Materials Risk has discussed the decline in commodity price volatility (and in oil prices in particular) a number of times over the past couple years. Macro factors such as monetary easing have helped with lower interest rates increasing the incentive to store commodities which, in turn increases the shock absorbing effect on prices. The oil market has been particularly interesting since despite the plethora of geopolitical concerns and significant supply outages oil prices have traded in a narrow range. A new chart from Bank of America Merrill Lynch shows that despite the interruptions to supply overall volatility in oil production growth has fallen to historic lows, suggesting that this may have been the main micro factor in dampening oil price volatility.
Related article: Oil prices caught in a vice
BofA Merrill Lynch go on to highlight the close relationship between conflict in energy producing countries (here measured by war casualties) and oil output. With war casualties in energy producing countries rising sharply in the past couple years they argue that this is likely to lead to more oil production outages in the future. However when you compare the chart of oil production volatility and the one below showing oil price volatility there appears to be little connection between the two. Oil production was significantly more volatile during the 1980’s and early 1990’s yet volatility remained low. While more recent spikes in oil price volatility are likely to have been caused by demand uncertainty as a result of the financial crisis than fluctuations in oil production (see more of BofA’s charts here).
Related article: Oil supply outages are becoming more common and difficult to predict
Related article: Is food price volatility about to return with a vengeance?
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