Implied Vols Falling near Start of Year Levels

Oil price volatility is gradually falling but both supply and demand uncertainty remain.

• Implied ATM Brent volatility is approaching levels seen at the start of this year before the Ukraine war. Current ATM implied vol is about 43% compared to levels at or just below 40% in Jan and Feb. Implied vol peaked at nearly 92% in March.
• With limited spare capacity, prices are likely to remain sensitive to any supply disruptions. Russian exports are forecast to fall further as the EU oil ban comes into effect. Saudi Arabia and UAE are the only OPEC nations with significant spare capacity, but they are unlikely to independently increase supplies against the current OPEC+ agreement. The US have also not yet shown signs of significantly increasing production despite rising rig counts over the last year.
• Any continuation to Chinese lockdown restrictions and concerns regarding global growth could impact prices to the downside.
• The current volatility skew is relatively flat with puts at a slightly premium throughout 2022. There remains a significant skew for low delta options on both the upside and downside highlighting some of the potential uncertainty still in the market.
• The graph below shows the implied volatility and historic 30 day volatility of front month Brent: