Oil Market Volatility: A Familiar Cycle Repeats

The current period of unrest in crude oil markets has been characterized as unprecedented and unique. However, analysis by Winhall Risk Analytics/OptionMetrics shows that this is not the case.

A familiar cycle has emerged since the beginning of the war: hostilities lead to higher prices and volatility, followed by reports of a ceasefire or negotiations, which results in crude oil price retreats. This pattern repeats every time tensions grow more intense and just as the market seems to be spinning out of control.

Despite frequent rumors of an impending ceasefire dampening both price and implied volatility since the initial shock, Brent's absolute price and volatility levels have been elevated but not historically exceptional. When compared to previous periods of high volatility such as during the height of the pandemic in March, April, and May 2020, Brent's peak at $114.01 on May 4th was only the 288th highest level since 03/04/2008.

In fact, daily changes in both price and volatility reveal a different conclusion: three of the top-10 largest negative price changes since 2008 have occurred since the war began. Brent registered two Top-10 positive and negative changes in implied volatility since the war started, with a notable rebound in implied volatility.