London, 31 March 2010

Exceptional calm in the markets for natural gas and crude oil stands in sharp contrast to more normal volatility in other commodities.

In absolute terms, volatility in aluminium (19 percent), crude (22 percent), corn (23 percent) and copper (26 percent) is very similar, while natural gas is slightly higher (32 percent).

But in the past, energy contracts have displayed much more volatility than base metals and farm products. Median (average) volatility for aluminium is just 16 percent, rising to 20 percent for copper and 22 percent for corn, but 32 percent for crude and 50 percent for natural gas.

So in relative terms, daily price movements in the energy contracts have been unusually small recently, while recent movements in base metals and agricultural contracts have been slightly higher than normal.

Volatility in natural gas is in just the 11th percentile, while volatility in crude lies in the 13th percentile (Chart 1 - download below). In contrast, volatility in corn is marginally above normal in the 56th percentile, and significantly above average in aluminium (69th percentile) and copper (76th percentile).

Volatility in some contracts, especially oil, has been much higher in the last decade than during the 1990s. But rerunning the analysis using historical distributions from the current decade (2000-2010) rather than the whole time period (1990-2010) makes no significant difference to the outcome (Chart 2 - dowload below).

Differences in volatility do not seem to be related to either inventories or published forecasts for the supply-demand outlook.

Volatility is low in both natural gas (where stocks are abundant and there is a consensus the market will remain comfortably supplied for at least 3-4 years) and crude (where global stocks have been falling and market observers are sharply divided about whether supply can keep up with renewed growth in demand).

At the other extreme, volatility is relatively high in both aluminium (oversupplied) and copper (where the balance is tighter). One explanation: the market is more comfortable about the outlook for some of these commodities, crude in particular, than some published commentaries imply.

Low volatility reflects a high degree of consensus among market participants about forward availability, and confidence that changes in demand or supply can be met smoothly without significant disruptions. In contrast, the current calm could be a brittle stalemate between bullish and bearish views that must eventually break down, with the market returning to more normal, and choppier, trading patterns in the near future. Crude volatility would only need to rise from its current 22 percent to around 32 percent to be in line with the average for the past 20 years, which would require only a modest increase in daily variability.

Ends --

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

Download the charts here:

Attachments:

X-COMMOD-VOL1.pdf	8 Kb
X-COMMOD-VOL2.pdf	8 Kb