Oil Prices Remain Volatile But The Lower Band Is Near

Oil market volatility has alarmed a lot of people. Just a month ago, oil prices were on the verge of heading back to $125, and today, we are barely holding onto $96. For those of you trying to explain why the volatility is so insane, you must understand that the actual physical fundamentals have not changed much in the oil market. Instead, there are few external variables that have altered the market's perception of the oil market. We had:

1. The Fed hiked rates by 75 basis points leading participants to think we are headed for a recession or that inflation will be fended off.

2. The US implied oil demand surprising to the downside suggesting to the oil market that $170 to $180 (crude + refining margin) is the peak.

In my opinion, the second variable is the most important and with China risking additional lockdowns again, the oil market was asymmetrically set up to the downside. 

Any time you look at the markets, you have to put yourself in the shoes of a trader. When WTI was at $120, what was your potential upside versus your potential downside? If demand was disappointing with prices where they were, what was the path forward going to look like?

That's why we had written at the time that the oil market will want to test where the lower bound is. Now fast-forwarding to today, crack spreads have meaningfully dropped.