PREDICTABLE SURPRISES
150
Figure 2: Brent & WTI Forward Curves (on February 24th left). Brent Forward Curve (rigth) 130
Brent 120 115
Aug-26-2011 Feb-25-2011 Feb-24-2012
WTI 90
95
60 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 Oct 15 Apr 16 Source:
www.nquantx.com
Leon Paneta has stated his views that there is a strong likelihood that Israel will attack Iran in April, May or June. If that were to occur, there would be strong pressure for the US to support Israel against Iran’s likely retaliation. Republicans are accusing the Obama administration of being too soft on Iran and it is unlikely that the US would not fully support Israel if Iran were to retaliate. The situation is gradually evolving into a complex
game of deceit, threats and ultimatums by the various parties involved. Though it is impossible to forecast the end result, game theory (Box 1) offers ways to analyse the situation and potential courses of action under certain assumptions of ‘rational’ behaviour by those involved. However, it is questionable to assume that rationality will triumph in this situation given that two of the key players involved happen to be Iran and Israel. As an example, in a televised address in early
Figure 3: Volatility Cone (95%, 99%): Confidence intervals for WTI futures price
US$/bbl
100 150 200 250 300
50 0 Source: NQuantX Global Commodity Workbench Upper 99% Upper 95%
February Iran’s supreme leader Ayatollah Ali Kahmenei described Israel as “a cancerous tumour that must be cut out, and God willing it will be”. Many people inside and outside Israel have
taken this existential threat seriously, and see a unilateral action against Iran as a survival-type of decision. Israel may only commit to hold off the attack if the United States draws a line in the sand and issues an ultimatum involving military action against Iran if Israel’s conditions are not met by a certain deadline.
Markets & Price Uncertainty The oil markets’ interpretation of developments
this year and the probabilities around potential future scenarios around the Iranian problem seem clear. The surge in crude oil prices over the last few weeks has resulted in a strong backwardated market
Option markets provide signals of
the probability of prices exceeding certain thresholds in the future
for WTI and Brent (Figure 2). The ‘fear premium’ is currently driving the short end of the market, while prices for the medium and long end of the forward curve beyond 2015 are actually lower. The volatility implied by the option markets can
Price
Lower 95% Lower 99%
be used to construct confidence intervals for futures prices at various points in time. Figure 3 shows a volatility cone for a 95% and 99% confidence level using the forward curve of February 24th
2012 and
the option implied at-the-money volatilities using NQuantX Global Commodity Workbench. Option markets also provide an indication of
prices exceeding certain thresholds in the future. Figure 4 shows the probability of prices being higher
34 March 2012
80 Apr 11 Apr 12 Apr 13 Apr 14 Apr 15 Apr 16
Dec 16 Dec 18 Dec 20
Dec 18 Apr 2012 Jul 2012 Dec 20
Nov 2012
Mar 2013
Jul 2013
Nov 2013 Dec 2013
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84