For the first part of 2016, crude oil prices were relatively more volatile than in recent history. This uncertainty was spurred by low oil prices, huge crude surpluses and inventories, and the uncertainty associated with each. Since the high point in March, inventory growth has slowed, showing the first signs of decreases in production. These signs, along with a few other key indicators have allowed prices to increase slightly, investor confidence to improve, and price volatility to stabilize.
The EIA reports on crude price volatility on a 30 day basis and reports it as an annualized percentage. The data is calculated from the standard deviation of daily percent changes in crude oil prices over the previous 30 trading days, to tell the volatility of future oil prices.
The data shows a strong inverse relationship between crude prices and their volatility. For example, a period with a great deal of volatility came during the 2009 financial crisis. As prices plummeted to as low as $40 per barrel, crude price volatility boosted from 30 percent to above 70 percent in a matter of months. The lack of demand was the main cause for the increase, as people worried about spending and other financial cuts.
Fast-forward to our current market and we have a slightly different scenario. Crude price volatility was the highest in 5 years, flirting around 45 percent near the beginning of March. Since then, the volatility has fallen to 33 percent. The hike in volatility in the beginning of 2016 was mainly fed by uncertainties related to supply, demand, and inventories. The continued oil glut has pushed supply so far that inventories are experiencing record levels. As companies try to curb production to affect prices, the volatility has experienced huge fluctuations as worries around the market continue.
The recent decreases in price volatility have been driven by slight crude price increases. The big gears of the oil and gas industry have finally cranked far enough to see the first signs of decreases production. Along with concerns about future economic growth, the US has finally seen a decrease in inventory growth. The decrease in volatility has also been aided by economic growth in other corners of the world, increased US gasoline consumption and demand going into 2016, and storage capacity constraints.
As far as actual prices go, we have witnessed a rollercoaster of ups and downs. The monthly trading range for Brent crude has been all over the place. At the beginning of the year spot prices closed at a low of $26 per barrel and a high of $36 per barrel. The $10 spread was one of the highest compared to monthly average prices since 2008. While these trends are beginning their climb back down, so many companies have already been rocked hard by the rough seas of this oil glut.