(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Jan 27 Intra-day price movements
are becoming less informative about longer-term changes in oil
prices as the ratio of genuine price signals to random noise
deteriorates, at least over shorter-time horizons.
Even a cursory look at the chart for front-month Brent
futures reveals that significant intra-day moves are
increasingly being reversed before the market closes, more often
than not leaving prices back where they started.
Futures prices never move in a straight line. Partial
reversals are common. But the ratio of continued moves (trends)
to reversals has been falling, implying short-term moves over
timescales ranging from seconds to minutes and hours are
becoming less useful as predictors of where the market will
close or where prices might go tomorrow, or next week or next
Since summer 2011, both intra-day volatility (measured by
the high-low trading range) and inter-day volatility (measured
by changes in closing prices) have declined. But inter-day
volatility has fallen faster. More intra-day moves are being
reversed before the market closes.
Charts 1-3 show how intra-day moves (measured using the
Parkinson high-low volatility estimator) compare with the
inter-day volatility (conventionally measured using closing
Because of the way they are defined, intra-day volatility
measured by the Parkinson high-low estimator has been lower than
conventional close-to-close volatility for most of the last two
decades (Chart 1). But the gap has been narrowing, and for much
of the last couple of years recorded intra-day volatility has
actually exceeded the inter-day measure (Charts 2-3).
The rise in random noise relative to genuine signals is
characteristic of range-bound markets lacking a strong trend.
Front-month Brent prices have been trapped on the inside of a
tight $105-115 range since July 2011, so it is unsurprising that
the ratio of signals to noise has worsened (Charts 4-5).
More structural changes may also be at work, however. On a
macro time scale lasting days, weeks or months, the futures
market seems to have become deeper and more liquid as the
commodity boom has drawn in a greater range of financial
participants and market makers. As a result, close-to-close
volatility has been constant or fallen slightly.
News events that would once have generated sharp price moves
now produce a more subdued response because the range of traders
and viewpoints has expanded.
In contrast, on a micro scale lasting from seconds to
minutes and hours, in which the market is increasingly dominated
by computer-driven trading programmes, a significant amount of
noisiness and volatility remains and may be increasing.
In many cases, computers appear to trade mostly against each
other, which can create price perturbations over short-time
Since computer-driven trading programmes generally have
short holding periods, however, and limited or no mandate to
hold positions overnight, most of those positions must be
unwound before the close, helping explain why a
higher-than-usual number of price moves are being partially or
(editing by Jane Baird)