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Oil options volatility nears record low amid Iran deal
November 25, 2013 / 8:21 PM / 4 years ago

Oil options volatility nears record low amid Iran deal

NEW YORK, Nov 25 (Reuters) - The future volatility of already becalmed oil prices is looking even more muted following an historic deal between Iran and major nations that may ease years of tensions.

Late last week, with an agreement over Iran’s nuclear program looking promising, the implied volatility in the U.S. crude oil market fell to nearly 18 percent, its lowest in eight months and near the lowest since the CBOE crude oil volatility index began tracking the market in 2007.

The index, which is a measure of options pricing that gauges expectation of how sharply U.S. oil prices will move over a 30-day period, has trended lower for two years. Growing U.S. oil production and slower global demand have added to expectations that crude oil prices may trade in a steady range for the next few years, diminishing demand to buy options.

The CBOE index, which tracks the United States Oil Fund , picked back up on Monday to trade at above 19 percent, but the overall mood was still one of reduced volatility.

“A falling OVX means a very stable market,” said Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania. “The market is at a comfortable level, it has settled down into this ($90-$95) range.”

In the past, the oil options market has been a good gauge of geopolitical market risk, spiking to more than 60 percent in the latter half of 2011 when rhetoric from Israel and the United States suggested a military attack on Iran could be a possibility. Hedge funds rushed to buy calls on $150 crude as a way to profit from a potential price spike.

But as the bellicose talk yielded to U.S. and European sanctions, volatility faded. It spiked again to nearly 30 percent in August, as fears grew of an assault on Syria; and it slumped again in mid-September after a last-minute deal to destroy President Bashar al-Assad’s chemical weapons.

“It appears to have been trending down ever since there was no military action in Syria, but was very dramatic as the deal with Iran unfolded, ” said Russell Rhoads, a senior instructor at The Options Institute at the Chicago Board of Options Exchange (CBOE).

The forward-looking index fell by more than 8 percent between Nov. 8 and Nov. 22 to its low last week as hope for a deal grew. The deal clinched on Sunday between Iran and six world powers would curb Tehran’s nuclear program in exchange for some initial sanctions relief.

Open interest in the oil futures market, or the number of long or short positions outstanding, fell by some 24 percent between July and November, as prices fell.

This indicates “bullish money being excised out of the market, not new money (being added) on the bear side,” Schork added.

A key question for the oil market is whether Iran’s oil exports will grow. For a period of six months, Iran’s crude oil sales cannot increase, the U.S. State Department said on Sunday.

By Monday, uncertainty over when Iran will resume increased exports stemmed losses in the oil futures market and boosted the volatility index slightly higher.

The market’s overall mood was muted on Monday, with only light bidding for the “put skew” in the first quarter of next year, according to one trader, meaning producers were likely buying puts, to limit their downside price risk.

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