Oil Marker Instability is Increasing

Chart of the Month – March 2022

Source: TradingView

The chart above is the WTI Oil futures chart. Each bar represents a two-hour window. It starts just before Russia invaded The Ukraine. The two market indicators at the left show how the oil price jumped in the night that the attack took place. The price moved up 7.4% from $92/bbl to $99/bbl. This is significant but pales in comparison to the move that took place over the weekend of March 4th-6th when the price increased 13.1% from $115/bbl to $130/bbl. What is even more striking is the intraday volatility seen on March 3rd. when the price fell 6.6% in a two-hour period from $115/bbl to $106/bbl and ten hours later recovered 4.5% also in a two-hour span.

This volatility continued on March 8th as the U.S. announced it would stop purchasing Russian oil sending the price up 5.4%.

As oil is one of the most important factors of production in the global economy, it is very disruptive to economic output to have prices move like a speed wobble on a bicycle that increasingly risks getting out of control. The impact of the increasing prices together with the rise in volatility trickles through to prices for gasoline and jet fuel, which have jumped by 33% and 50% this year respectively.

For policy makers, particularly central banks this sort of volatility makes planning almost impossible. Should central banks protect against the impact of inflation, or the economic drag inevitably created by higher energy prices? If central banks continue with plans to raise interest rates to fight inflation, they risk pushing the economy into a deeper recession. If they don’t, they risk inflation eroding the purchasing power of household incomes and reducing standards of living. The volatility in prices makes the situation even more challenging as it is difficult to get a sense of where or when oil prices may settle. As central bankers work through this conundrum, it throws into question the markets’ estimates of five or more interest rate increases in the next twelve months.


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