The crude oil and gold markets have typically provided investors and corporates with interesting clues to the state of financial, economic and political risk. One of the surprising features of commodity markets and specifically crude oil vol is that unlike equity, rates and FX vol, Brent vol has fallen to levels significantly below those that prevailed before the onset of the financial crisis, (Figure 1). Moreover, the term structure of Brent implied vol is flat across almost the entire vol surface. This is in stark contrast to the term structure of implied vol in other asset classes, which is upward sloping. In our view, this would tend to imply that while risk aversion exists in equity, rates and FX vol markets, a significant degree of complacency prevails in the crude oil market. This would seem at odds with the heightening level of geopolitical risk that exists currently in global oil markets. This, therefore, gives rise to opportunities in commodities, which are perhaps not as compelling in other asset classes. First, investors can establish long vol positions on Brent crude oil at very attractive levels as a tail risk hedge and second, hedgers can take advantage of the record low levels of volatility to buy cheap options to hedge their exposures.
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