London, 30 March 2010

Eerie calm has descended across the crude oil market as volatility drops across the whole length of the curve and prices soften, particularly at the back end.

Front-month prices have been trading in an increasingly tight range between $80 and $82 per barrel with unusually small daily changes.

Realised volatility has sunk to just over 23 percent (30-day, annualized), from over 31 percent at the start of the month and 28 percent around the turn of the year.

Volatility in the spot month is down to the 19th percentile of its historic 1986-2010 distribution and 8th percentile of the more recent 2006-2010 distribution.

Prices further forward continue to soften. Crude one-year forward has eased $3 from around $86 at the start of January to $83. Prices for end-2015 have come down by an even bigger margin of $10, from around $96 to $86. Volatility remains comparatively higher at the forward maturities.

But here too it is gradually declining. One-year forward volatility is down to 20 percent (50th percentile, 1986-2010; 25th percentile, 2006-2010) from 29 percent at the start of March (84th percentile; 65th percentile).

- See charts to download at the end of this article -

Spot prices have stabilised, and softened further forward, despite positive news flow about improving oil demand and a consolidating global recovery -- illustrated by rising equity prices and climbing bond yields, rising freight movements, and manufacturing surveys.

Much of the demand recovery appears to have been anticipated during H2 2009, when spot crude moved up from just under $70 to a little over $80, and is already discounted in prices.

The market seems increasingly comfortable with real prices about $75-80 in the medium term. Forward prices for Dec 2015 ($86.65) are equivalent to $77 per barrel now, after adjusting for inflation at 2.5 percent per year, which is not much different from today's spot price.

Price expectations appear to be stabilizing around the $75-$80 sustainable level. Leading producers have indicated it is a "fair" price (Saudi Arabia's King Abdullah in 2009), even a "beautiful" one (Saudi Oil Minister Ali Naimi in March 2010).

BP Chief Executive Tony Hayward has confirmed $74 is "very comfortable" for the company, sufficient to fund its exploration and production investment.

On the consumer side, stable real prices around $75 allow governments to continue meeting their energy security and CO2 reduction commitments, by encouraging conservation and underpinning investments in alternative sources such as natural gas, unconventional oil, nuclear and renewable technologies.

Falling volatility along the length of the curve (in the technical sense of smaller daily price changes), reduced oscillation (a tightening trading range), and a flattening curve all indicate price expectations are converging and the market is groping towards a new nominal anchor around $75.

Ends --

By John Kemp, Reuters columnist for Commodities Now. The views expressed are his own

Attachments:

OIL-VOL-FWD-MAR10.pdf	21 Kb
OIL-VOL-FWD-PCTL.pdf	5 Kb
OIL-VOL-MAR10.pdf	21 Kb
OIL-VOL-PCTL.pdf	5 Kb