar Index began to rise again after a few days of decline, while the already rising Brent crude price continued to rise.
Moreover, the current price is in line with that of mid-August, and especially with that of January 2022, which is before the outbreak of war in Ukraine.
Therefore, it seems that the recent volatility was only a temporary factor, which merely prevented the price of Brent crude from lateralizing right around the January price levels.
Starting at $87 on 17 August, it first rose to $97, then fell to $81, only to rise again to $90 before falling back to $76 on 27 September. At that point the volatility amplified again, with a rapid rise to $93, only to return to the current $86.
In short, three ups and downs in just two months with swings of even more than 20%, only to return to the starting price, which, probably not coincidentally, is also the same as at the beginning of the year.
In contrast, what it did from February to August had a clear direction: a sharp rise at the beginning, followed by a slow descent. Whereas in the last two months, it has basically consisted of lateralization with sustained volatility.
Such a scenario must have favored short-term speculation, which is perhaps also why there has been so much volatility with no clear direction up or down.
The price of oil, amid past and present events
Except for the black swan at the beginning of the pandemic, which caused all financial markets to collapse in March 2020, the year 2022 was absolutely one of the most volatile years in decades for oil prices. To find something similar one has to go back to 2014, when the price probably fell as a consequence of Russia’s war in Crimea.
If in 2014 the price fell and then stayed low, in 2022 it first rose significantly, but then fell back, completely zeroing out the growth.
Therefore, these are different dynamics, perhaps also because the financial oil market itself has evolved.
Incidentally, the current price of $86 is also perfectly in line with that of 2010, which was after the recovery following the crash for the great financial crisis of 2008.
Generalizing, and taking into account movements over the long term, one could say that from October 2007 to the present, the price of Brent crude has basically fluctuated around an average level of just under $90 per barrel, with sharp hikes up to $147 in July 2008, and sharp declines down to $10 in March 2020. However, whenever in the past fifteen years the price of Brent crude has risen well above $90 then it has ended up falling back, and whenever it has fallen well below $80 it has then ended up rising again.
Almost as if for fifteen years it lateralized around $90 but with very strong volatility.
In reality, volatility is often measured over the short term, so this description seems a bit far-fetched. But given that the price had instead, for example, risen from $20 to more than $80 per barrel in the previous fifteen years, the comparison reveals a remarkable difference.
Indeed, from 1986 to 2003 there had been another long phase of lateralization over the long run with high volatility only at times, followed by growth right up to 2008. In short, only five years of growth and then back to lateralization but on a level of four times as high, and with much higher volatility.
In such a situation it is primarily speculators who gain in the financial markets, and this could mean that the financial oil market in the last fifteen years may also have become partly a speculative market.