Oil Market Volatility: Not as Exceptional as You Think

The oil market has been subject to a familiar cycle since the beginning of the war. First, hostilities and threats of escalation drive up prices and volatility. Then, as tensions rise, reports of a ceasefire or negotiations emerge, causing crude oil prices to retreat. This pattern has led some to believe that the current period is unprecedented.

However, data from OptionMetrics shows that while the current situation is volatile, it's not historically exceptional. In March 2020, Brent's price peaked at $114.01, but this level was only the 288th highest since 2008 and $32.37 lower than the all-time high of $146.38 recorded on July 3rd, 2008.

The current period has seen three of the top-10 largest negative price changes since 2008, with Brent's implied volatility peaking at 107.6% on April 7th, only the 17th highest level ever recorded. Nevertheless, daily price and volatility swings have been extreme, particularly to the downside.

The pandemic-era saw even greater volatility, with crude oil settling at a negative $37.63 on April 20th, 2020, an all-time record implied volatility of 153.9%, and a significant share of top-10 price and implied-volatility swings recorded from March to May 2020.

The current episode may be entering a more volatile regime if hostilities continue to intensify, with the supply situation remaining extremely tight and prices restrained by the possibility of renewed negotiations or another ceasefire.