The biggest swings in crude prices since 2009 are signaling more money for traders.
The CBOE Crude Oil Volatility Index, which measures fluctuations using options of the US Oil Fund, climbed to 63.14 on February 5, the highest level in almost six years. More than 5 million contracts of Brent crude, the global benchmark, traded on the London-based ICE Futures Europe exchange last month, an increase of 29 per cent from a year earlier.
"Volatility for traders is always what you want, you don't want a market that has nothing to offer," said Doug King, the London-based chief investment officer of the Merchant Commodity Fund, which has $275 million under management. "The volatility in the last two months has been outsized."
While the turmoil in oil markets has roiled economies from Russia to Venezuela, sending currencies crashing and undermining government budgets, it signals a return to the volatility on which commodity traders thrive.
It also means an annual oil-industry gathering in London this week will be the most interesting in years, according to Hamza Khan, a senior commodity strategist at ING Bank NV.
Brent declined for a seventh month in January to the lowest level since March 2009 amid a global glut. It then rebounded in the biggest two-week gain for 17 years through February 6 on signs drilling was slowing in the US. These swings follow two years that had the lowest volatility since at least 2007, the CBOE index shows.
"Prices have been moving by $10 a barrel over the last few years," Khan said in an interview in London on February 4. "In 2015, they could rise by $30, $40, even $50. If you're on the right side of that trade it presents huge opportunities."
Brent has averaged $51.50 this year compared with about $109 a barrel in 2013 and $99 last year.
Relatively small price swings curbed commodity-trading profits in 2014, according to Trafigura Beheer BV, the world's third-largest independent oil trader. The company had a gross profit margin of 1.6 per cent compared with 1.4 per cent in 2013, it said in its annual report.
Earnings at Glencore's energy-marketing unit fell 55 per cent in the first half of 2014 because of "fewer trading opportunities and low volatility in oil pricing," the world's second-biggest oil trader said in its mid-year results in August.
As oil collapsed, the market moved into contango, whereby prices in the coming weeks are lower than those for delivery at a later date. That allows traders who control or have access to storage tanks to make money if the cost of storing is less than the difference between current and future prices. By the middle of this year, oil inventories in industrialised nations may come close to the record high of 2.83 billion barrels reached in August 1998, the International Energy Agency said in a report on Tuesday.
Some hedge funds have profited amid the swings in prices. PointState Capital LP bet on a rout last year and made about half of its $2 billion gain from trading oil. Greenlight Capital sold enough crude futures in June to offset declines in positions it held in oil producers. Pierre Andurand's hedge fund, Andurand Capital, gained 38 per cent and the Merchant Commodity Fund returned almost 60 per cent last year betting on oil's collapse.
Crude-price volatility typically causes an "increased sense of economic uncertainty" as oil constitutes one of the biggest drivers of the global economy, the World Bank said in a 2013 study. Fluctuations make it harder for consumers including airlines to hedge their costs and for producers to forecast returns on their investments.
Parties in London
The oil slump has also prompted a wave of retrenchment across the industry, including more than $40 billion of spending cuts announced since November 1 by companies including Chevron and Royal Dutch Shell Plc. There's still money for parties in London this week because the event known as IP Week is dominated by oil traders and banks, according to Christopher Bellew, a senior broker at Jefferies Bache.
"Oil traders come to London to meet their counterparties, bankers and brokers, have meetings in the day and party in the evening," he said by email on February 4.
CME Group hosted cocktails at the Criterion Restaurant on Monday, while Intercontinental Exchange will entertain guests at Quaglino's on Tuesday, according to invitations received by Bloomberg News. About 1,300 guests are paying 300 pounds a head to attend a four-course dinner at the Grosvenor House Hotel on February 12, according to the organiser HG3 Conferences.
Traders will be busy in London looking for opportunities to make money buying, storing and selling oil cargoes, Merchant's King said in a phone interview on Monday.
"They can benefit from market gyrations, volatility," said King. "They will want to talk with a storage operator, talk with the freight owners, and work out exactly what there is around."