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Crude Oil Volatility with Geopolitical Events![]() Brett Friedman, Winhall Risk Analytics/OptionMetrics Contributor
The most recent geopolitical events in the Middle East have thrust crude oil back into the news. As of April 15, front month Brent crude was up almost 17% year-to-date. If the situation worsens, and the region slips into a wider war, a test of the psychologically important $100 level and beyond is not out of the question.
Less reported are crude's implied volatility and the factors that are influencing it currently. Futures, with individual contract months and their related options, extending months to years in advance, allow forward price and implied volatility curves to be constructed. Since implied volatility is, in one regard, a measure of future uncertainty and anxiety, and forward volatility and price curves may be constructed, they can be used to help us understand the long term effects on the market from geopolitical events and how they change over time. Since crude oil has been buffeted by such shocks since the start of the war in Ukraine over two years ago, and has only recently been subjected to even more turmoil, it is a case in point.
To illustrate this, we used the OptionMetrics IvyDB Futures database to compile Brent crude oil futures data and implied volatilities since March 4, 2008. For each date, we examine continuous futures and options contracts with fixed 1, 2, 3, 4, 6, 12, and 24 month expirations and put and call deltas ranging from 0.10 to 0.50. We then produce forward price and implied volatility curves, as well as at-the-money to out-of-the-money skews, for the initial phase of the last two major geopolitical events to affect crude oil, the war in Ukraine (02/23/22 - 03/08/22), the war in the Middle East (10/07/23 - 10/18/23), and a more current date (4/11/24). We then compare the market's reaction to each event.
Our results are summarized in the table below:
Source: OptionMetrics
The implied volatility curves for each date are worth examining in more detail, as it is apparent that the implied volatility reaction to the war in Ukraine was much larger and extended further into the curve than that of the war in the Middle East. ![]() Source: OptionMetrics
Several observations:
Source: OptionMetrics
Brent Futures, Implied Volatility Quintiles, (3/4/2008 - 4/11/2024) ![]() Source: OptionMetrics
What does all this mean for the current crude market?
Mostly, that the effect of geopolitical events on crude oil tends to lessen as multiple events occur concurrently, especially if major supply disruptions do not occur. This tends to simultaneously flatten and shift lower both the price and implied volatility curves. Markets are easily bored and require new information to keep focused on a specific fundamental, no matter how important or grave the topic. If no new geopolitical events are forthcoming, the crude markets may have to renew their focus on traditional supply and demand factors.
For more insights on futures and options, visit the OptionMetrics blog.
Brett Friedman is with Winhall Risk Analytics and is an OptionMetrics Contributor. Prajwal Pitlehra, a FRE candidate at the NYU Tandon School of Financial Engineering, assisted in the production of this article.
There is an inherent risk involved with financial decisions. The information in this article is for informational purposes only and is not intended to provide financial advice.
On the date of publication, OptionMetrics did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here. |
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