Last week saw some record price moves for oil-related indicators —
- Last Thursday (May 5th) the spot price for WTI crude oil fell by 8.6% and the CBOE Crude Oil ETF Volatility Index (ticker OVX) rose by 33.5%, the biggest one day % move in the history of the OVX Index, which dates back to May 2007 www.cboe.com/OVX.
- Last week the spot price for WTI crude oil fell by $16.75 (from $113.93 to $97.18 per barrel (source: Bloomberg)), its biggest ever one-week price drop in nominal dollar terms (but not in % terms).
Here are ten reasons for investors to explore the OVX Index and volatility of crude oil:
1. High Historic Volatility for Crude Oil Spot Prices
The average 30-day historic volatility for crude oil spot prices (WTI – West Texas Intermediate) since January 1990 has been about 37.2 since January 1990.
Since January 1993, the average 30-day historic volatility for key spot prices was 36.6 for crude oil, 26.5 for silver, 16.7 for the S&P 500 (SPX) Index, and 14.7 for gold.
2. High Levels for the OVX Index
In the time period from May 10, 2007 through May 5, 2011, the average daily closing value was 42.2 for the OVX Index and 26.6 for the well-known VIX Index.
3. High Volatility of Volatility for OVX Index
The 30-day historic volatility of the OVX was 101 on May 10.
The average 30-day historic volatility for the OVX Index since July 2008 was about 63.7 (source: Bloomberg).
4. Biggest % Daily Changes for OVX Index and for Crude Oil Spot Prices
In the past four years the OVX Index has experienced 4 days in which it has fallen by more than 11 percent, and five days in which it rose by more than 20 percent.
5. Open Interest for Commodity-based ETF Options and for VIX Options
Options on the SLV, GLD, USO, XLE, and VIX all have open interest of more than 1.4 million contracts.
6. Low Correlation of OVX to Certain Other Key Indicators
Here are the correlations of daily price changes in 2010 for the OVX Index versus other key indicators —
-0.64 USO ETF
-0.60 S&P GSCI Index
-0.58 EEM ETF
-0.58 Crude Oil Spot
-0.54 EWZ ETF
-0.52 FXI ETF
-0.36 SLV ETF
-0.16 GLD ETF
0.67 VIX Index
Assets with low or negative correlations might have the potential to serve as good diversifiers. Diversification was a big issue for investors during the 2008 financial crisis.
7. Coverage of Oil VIX on CNBC
During trading hours the “Oil VIX” ticker is one of the key featured tickers at the top of the screen on CNBC TV.
8. Recent News Coverage of Commodity Volatility
Here are some recent headlines —
“Commodity Prices Plunge.” Wall Street Journal (cover story) (May 6, 2011)
“Selloff Drives Bearish Moves in Silver, Oil ETFs.” WSj.com (May 5, 2011)
“Crude Oil Volatility Rises as Crude Surges on Economic Outlook”
Bloomberg.com (May 9, 2011)
“Oil sees biggest weekly drop since ’83.” Calgary Herald (May 7, 2011)
9. Demand and Prices for Crude Oil
A May 10, 2011, release noted: “… World crude oil and liquid fuels consumption grew to 86.7 million bbl/d in 2010, surpassing the previous record of 86.3 million bbl/d set in 2007. EIA expects that world liquid fuels consumption will grow by 1.4 million bbl/d in 2011, followed by 1.6 million bbl/d growth in 2012, resulting in total world consumption of 89.7 million bbl/d in 2012. … ” http://imarketnews.com/node/30552
The world’s top countries in terms of demand for crude oil are —
Korea, Republic Of
The US Energy Information Administration has noted that “The United States imported about 51% of the petroleum, which includes crude oil and refined petroleum products, that we consumed during 2009. Just over half of these imports came from the Western Hemisphere. …” http://www.eia.doe.gov/
10. Possible OVX Futures and Options
On March 16, 2011, CBOE announced a rule filing that “would permit the trading of options on the CBOE Crude Oil ETF Volatility Index (OVX), based on United States Oil Fund (USO) options. The CBOE Crude Oil ETF Volatility Index (OVX) has been calculated and disseminated by the CBOE since 2008 and, pending approval, will have a tradable contract tied its benchmark, allowing investors to hedge the risk of volatility in the active oil sector for the first time.” More details on tradable OVX products should be available in future weeks at www.cboe.com/OVX .
Matt Moran serves as Vice President, Business Development for CBOE. He is an Associate Editor of The Journal of Trading and The Journal of Index Investing, and he earned JD and MBA degrees at the University of Illinois.