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March 27, 2020

Oil market volatility is at an all-time high

implied volatility measures
Source: U.S. Energy Information Administration, based on data from Bloomberg, L.P.

Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID-19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, daily price changes for the U.S. benchmark crude oil West Texas Intermediate (WTI) have been extremely volatile.

Implied volatility measures an asset’s expected range of near-term price changes. OVX measures the implied volatility of oil prices and is calculated using movements in the prices of financial options for WTI, the light, sweet crude oil priced at Cushing, Oklahoma. VIX measures the implied volatility of the Standard and Poor’s (S&P) 500—a stock market index of 500 large companies listed in the United States. Crude oil volatility is typically higher than the S&P 500’s volatility, generally because OVX represents changes in one commodity and VIX represents changes across a diverse group of 500 companies.

Both volatility measures have been relatively high this month: on March 16, the VIX index measured 82.7, a level higher than any point during the financial crisis of 2008–09, the last time the global economy experienced a significant recession. Crude oil market volatility has been even higher. On March 20, OVX reached 190, the highest value since its inception in May 2007.

Daily WTI crude oil futures prices
Source: U.S. Energy Information Administration, based on data from Bloomberg, L.P.

Since 1999, daily WTI crude oil futures prices have settled within 2% of the previous trading day’s price about 70% of the time. Nearly all (99.5%) of the daily WTI price changes since 1999 have settled within 10% of the previous day’s price; larger price changes are relatively rare. March 2020 has had four days where WTI prices decreased by more than 10% and two days where WTI prices increased by more than 10%.

The 25% decline on March 9 and the 24% decline on March 18 were the two largest percentage declines in the WTI futures price since at least 1999. On the days following those declines, WTI prices rose by 10% (March 10) and 24% (March 19), likely in response to announced plans from various countries’ governments that emergency fiscal and monetary policy would be forthcoming.

frequency of WTI futures daily price percentage changes
Source: U.S. Energy Information Administration, based on data from Bloomberg, L.P.

Other highly volatile time periods, such as the 2008–09 financial crisis, also produced large price increases and decreases in quick succession. The largest single-day increase during the 2008–09 financial crisis—an 18% rise on September 22, 2008—was followed by the largest single-day decrease, a 12% fall on September 23.

Principal contributors: Jesse Barnett, Jeff Barron