WTI Volatility Index at Elevated Levels Since Price Crash
Prior to the fall 2014 crash in oil prices, volatility in the oil markets had been on a steadily decreasing trend. An examination of futures volatility in the post-crash period, however, suggests a new normal of heightened uncertainty in pricing outlooks with wide-reaching implications.
As WTI plunged from $100 to $40 per barrel in late 2014, the volatility of one month options on crude oil futures shot up dramatically and the market hasn’t been the same since. Post-crash, the CBOE’s WTI Volatility Index has remained elevated, reaching lows in the upper 20s in July of 2015 and a high of 84 this previous February. The index averaged 24.4 between 2012 and November 2014, when OPEC announced its decision to maintain production levels; since then, it’s almost doubled to 47.4.
Like its VIX index for the S&P 500, CBOE’s WTI index can be interpreted as a “fear gauge” for oil markets, measuring the market’s expectation for short-term movement within a price range. The index is expressed as a percentage and is calculated according to the value of WTI option premiums.
Historically, the index has shot up during oil’s price plunges of 25% in the summer of 2012, 64% in the fall of 2014, and the recent 55% decline from summer 2015 through spring 2016. It’s lowest range was attained during the final months of the pre-crash bull market.
Heightened WTI uncertainty isn’t just a speculators’ problem. In the shale patch, many producers have moved to hedge production and lock in whatever margins they can. Increased uncertainty has spread to other major consumption, investment, and government planning decisions that factor in long-term oil price forecasts. As Robert McNally of Columbia’s Center on Global Energy Policy has noted, “global equity, bond, and currency markets are being roiled by violent oil price moves; oil is the tail that is wagging several macroeconomic and financial dogs.”
In summary, the market for crude is on a roller coaster of sentiment with significant price swings likely to continue; time will tell how long of a ride we’re in for.
