Best of the Week
Most Popular
1.Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - Harry_Dent
2. Is This How World War III Begins, In Almost Complete Silence? - Jeff_Berwick
3.Trump Wins 2nd Presidential Debate, Betfair Betting Markets Odds Bounce - Nadeem_Walayat
4.Why Krugman, Roubini, Rogoff And Buffett Dislike Gold - GoldCore
5.End of SPX Stock Market Correction Nears - Tony_Caldaro
6.Get Ready for the Future - Exponential Machine Intelligence Mega-trend towards Singularity - Nadeem_Walayat
7.US Housing Market Bubble II – It’s Happening Again! - Andy_Sutton
8.FTSE BrExit Stock Market Panic Crash Resolves towards New All Time Highs - Nadeem_Walayat
9.Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - Nadeem_Walayat
10.Gold’s, Miners’ Stops Run - Zeal_LLC
Last 7 days
Establishment Mainstream Media Elite Buys US Election for Hillary Clinton, Time Running Out for Trump - 23rd Oct 16
Inflation About To Explode Higher - 22nd Oct 16
Still waiting for SPX uptrend to kick off - 22nd Oct 16
Will a Rising US Dollar Crush Gold’s Fledgling Bull? - 22nd Oct 16
Why The Global Economy Will Disintegrate Rapidly Back to Olduvai Gorge - 22nd Oct 16
GLD Bleeds Out; Weekly Gold Update - 22nd Oct 16
Stock Market Investment Success Through the “Investment Rule of 72” - 21st Oct 16
The Final Bottom in Gold - WHEN - 21st Oct 16
Gold Green Lights Upleg - 21st Oct 16
Demand for US Mints Silver Eagles has ‘Returned with a Vengeance’ - 21st Oct 16
Central Bankers Can't Stop The Death Blow Of The Post US Election Recession - 21st Oct 16
The Fortune at the Bottom of the Pyramid: Golden Opportunity for Frontier Asia - 21st Oct 16
Have You Taken These 4 Simple Steps to Improve Your Trading? - 21st Oct 16
The Stock Market is an Accident Waiting to Happen - 20th Oct 16
It's Rally Time for Gold and Silver Equities - 20th Oct 16
Cashless Society – Risks Posed By The War On Cash - 20th Oct 16
China's insane Housing Market Will Tumble and Crash in 2017 - 20th Oct 16
Donald Trump Bounces Going into 3rd and Final US Presidential Election Debate - 20th Oct 16
Attention Please: Phase Two of the Gold and Silver Train Now leaving the Station. All Aboard? - 19th Oct 16
How to Successfully Trade a Stock Market Crash - Black Monday October 19th 1987 - 19th Oct 16
Tesla, Apple and Uber Push Lithium Prices Even Higher - 18th Oct 16
Silver, Debt, and Deficits – From an Election Year Perspective - 18th Oct 16
UK Property Market: Slow Growth Does Not Equate To Decline - 18th Oct 16
Trump Election Victory is in Your Power - 18th Oct 16
Stock Market More to Come! - 18th Oct 16
This Past Week in Gold and Silver - 17th Oct 16
A Falling Stock Market Cannot Be Allowed - Financial Repression Is Now “In-Play”! - 17th Oct 16
Commodities, Forex and Stock Market Trend Forecasts - 17th Oct 16
Stock Market Crash..or No Crash? - 17th Oct 16
A perspective on risk rally – Risks abound but Stock Market is Confident - 17th Oct 16
Bank of England Blames Brexit for Sterling Drop Inflation, Masks QE Money Printing Cause - 17th Oct 16
From Piety to Pride to Pity, America's Racial Divide - 17th Oct 16
Is Obama Juicing US Government Spending To Get Hillary Clinton Elected? - 16th Oct 16
Seek Your Independence: Anything Else Will Destroy You - 16th Oct 16
SNL - US Presidential Debates, 1st, 2nd, VP - Like You've Never Seen them Before! - 16th Oct 16
End of Economic Growth Sparks Wide Discontent - 16th Oct 16
Donald Trump on Life Support, May Abandon Election Campaign and War on Republican Party - 15th Oct 16
The Gold Manipulators Not Only Will Be Punished, They Have Been Punished - 15th Oct 16
Black Votes Matter - Is the US on the Verge of Mass Race Riots? - 15th Oct 16
Gold Stocks Screaming Buy - 14th Oct 16
Brace Yourself for the Quadrillion-Dollar Reckoning - 14th Oct 16
The Next Recession Will Blow Out the Budget - 14th Oct 16
John Mauldin: My Infrastructure Plan to Save the US Economy - 14th Oct 16
World War III On The Brink: War Will Continue Until It Triggers Economic Collapse - 14th Oct 16
US T-Bill Rejection At Ports In Progress - 14th Oct 16
These 2 Debt Instruments Pose Peril to Millions of Investors - 14th Oct 16
China’s Rocketing Housing Market Real Estate Bubble - 14th Oct 16
DIY Winter Home Maintenance Money Saving 22 Point Checklist to Get Ready for Winter/Fall - 14th Oct 16
US Stock Market, Big Picture View - 13th Oct 16
Stock Buybacks Main Force Driving Bull Market; Rewards Investors and Starves Innovation - 13th Oct 16
SPX Gapping Down... - 13th Oct 16
Syria - Obama Stepped Back From Brink, Will Hillary? - 13th Oct 16
The Structure and Future of Gold in the Investment and Monetary World - 13th Oct 16
Can Trump Still Win Despite Opinion Polls, Bookmakers and Pundits all Saying Hillary has Won? - 12th Oct 16
Gold and Crude Oil - General Stock Market Links - 12th Oct 16
Samsung's Galaxy Battery Just The Tip Of The Iceberg - 12th Oct 16
Hillary: Deceit, Debt, Delusions (Part Two) - 12th Oct 16
Gold and Silver Metals Show Strength Relative to the USD Index - 12th Oct 16
Announcing Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 12th Oct 16
Confirmed Stock Market Sell Signals - 11th Oct 16
Hillary Deceit, Debt, Delusions - 11th Oct 16
Trump Support Crashes to New Low of 6.4 on Betfair Odds Betting Market - 11th Oct 16
The World Is Turning Dangerously Insular - 11th Oct 16
An American Tragedy: Trump Won Big - 11th Oct 16

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

LEARN to Trade

Crude Oil Price Volatility on the Way?

Commodities / Crude Oil Oct 10, 2013 - 04:57 PM GMT

By: Submissions


Tom Therramus writes: In a previous articles published in 2010 and 2011 , I discussed predictive relationships that appear to occur between large, rapid swings in oil price and recessions, stock market crashes and shifts in political polls. Given the economic disruptions that nearly always happen in the aftermath of oil shocks, it seems important to understand what is behind the timing of transient instabilities in the oil markets.

Last time I examined whether repetitive patterns could be found in the ebb and flow of oil price changeability (volatility) between 2000 and 2010. To do this, rolling standard deviations were calculated through a 120-month series of monthly oil prices starting from January 2000. A mathematical tool called Fast Fourier Transform (FFT) was then used to scan for repeating patterns in this rolling 10-year sequence.

What I found was that from the mid 2000s, changes in oil price showed evidence of a multi-year oscillation. This pattern was marked by a single dominant frequency that peaked at 2.8 years (~32 months). Putting this in an alternate way, during the first decade of the new millennium, volatility in the price of oil appeared to spike every two to three years.

In a confirmation of the potential emergence of a long-term rhythmic pattern, oil price variance spiked again in April 2011, precisely 32 months after the last major round of volatility had topped out in July 2008.

It is coming up on 30 months since the now largely forgotten market turbulence of mid-2011. If oil price volatility is oscillating in a repeating two to three year cycle, then can we expect to see another wave of instability in oil prices occur in late in 2013 or early 2014

Oil price has begun showing signs of an uptick in twitchiness recently - albeit that the increase in volatility is as yet modest. As I write this piece in October 2013, a crisis triggered by the use of chemical weapons in Syria, is the cause du-jour that is being tagged for oil ramping-up from the mid-90s to up over 110 dollars a barrel - an explanation that I find doubtful, but this is by-the-by.

It remains to be seen whether the oscillatory signal described in my 2011 article continues into the future. However, I have used oil price data that has accumulated since my earlier publication to extend the analysis - the results of which will now be shared with readers.

To improve resolution of changes in oil price volatility over the last 10 or so years, I used a slightly different approach. Instead of scanning through MONTHLY averages, a rolling 3-day standard deviation was calculated through DAILY prices of West Texas Intermediate (WTI) crude oil from 5 January 2004 to 30 July 2013.

The time series for the daily price of WTI oil (red line) and its corresponding rolling 3-day standard deviation (blue line) for the period are shown in Figure 1. For those who follow oil prices, the red line on the plot is all too familiar - distinguished as it is by the scary, vertiginous peak of 2008.

Figure 1 - Oil Price Volatility

To scan for evidence of repeating signatures in the serrate blue line that traces oil price volatility on the figure, I again used fast Fourier transform. The results of this analysis is summarized in Figure 2 - and from this plot it can be seen that during the last 8 years price volatility has exhibited a dominant periodicity of ~2.9 years (33 months).

Figure 2 - Oil Price Spectral Diagram

This 2.9-year estimate for the period between spikes, based on daily oil prices, is in agreement with my 2011 , estimate - calculated as it was monthly prices. Thus, the updated analysis accords with the previous finding - namely, that between 2004 and 2013 variance in the price of oil demonstrated a tendency to spike at a frequency of every two to three years.

Readers of my previous articles will know that I suspect that the "rinse and repeat" volatility cycle suggested by my analyses results from a global plateau in oil production being reached in 2005. I favor the hypothesis that an autonomous (e.g., like a heart beat) oscillation in price volatility has emerged as a result of imbalances between supply and demand at this production plateau. Interestingly, similar oscillatory phenomena have been noted as an emergent property of predator-prey relationships in nature.

A major new development in the hunt for oil is the rise of "Fracking" - an extraction technology that has pushed the US to the forefront as a major producer. It will be interesting to watch and see whether "Fracking" alters the dynamics of oil price changeability in the next few years.

If a new spike in price variance does occur in coming months, then it would pay to keep an eye on stocks, given the tendency of the market to react to oil shocks. Also, if a new wave of instability in the oil market sweeps in, then the 2014 congressional elections could have surprises in store. Stay tuned to this frequency.

By Tom Therramus

This article was written by which provides free information on crude oil.

© 2013 Copyright All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2016 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife