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Energy Insights: Energy News: Oil’s Big Swings Are the New Normal

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Oil’s Big Swings Are the New Normal



Market has rarely been more volatile; an end to the ‘Groundhog Day’ era

A few years ago, Goldman Sachs analysts talked of a ‘Groundhog Day’ loop for oil. The market is far more volatile now.


A few years ago, Goldman Sachs analysts talked of a ‘Groundhog Day’ loop for oil. The market is far more volatile now. Photo: Bloomberg News

Volatility is roiling the oil market, luring traders in search of quick profits but discouraging longer-term investors who had grown accustomed to more muted swings.

Crude prices tumbled Thursday to their lowest levels in nearly a month after data released Wednesday showed inventories continuing to swell.

Volatility has surged in recent months following a bruising selloff that cut global benchmark prices by 60% from June through January. That was followed by a jump of more than 30% in the first two weeks of this month.

It is a sharp turnaround for a market that was relatively dull until a year ago, with Brent crude, the global oil benchmark, trading at more than $100 a barrel on average for three years in a row, ending in 2013.

Goldman Sachs analysts talked of markets being stuck in a “Groundhog Day” loop, referring to a movie in which a weatherman keeps waking up on the same day in a seemingly endless cycle. Traders complained that a lack of volatility in energy markets made it hard to make money.

Last year’s selloff was driven by unexpectedly strong U.S. oil output coupled with the decision by the Organization of the Petroleum Exporting Countries to keep output steady, leaving the market awash in supply.

But attention is now turning to how the U.S. shale industry is reacting to low prices, with any signs that output is cooling likely to spark a sustained oil-price recovery and put a floor under current prices.

The big swings by oil prices are drawing in hedge funds and other short-term speculators who look to profit from the rapid moves, with an increased number of bets also contributing to the big moves.

“We like volatile two-way markets,” said Emil van Essen, principal of Emil van Essen Managed Futures, which oversees $130 million. Although recently, as prices have risen, “it’s just been a one-way street.”

Mr. Van Essen is using options that benefit if West Texas Intermediate prices, another benchmark, fall to $40 a barrel but lose money if they fall to $30, as well as bets that would profit from rising prices.

The WTI oil price fell $2.82, or 5.5%, to $48.17 a barrel Thursday on the New York Mercantile Exchange.

Big investors have also turned to the energy sector as prices have risen recently, with investors placing a net $9.4 billion into global energy-sector funds so far this year, according to data provider EPFR. That compares with $6.1 billion in the final two months of 2014.

But too much volatility also can be harmful, especially to traders with long-term views as the market can lead to heavy short-term losses even if their outlook is correct.

“The current volatility is too high for us,” said Hakan Kaya, portfolio manager for Neuberger Berman Group LLC, which manages $250 billion in assets. Mr. Kaya, who helps oversee about $300 million in commodity investments, said his fund has less money invested to oil prices than it would if volatility were lower.

Oil prices have closed higher or lower by more than 2% for 24 out of the 37 trading days this year, compared to just three days in the same period last year. For eleven consecutive trading days up to Feb. 13, oil prices closed higher or lower by more than 2%, the longest streak of this kind since the 21-day period from Dec. 4, 2008 to Jan. 5, 2009.

The CBOE Crude Oil Volatility Index, which tracks investor expectations for price swings based on options on the United States Oil Fund LP, an exchange-traded fund for West Texas Intermediate crude oil, meanwhile topped 63 earlier this month, up from around 15 in June 2014. The higher the index’s level, the more volatile markets are.

OPEC’s failure to agree on supply cuts to help support prices when it met last November has been the key source of oil’s new volatility. Oil traders had come to rely on OPEC, led by the world’s biggest oil exporter Saudi Arabia, to help keep prices above $100 a barrel, said Mark Keenan, head of Asian commodities research at French bank Société Générale SA .

Analysts and traders have thus found themselves grappling with newly important but unfamiliar data, such as how many U.S. drilling rigs are operating, or the financial health of U.S. shale companies. That raises the risk that people trade on misinterpreted numbers, roiling prices and possibly distorting valuations, said Citi Futures oil analyst Tim Evans.

“While we clearly see the heightened interest in the drilling rig count, it looks to us as though those most eager to call a longer-term bottom in oil prices are seizing opportunistically on the one bullish data point they can find rather than building a more complete fundamental picture,” Mr. Evans wrote in a note last week.

Other data points coming under higher scrutiny than ever before include the monthly selling prices charged by Middle Eastern producers for exports, or the amount of unsold West African oil. Oil’s rally this month was in part caused by a succession of capital spending cuts announced by oil majors like Royal Dutch Shell PLC and Total S.A. that suggested oil supply growth might eventually slow.

BP Capital LP, which manages about $1 billion in assets, is investing in oil futures and options as far as three years away, believing that this year’s volatility in the oil markets is a sign of what’s to come, said David Meaney, a portfolio manager. As shale drillers become the swing producer in the market, the supply-and-demand balance will likely move wildly because shale-well production peaks and declines so quickly, he said.

“We think we’re going to get higher highs, lower lows and shorter cycles,” Mr. Meaney said. “We plan to take advantage of panic in the market.”

Write to Eric Yep at and Nicole Friedman at

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