Prices for West Texas Intermediate, the benchmark U.S. crude, are the least volatile in 17 years as surging domestic output expands inventories and provides a buffer against disruptions.
Implied volatility for at-the-money, front-month WTI options, a measure of expected futures movement and a key determinant in options pricing, fell to 15.4 percent Dec. 6, the lowest in data compiled by Bloomberg that starts in 1996. WTI traded in November in the tightest range in more than a year.
Rising shale-oil output increased domestic production to a 24-year high, helping shield the U.S. from interruptions in supply from Libya, Iraq and Iran. WTI was at its biggest discount to Brent, the European benchmark, in eight months on Nov. 27, having predominantly been at a premium until 2009. Open interest, or contracts outstanding, in WTI fell to a nine-month low as the measure for Brent neared a record high.
“As WTI continues to hover around $95, there seems to be an agreement that this is where prices belong,” said Stephen Schork, the president of the Schork Group Inc., a consultant to the energy industry in Villanova, Pennsylvania. “The market is well supplied. There’s been a massive exodus of cash coming out of WTI, vis-a-vis a very strong drop in open interest.”
WTI, the U.S. benchmark, was little changed in today’s electronic trading after rising 1.2 percent yesterday to settle at $98.51 a barrel on the New York Mercantile Exchange. Implied volatility was 15.6 percent, data compiled by Bloomberg show. Futures have traded between $90 and $100 since Oct. 22. WTI slid 35 cents to $98.16 at 10:44 a.m. today.
Implied volatility fell from 28.6 percent in September, when U.S. crude inventories decreased to 355.6 million barrels, the least since March 2012. Supplies climbed to 391.4 million in the week ended Nov. 22, the most since June, according to the U.S. Energy Information Administration.
The gauge represents an estimate of expected price gyrations of WTI futures. Higher volatility increases the cost of options that give the holder the right to buy or sell a futures contract at a certain price.
Stockpiles at Cushing, the delivery point for WTI futures, rose to 40.6 million barrels on Nov. 22 after dropping to 32.6 million on Oct. 4, the lowest since February 2012.
“The lack of volatility in the marketplace suggests that the market is not worried about a major supply disruption,” said Phil Flynn, a senior market analyst at Price Futures Group in Chicago. “The U.S. is very well supplied. The market is confident that we will stay in this established trading range.”
U.S. crude production climbed to 8.02 million barrels a day in the week ended Nov. 22, the most since January 1989, EIA data show. The country met 86 percent of its energy needs in the first eight months of 2013, on pace for the highest annual rate since 1986, according to the data.
While U.S. output increases, the global market is facing supply losses in the Middle East and North Africa that the Paris-based International Energy Agency said may offset rising shale production.
World oil demand will increase by 1.2 million barrels a day to 92.4 million next year, the IEA said today in its monthly report. That’s 240,000 barrels a day higher than its projection from last month with consumption in the U.S. rebounding to its strongest level in five years a key factor.
The 60-day historical volatility of Brent, a gauge of price changes in the period, surpassed WTI last month for the first time since 2010. Brent, the benchmark for half of the world’s oil market, traded in an $8.68 range last month. WTI moved in a $4.88 band, the tightest since April 2012.
Open interest in Brent rose to 1.6 million contracts on Dec. 6, close to the record of 1.61 million set on May 13. WTI open interest dropped to 1.61 million contracts on Nov. 20, the lowest since Feb. 6 and 17 percent below the all-time high of 1.94 million reached Sept. 18.
“We got stuck in these consolidation periods and the market hasn’t been able to generate enough volatility,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund focused on energy. “The market hasn’t been that attractive and there isn’t a lot of action there.”
While swings in futures are narrowing, prices remain high historically. WTI averaged $98 this year, the second-highest level on record. It will average $98.75 in 2014, according to the median of 32 analyst estimates compiled by Bloomberg.
A change of implied volatility can jolt options prices. The implied volatility of Brent surged to 26.8 percent on Aug. 28 as the U.S., France and Britain moved closer to a military strike against Syria. Futures gained almost $6 a barrel in two days. October $110 call options, bets that prices would rise, more than tripled to $6.92 from $2.07 in the two days. October $110 WTI calls jumped to $2.93 from 74 cents.
“Traders like volatility levels to change,” Flynn said. “When volatility is low, they will have to be a little smarter and try different things.”
Brent dropped as much as 2.7 percent on Nov. 25 after Iran and world powers reached a preliminary agreement on its nuclear program that would ease some sanctions against the Persian Gulf nation. WTI fell as much as 1.9 percent. Iran output slid as much as 1 million barrels a day since the start of 2012 as the sanctions curbed exports, data compiled by Bloomberg show.
The European benchmark gained 1.2 percent on Nov. 13 after Ibrahim Al Awami, the Libyan oil ministry’s head of measurement and inspection, said protests kept the country’s 120,000-barrel- a-day Zawiya refinery closed. WTI rose 0.9 percent.
Iraq plans to boost production by 500,000 to 750,000 barrels a day in 2014, Deputy Prime Minister Hussain Al- Shahristani said in South Korea on Oct. 16. The country produced an average of 3.1 million barrels a day in November, according to data compiled by Bloomberg.
The decline in open interest in WTI coincides with a retreat from commodities by many of the biggest traders. Total headcount in commodity units at the 10 largest banks, from Goldman Sachs Group Inc. to Barclays Plc, stood at 2,290 at the end of September, about 4 percent less than at the end of 2012, according to Coalition, the London-based analytics company.
JPMorgan Chase & Co., the biggest U.S. lender by assets, is seeking to sell its physical commodity business and Deutsche Bank AG also announced cutbacks. Investors pulled a record $34.1 billion from commodity funds since last December, according to EPFR Global, which started tracking the flows in 2000.
WTI’s implied volatility increased to a record high of 111.4 percent in December 2008 as prices fell to $33.87 from $145.29 in July during the financial crisis.
Volatility will probably increase as inventories diminish, Kilduff said. Rising refinery operating rates and expansion in pipeline capacity are likely to reverse the gains in supplies held at Cushing, he said.
TransCanada Corp. said Dec. 2 that it will begin operating the southern leg of its Keystone XL pipeline to the Gulf Coast next month, delivering as much as 700,000 barrels a day of crude to Port Arthur, Texas, from Cushing. Port Arthur is home to 6.1 percent of U.S. refining capacity.
Cushing inventories showed the first decline in eight weeks in the seven days ended Nov. 29, as refineries boosted operations to 92.4 percent of capacity, the highest since Sept. 13, according to EIA, the Energy Department’s statistical arm.
“A lot of speculation is out of the market,” said Rich Ilczyszyn, chief market strategist and founder of Iitrader.com, a commodities trading company in Chicago. “But you are going to see a lot of big money position themselves next year. Funds will come in to fill the void.”