Crude Oil Volatility – No End in sight!

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With economic momentum stalling in China, any hopes of commodity prices bottoming out any time soon have been dented

  1. The latest official manufacturing PMI for China signals stalling economic momentum. Producer sentiment in China, now reversing back into contractionary territory and below expectations, highlights the market’s fear of China’s economy being vulnerable to a much sharper contraction.
  2. This undermines any hope of commodity prices bottoming out any time soon, while elevating fears of China unleashing extraordinary stimulus, including allowing for market forces to drive the yuan much lower than the 3-4% devaluation against the US dollar seen last month.
  3. At risk remains most notably crude oil as – amidst heightened equity markets volatility – the souring sentiment in China will underpin uncertainty in crude oil prices.
  4. Elevated volatility has been most noticeable in WTI Crude Oil with implied volatility surpassing 50%, levels not seen since last year’s crash in prices and representing a sizable risk premium over other risk assets.
  5. Underscoring the downside risk to crude oil is the spread of crude oil volatility over the VIX which, compared to its January peak, has not been attained yet. However, this can easily be breached if the world’s 2nd largest economy cannot switch into higher gear, a fear largely ignored by markets in January.
  6. With approx. 10% of open interest in WTI Crude Oil futures contracts on NYMEX being non-commercial, speculative positioning on crude oil remain elevated. Furthermore, with the ratio of short to long positions hovering around 0.5, (a relative high ratio when compared to recent history), speculators’ bearishness on crude oil have not dissipated in spite of the oil crash last month. More price volatility, not less, is likely to be expected in crude oil.
  7. As oil futures swing erratically amidst an uncertain macro outlook, investors looking to leverage their exposure to oil using ETPs may consider switching between both bullish and bearish positions over shorter investment horizons.
  8. Geared short ETPs tracking WTI Crude Oil can also offer efficient hedging overlay constructs around long positions to ride out the uncertainty

WisdomTree Crude Oil Volatility

Viktor Nossek – Director of Research – WisdomTree Europe