The Collapse Of Oil Price Volatility

1. Oil volatility collapses

- For two months, the oil market has been incredibly boring. Brent futures have not moved more than $1 per barrel in either direction over a single day for seven consecutive weeks.

- The OPEC+ cuts have stabilized the physical market, and money managers have placed bets on options that pay off with lower volatility. According to the Wall Street Journal, so-called “strangles” have suppressed implied volatility.

- Implied volatility has declined from a peak of 345 percent on April 21 (when oil prices went negative) to just under 30 percent by late August.

- The trades have trapped oil prices within a narrow range. “It feels like we have two tectonic plates building up energy,” Marwan Younes, chief investment officer of Massar Capital Management, told the WSJ. “The day it gives way will be a fairly eventful day.”

2. Natural gas power burn hit record in July

- On July 27, U.S. natural gas used in the power sector hit a record high at 47.2 billion cubic feet. Gas-fired power generation reached 316 GW, also a record high.

- The previous record stood at 45.4 Bcf, set on August 6, 2019. Gas power burn surpassed that previous record on seven days last month.

- High temperatures and low prices stoked demand. Also new gas-fired power plants added capacity.

- Gas made up 45 percent of U.S. power generation on July 27, with coal at 24 percent, nuclear at 17 percent and renewables at 12 percent.

3. Exxon ejected from Dow as energy declines

 ExxonMobil (NYSE: XOM) is set to be removed from the Dow Jones Industrial Average, a company that was once the most valuable in the world.

- Exxon was worth $415 billion in 2013, and is now under $170 billion.

- The demise is emblematic of the energy sector’s poor performance on the whole. Energy now only makes up less than 2.5 percent of the S&P 500, down from over 12 percent as recently as 2011.

- The energy sector has declined by 40 percent this year even as the S&P 500 is up more than 7 percent. Exxon’s shares are down more than 40 percent.

- This year, the company reported two consecutive quarterly losses for the first time in two decades.

4. Nickel hits nine-month high

- Nickel prices shot above $15,000 per ton for the first time since November 2019.

- A likely factor is the decline of nickel stocks in China, according to Bloomberg. Nickel stocks fell to their lowest level in two years.

- But the steep drop in nickel inventories does not tell the whole story. “In our view, the fall in stocks is due to the mineral ore export ban that has been in force in Indonesia since the start of the year and to corona-related production outages in the Philippines,” Commerzbank wrote in a note.

- The bank does not see concerns about a shortage as justifiable. “According to data from the customs authorities, China imported 16.7 million tons of nickel ore and concentrate in the first half year – nearly 20% less than a year earlier.”

- Commerzbank said there could actually be a surplus “of around 150,000 tons for the year” due to weak global demand. “In our opinion, nickel is too expensive from a short-term perspective.”

5. OPEC+ has room to run

- OPEC+ could have room to increase production in 2021, according to a new analysis from Standard Chartered.

- The investment bank estimates that the “call on OPEC” increased by 2.2 mb/d in August to 25.1 mb/d, which would actually be above the group’s estimate production levels.

- The call on OPEC may also rise above the 2021 production target as soon as September.

- By the second half of 2021, the call on OPEC could be as much as 5 mb/d above planned production levels.

- There is still the matter of inventory surplus, but OPEC+ has room to erase the overhang and also add some production back. “On our projections, OPEC and its partners in OPEC+ could both remove the overhang by end-2021 and produce an extra 770mb (2.1mb/d) in 2021 beyond current targets,” Standard Chartered said.

6. Carbon prices skyrocket

- Carbon prices in Europe have shot up close to a record high of 30 euros per ton, despite a weak economy.

- As the FT notes, the carbon market is attracting a growing number of traders, which are eyeing the medium- and long-term, not short-term economic weakness. The European Union has charted a course for lower carbon emissions, which will put upward pressure on carbon prices over time.

- But as investors pile into the carbon market, they are pushing up prices of the tradable credits. “By 2022 the EU carbon price could easily reach €40,” Florian Rothenberg at commodities consultancy ICIS, told the FT. “But if financial investors and speculators believe this the price could easily reach much higher.”

- Famed hedge fund manager Pierre Andurand, who made 150 percent profit for investors in the first five months of 2020 by shorting oil prices, is now stepping up bets on carbon.

- “We’re comfortable over a five-year horizon that the price has to go up — that’s pretty much a guarantee,” Andurand told the FT. “As long as the EU maintains this commitment to fighting climate change and utilizing the carbon market, we’re confident prices will rise.”

7. E&P hedging on track for oil, up for gas. But at lower prices

- Roughly 19 percent of oil production from E&Ps is hedged for 2021, according to Goldman Sachs. For natural gas, hedging has reached 34 percent, up from a five-year average of 25 percent.

- That puts 2021 hedging “in line with average levels seasonally for liquids and above-average levels seasonally for gas,” Goldman said.

- Current hedging is at an average of $44.36 per barrel WTI, and $2.73/MMBtu for gas.

- Those prices are in line with strip prices, but for crude, the hedging price drops to new lows. In fact, the average hedged price has declined steadily over time.

- For 2020, hedging is at its highest level in at least five years at 67 percent.