Are We In For A Low Volatility Year, Or Is This Just The Calm Before The Storm For Oil Prices?

It’s a mixed start to the week for energy prices as crude oil and diesel contracts move modestly lower while RBOB gasoline futures cling to penny gains. The quiet trading so far in March stands in stark contrast to the madness we became accustomed to after 2020’s COVID lockdowns, the refinery mayhem from winter storm Uri in 2021 and the full-scale invasion of Ukraine in 2022. While March of 2023 didn’t have a major event, we still saw oil prices plummet $10/barrel in the first two weeks of the month, only to gain that back by the end, which makes you wonder if we’re in for a low volatility year, or if this is just the calm before the storm?

So far, the market continues to largely shrug off the conflict around the Red Sea after dozens of Houthi drones were shot down over the weekend by US, British and French naval forces. There are also reports that militants are taking a page from Ukraine’s playbook and are targeting Israeli refineries with drones, but so far no disruptions have been noted from those attacks.

Liquidation was the theme of last week for money managers in energy contracts last week with open interest dropping in all contracts, and both long and short positions reduced in most. Heating Oil was the only contract to see a net increase of any existing position with 4,300 new short contracts added.

Nearly 1/3 of all remaining speculative short positions in WTI were covered last week after prices reached a 4-month high to start March.

Baker Hughes reported a decline in drilling activity last week with the US oil rig count dropping by 2, while the natural gas rig count dropped by 4. In total, the US is only operating roughly 1/3 of the total drilling rigs that were active a decade ago, but huge efficiency gains in that time are helping the US produce more oil than any country ever over the past year.

That increase in production is a big reason why OPEC & Friends have been forced to curb their oil output in recent years to prevent a glut of supply like the world is currently witnessing in Iron Ore and Wine.

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