By Erik Norland, Senior Economist, CME Group
Highlights
There is considerable change underway in Saudi Arabia, from how the country is governed and managed to an even more activist role in the politics of the volatile Middle East. Options markets, however, appear to be almost entirely unconcerned about recent developments in the country, the world’s largest exporter of crude oil and a key U.S. ally in the Middle East.
At-the-money implied volatility on West Texas Intermediate (WTI) Crude Oil options has been trading near its lowest point since late 2014 and is well below its long-term average. For example, on November 17, 90-day WTI options closed at 23% implied volatility, well below their 31% average so far this decade (Figure 1). Are markets too complacent in the face of potential political disruption in Saudi Arabia and its neighboring countries.
Figure 1: Whistling Past the Graveyard or Rightfully Unconcerned?
Several events have occurred since November 4 that should be of concern to the oil market:
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