Crude oil volatility hits record level; groups issue sustainability guidance

Volatility in crude oil prices rose to a record level in March as global trade groups released guidance on sustainability reporting.

The economic contraction caused by the 2019 novel coronavirus disease, or COVID-19, has contributed to a significant decline in crude oil prices since the start of 2020, according to the U.S. Energy Information Administration (EIA). Another contributing factor has been a rise in the supply of crude oil as a result of the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With demand falling and supply rising, daily price changes for the U.S. benchmark crude oil West Texas Intermediate (WTI) have been extremely volatile.

Implied volatility measures an asset’s expected range of near-term price changes. OVX measures the implied volatility of oil prices and is determined using movements in the prices of financial options for WTI, the light, sweet crude oil priced at Cushing, Okla. VIX measures the implied volatility of the Standard and Poor’s (S&P) 500 — a stock market index of 500 large companies listed in the United States. Crude oil volatility is usually higher than the S&P 500’s volatility because OVX represents changes in one commodity, while VIX represents changes across a group of 500 companies.

The two volatility measures were high in March. On March 16, the VIX index was 82.7, a level higher than any point during the financial crisis of 2008 and 2009 — the last time the global economy experienced a significant recession. Crude oil market volatility has been even higher, according to the EIA. On March 20, OVX rose to 190, the highest value since its inception in May 2007.

Since 1999, daily WTI crude oil futures prices have been within 2% of the previous trading day’s price about 70% of the time. Nearly all of the daily WTI price changes since 1999 have been within 10% of the previous day’s price. Larger price changes are rare, according to the EIA. In March, WTI prices fell by more than 10% for four days, and the prices rose by more than 10% in two days.

The 25% decline on March 9 and the 24% decline on March 18 were the two largest percentage declines in the WTI futures price since at least 1999. Following the declines, WTI prices rose by 10% on March 10 and 24% on March 19, likely as a response to announced plans from various countries’ governments that emergency fiscal and monetary policy would be coming.

Other highly volatile times, including the 2008-09 financial crisis, also led to large price increases and decreases in quick succession. In the 2008-09 financial crisis, the largest single-day increase was an 18% rise on Sept. 22, 2008. It was followed by the largest single-day decrease of 12% on Sept. 23.

Meanwhile, the American Petroleum Institute (API), the IPIECA and the International Association of Oil & Gas Producers recently released a new edition of the “Sustainability Reporting Guidance for the Oil and Gas Industry.” This is the 15^th year that members of the three organizations have collaborated on the guidance.

“The U.S. natural gas and oil industry is committed to environmental stewardship, safety and strong stakeholder relationships,” said API President and CEO Mike Sommers. “Oil and gas companies were among the first businesses to pioneer sustainability reporting. This guidance helps provide detailed reporting on environmental, health, and safety, social and economic performance — critical information that helps to foster collaboration with a wide range of stakeholders focused on creating a significant turning point in meeting the challenge of climate change head on.”

The following six areas received guidance updates: reporting process; governance and business ethics; climate change and energy; environment; safety, health and security; and social impacts. The modifications were made to improve reporting of performance indicators related to climate change and energy as these areas are of interest to an investment community that’s increasingly committed to financing, innovative, lower-carbon, energy projects, according to the trade groups.

The guidance was updated with the help of more than 80 representatives from 28 oil and gas companies from six continents and an independent external stakeholder panel, including experts representing non-governmental organizations, investors, investor groups, banks and consultants.