Kemp: Oil Prices Settle Into New Equilibrium



Reuters

John Kemp is a Reuters market analyst. The views expressed are his own

LONDON, July 1 (Reuters) - Benchmark crude oil prices have barely moved for more than two months, implying the market has found a temporary equilibrium after the enormous price shock in the second half of 2014 and early 2015.

Over the last 30 trading days, the range between the highest and lowest closing prices for front-month Brent futures has been just $4.50 per barrel.

The highest close for the front-month futures contract was at $66.54 per barrel (May 21) and the lowest was $62.01 (June 29).

The trading range is the smallest since the shock began in June 2014, and down from a peak of almost $40 per barrel in early January 2015.

In dollars per barrel, the range has been narrow by the standard of the last decade (http://link.reuters.com/cew94w).

Even in percentage terms, which allow for differences in outright prices, the market has been quiet (http://link.reuters.com/few94w).

The trading range has been around 7 percent over the last 30 days, down from almost 40 percent at the start of 2015.

The price stabilisation implies the market believes $60-65 per barrel will gradually bring supply and demand back into balance, which seems sensible.

The low variability in prices is also helping anchor short- and medium-term expectations for producers and consumers at around the current level.

Expectations are not always correct but price convergence within a fairly narrow range makes it easier for producers and consumers to formulate budgets for the rest of 2015 and 2016.

Volatility

Volatility is a subtle concept that has rather different meanings for different people in oil and other commodity markets.

For traders, investors and hedgers, "volatility" has a precise definition as the standard deviation of price moves over a given number of days and expressed at an annualised rate.

For commodity producers and consumers, however, volatility is not about daily price movements but ranges over a period of time.


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