On Monday 6 July, the front month futures price for crude oil benchmark WTI declined 7.7%, the largest single day decline in percentage terms since 4 February 2015. With this decline, oil prices dropped below the trading range established over the past few months. Uncertainty over Greece’s fiscal position, volatility in the Chinese stock market, and uncertain prospects for a nuclear deal with Iran were all listed as immediate factors affecting expectations for future crude oil supply and demand. Other market indicators over the past few weeks, such as the stabilisation of the US rig count and growing petroleum product inventories, may also have contributed to lower prices.
A rare occurrence
The EIA has said that single day declines of this size are very rare in oil markets. Historical daily oil price movements are close to being normally distributed, with small daily increases and large daily decreases occurring slightly more frequently than would be expected in a perfect normal distribution. Since 2 January 2006, the average daily percentage change for the front month WTI crude oil contract was close to zero, at 0.002%, and in that time daily price movements had a standard deviation of more than 2%.
Using history for a guide, the EIA has said that the downward price movements of 7.7% on Monday last week as more than 3 standard deviations below the average daily change. With the assumption that daily oil prices re independent and are normally distributed, a decline of Monday’s magnitude would, in theory, have a 0.05% chance of occurring, or approximately 1 in 2000. Historically, since 2 January 2006, 15 trading days recorded a larger price decline.
Volatility
Crude oil price volatility does indeed remain elevated, driven by uncertainty over future global economic growth and oil production levels. WTI implied volatility, an expectations of future price movements calculated form the prices of futures and options contracts, averaged 36.5% from July 1 – 7, higher than both the June average and the comparable year ago period.
Edited from press release by Claira Lloyd