Oil price volatility has climbed to its highest since 2009 as traders try to price in an uncertain supply outlook after Russia hinted it was open to coordinating output with OPEC just as Iran lifts exports following an end to international sanctions.
At-the-money implied volatility for both Brent and WTI crude oil options has increased sharply this week to close to seven-year highs as chatter intensified that major oil producers were prepared to discuss constraining output in a bid to boost prices. Implied volatility is a measure of expectations for future market price turbulence.
Effective producer co-ordination had been deemed unlikely earlier in 2016, especially after diplomatic tensions flared between Saudi Arabia and Iran shortly before Iran’s sanctions were lifted, apparently reducing the likelihood of any agreement within OPEC.
Yet the prospect of collective action was given extra credence Wednesday when Russian officials confirmed discussions over possible coordination with OPEC members.
Even so, softening demand indicators continue to suggest further price weakness is justified, contributing to large price swings in recent sessions.
These price moves in turn fueled expectations for even greater volatility going forward, as captured by the 35 percent climb in implied volatility since the beginning of the year. Outright close-to-close price volatility is also at 2008/2009 levels.