(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, April 7 The oil market has rarely been
so quiet. Benchmark Brent has traded in a narrow range of $5
either side of $110 per barrel since the summer of 2012.
Price volatility has fallen to some of the lowest levels
since crude futures markets were established in the early 1980s.
Oil prices have rarely been so stable for so long since the
1973 oil shock ended the long period of calm in the 1950s and
1960s and ushered in the era of OPEC dominance.
Measured volatility in front-month Brent futures prices has
been below average continuously for almost two years.
For much of this time, volatility has actually been below
the 25th and 10th percentiles of the 1988-2014 distribution
Annualised volatility so far this year is running at 15
percent or less, compared with an average of 30 percent since
Large daily price moves have become increasingly infrequent
(Chart 2). Even major supply disruptions from the North Sea and
Libya have failed to move prices.
Crude has moved into a new era in which confidence about
plentiful shale oil from the United States is more than enough
to offset political risks emanating from the Middle East and
production problems in other regions.
Chart 1: link.reuters.com/myn38v
Chart 2: link.reuters.com/jyn38v
French mathematician Benoit Mandelbrot, the leading expert
on volatility, argued that commodity markets, like other
financial assets, swing between a mild state and a wild one,
alternating between periods of low and high volatility ("The
misbehaviour of markets" 2004).
But the oil market has been stuck in its current calm state
for such an abnormally long period that it seems safe to infer
that something fundamental has changed in the way oil prices
trade and behave.
It is not hard to find the explanation. The period of high
and rapidly rising prices between 2004 and early 2012, briefly
interrupted in 2008 and 2009, has produced a profound "regime
From the demand side, consumption of liquid transport fuels
has peaked in the developed economies as automotive engines
become more efficient and petroleum-derived gasoline and diesel
are being partially replaced by biofuels.
On the supply side, high prices have spurred development of
shale and reversed the previous trend towards growing dependence
on conventional oil fields in the Middle East and OPEC member
It has decisively altered the medium-term outlook in the
minds of many producers, consumers and traders and reshaped what
they consider to be the normal range for oil prices, something
Paul Stevens at Chatham House calls traders' "bands of belief".
One result is that there is now almost no discussion among
market participants or in the media about oil and other fossil
fuel reserves peaking or running out.
Controversy about speculation in the market has almost
entirely disappeared as oil prices have stabilised.
Another result is that investors have largely lost interest
in buy-and-hold commodity strategies that relied on oil and
other fuels becoming progressively more scarce and expensive.
The number of hedge funds specialising in oil has begun to
fall, and institutional investors are allocating a smaller share
of their portfolios to commodity-based products.
Trading activity has shifted from banks, hedge funds and
mutual funds specialising in trading outright prices to
merchants and the trading desks of the major oil companies,
which are expert at locational and quality arbitrage.
At a more global strategic level, the influence of
traditional oil exporters around the Persian Gulf is declining
as alternative supplies become more available, now and in
Political risk and other sources of supply-side risk are
diminishing as oil supplies become more geographically
It is no coincidence that the oil market in 2014 is
beginning to resemble the markets of the 1950s and 1960s,
because that was the last time the United States, with its
large, stable and non-monopolised oil industry, was the marginal
producer in the global oil market.
Oil markets are inherently cyclical. The long-term behaviour
of oil prices owes more to Hyman Minsky ("Stabilising an
unstable economy" 1986) than Francis Fukuyama ("The end of
history and the last man" 1992).
The current calm will eventually sow the seeds of its own
destruction as complacency grows. But in the meantime, the
market appears firmly settled into a new era that is
transforming the role of everyone involved in the production,
transportation, refining, risk management and consumption of
(editing by Jane Baird)