Historical oil price data shows one day price drops of 7.7% or higher are relatively rare
Last Monday saw the largest drop in oil prices for West Texas Intermediate (WTI) in four months, when the U.S. crude benchmark shed 7.7% of its value in a single day of trading. Concerns over the Greek debt crisis, weakness in the Chinese stock market and the potential for increased oil exports from Iran all contributed to pushing prices down.
Single-day price drops of that magnitude are relatively rare, according to information from the Energy Information Administration (EIA). Since January 2, 2006, the average daily percentage change for the front month WTI crude oil contract was close to zero, at 0.002%, and in that time daily price movements had a standard deviation of more than 2%, according to the EIA.
Assuming that daily oil prices are independent (i.e., one day’s movements do not influence another day’s movements) and are normally distributed, a decline the size of last Monday’s 7.7% fall only occurs, in theory, 0.05% of the time, meaning the odds of such a price drop are about one in two-thousand, according to the EIA’s data.
WTI implied volatility, an expectation of future price movements calculated from the prices of futures and options contracts, averaged 36.5% from July 1 to July 7, higher than both the June average and the comparable year-ago period. Continued uncertainties in international markets, along with a surprise build in oil inventories which sent prices down another 1% last Wednesday, have continued to drive volatility in oil prices.
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