Five Fundamental Reasons for High Oil Volatility
By Amanda Townsley
Loading...

Traders report that the market today is headline-driven, and this fits with the uncertainty around oil balances. Here are five key drivers to keep an eye on:

1. Economic Indicators & Fed Policy 

Oil demand is highly correlated with economic activity.  The more goods we make, the more energy we consume producing them and the more fuel we use moving them via truck, ship, and rail.  As we move into the end of 2022, some believe a mild global recession is imminent, or already underway.  But the severity of the economic malaise and the duration remains in question, leading to greater focus on  economic data releases like the weekly jobs report, monthly ISM and PMI data.  The action and commentary of the Federal Reserve that can exacerbate or assuage conditions are also key. 

In the 2008-09 Great Financial Crisis, global oil demand fell short of trendline growth by an average of 4 million barrels per day across a 12-month period.  In the milder Dot-Com collapse in 2000-01, the loss was closer to only 1 million barrels per day.   

2. Chinese COVID Policy

Chinese growth has slowed sharply this year as leaders pursue a Zero-COVID policy.  Before 2020, Chinese oil demand was growing at just under 5% a year – or an average of 600,000 barrels per day, according to IEA data.  But in the second quarter of 2022, demand fell 1% year on year, a loss of 1 million barrels per day.  Expectations that continued lockdowns with little stimulus recently caused S&P Global Commodity Insights to lower their forecast for the next 12 months by over 500,000 barrels per day – amounting to an additional 187 million barrels of inventory.   

3. The Iran Nuclear Deal

Iran has been exporting approximately 800,000 barrels per day of oil and condensate in 2022, down from over 2 million barrels per day before sanctions were reinstated.  Prospects of reviving the 2015 nuclear deal have varied wildly over the last 18 months, with high expectations in March fading by July.  According to commodities analysts, resolution could quickly bring on an extra 500,000 barrels per day of exports, and at least another million over the following 12-18 months.  Talks amongst delegates and deadlines for performance continue to be closely tracked by traders and analysts.  As of early October, behind the scenes talks continue, with Iran holding out for the International Atomic Energy Agency to cease investigations into undisclosed nuclear activity.

4. OPEC Meetings & Minister Commentary

OPEC+ meetings – and the commentary of key OPEC+ ministers in between them – have a long-standing tradition of influencing market prices because they can significantly change oil balances.  The October 5, 2022 meeting implemented a headline cut of 2 million barrels per day from November 2022 until the end of 2023.  While underperformance of OPEC+ production implies the real supply impact will be closer to 800,000 barrels per day, this amounts to over 300 million barrels – equivalent to the swing in OECD oil inventories from average to minimums.   CME’s OPEC Watch Tool can help traders track upcoming meetings and outcomes priced into the crude oil options markets; CVOL offers real-time insight into volatility response leading up to and following key meetings.

5. Strategic Petroleum Reserve Discussion   

During 2022, the United States released over 200 million barrels of crude oil from the Strategic Petroleum Reserve.  Some market watchers correlate the release with the decline in gasoline prices over the summer period.  As the price of crude oil has declined, questions remain on when and how much the U.S. will seek to purchase.  If prices rise, the rhetoric may shift toward additional releases.  SPR policy will be essential to continue to watch. 

Global oil stocks

Beyond these factors, there remain even more wildcards for oil balances.  The impact of European sanctions on Russian production is unknown. Most expect sanctions to cut 1 – 2 million barrels per day of supply, but output thus far has been resilient.  The severity of winter weather and the impact of oil demand from high natural gas prices is too early to know with certainty.  U.S. production continues to disappoint, with the slope of the increase still unknown.  

Forward Curve Prices

With large uncertainties, it’s no wonder the options market continues to price high volatility.  In fact, as of early October 2022, the term structure of WTI is in slight contango with even higher volatility prices through mid-2023.  While the 10-year average at-the-money volatility is 34%; the forward curve is still above 40% in 2025.Meetings, public comments, and geopolitical events impacting probabilities will continue to generate headlines and give market participants plenty of price risks to manage in the oil markets. 

Loading...

About the author

Amanda Townsley
Amanda Townsley, Senior Director of Energy Research and Product Development, CME Group

is based in Houston.

 

 

OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.

All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).

©2025 CME Group Inc. All rights reserved