(Bloomberg) — Crude oil’s geopolitical risk premium has vanished from the market as fast as it appeared, as the initial fear of a wider Middle East conflict faded.
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With Israel and Iran stepping back from direct conflict, volatility has dropped back to multiyear lows and the skew has flipped back to favoring puts, as focus returns to the usual suspects: interest rates, OPEC+ supply and global demand growth.
“On geopolitics, the probability implied from the options market of Brent above $100 by year end has reset back to 9% from reaching as high as 17%,” said Tanvir Sandhu, Bloomberg Intelligence’s Chief Global Derivatives Strategist. “The price action around tensions in the Middle East is often short-lived without any signs that it’s impacting oil supply. There is a fair bit of dispersion and volatility in the commodity space which creates trading opportunities.”
Listen: All Options Considered podcast discussing geopolitics, US election and market volatility
Now, demand growth is being called into question amid persistently high interest rates, with narrowing distillate crack spreads and weaker US data. One caveat: US weekly product supplied — the most widely available frequent data — tends to understate consumption. Take distillates, where the weekly estimates during February lagged the monthly final data by 4%, or more than 100,000 barrels a day. That may keep the skew from swinging too far in a bearish direction.
Cocoa’s wild ride is showing no signs of an end, keeping options volatility elevated even as prices have taken a breather from the massive leaps higher. Still, the levels appear justified by the realized volatility, with huge swings whipsawing traders. Skew is a more nuanced story, with some short-term bearishness — or at least cover against a drop in prices — coming into the market.
July puts moved to a premium over calls, and put spreads traded Friday protecting against a 30% drop to below $5,000 a ton. On the flip side, December options retain a bullish bias, and 5,000 contracts of December $14,950/$15,000 call spreads changing hands.
With gold volatility slipping from the highs as well, other areas that had been calm are starting to perk up a bit.
Read more: Zero-Day Options Boom Risks Turning Into a Bust: MLIV Pulse
Big crop supplies worldwide have limited volatility in agriculture markets, with both corn and soybeans seeing volatility levels below five-year averages for this time of year. That could start to change soon as the US transitions from relatively timely spring planting to the uncertainties of the summer growing season, with extended weather outlooks pointing to hot temperatures that could stress crops. Three-month corn implied volatility has risen to the highest since the end of July. Still, there’s a ways to go before reaching the heights from past years.
Joe Davis, director of commodities at Futures International LLC, said volatility in corn — the most widely grown US crop — has a seasonal bias to firm through June. “Corn volatility looks cheap,” Davis said. “We have just been stuck in a range since the end of February. Any hiccup and weather will lift corn out of its range, and volatility will go along with it.”
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EQUITIES
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Not only is S&P volatility sinking, with the VIX dropping back into its 1st-quarter range, but the VVIX — the vol of vol — is even cheaper. It closed at the lowest level since January 2023, and is near decade-lows.
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While spot VIX got hammered last week, the rest of the curve weakened much more gently. Still, it looks like fears of a summer selloff appear muted.
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Read More: Oil’s Geopolitical Risk Premium Vanishes as Fear of Wider Mideast Conflict Fades