Over the last four weeks, economic data, policy actions, and oil market balances have generally been consistent with market expectations. The period began with hopes of stimuli from governments and central banks around the world that improved expectations for economic growth and increased oil prices. More recently, the European Central Bank announced details for a new bond-buying program. In addition, the Chinese government formalized plans for $157 billion in infrastructure-improvement spending, and as many analysts had expected, the U.S. Federal Reserve System announced a new round of treasury bond and mortgage-backed security purchases, otherwise known as quantitative easing, at the conclusion of the September 12-13 meeting of its Federal Open Market Committee. After moving higher on improved expectations for economic growth through mid-August, crude oil prices settled into a narrow trading range. That trading range has persisted, causing the decline in historical volatility during the second half of August and the first half of September, with historical volatility reaching a 2012 low on September 13.
While historical volatility has declined sharply, implied volatility has fallen only slightly and more gradually on perceptions that geopolitical, technical, and economic risks to future market conditions are largely unchanged. Uncertainty about Iran's nuclear ambitions and surprise production outages from outside of the Organization of the Petroleum Exporting Countries (OPEC) are sources of potential upside price risk. A slowdown in China's economic growth and fears over the stability of the euro, even with the recent government and central bank interventions, pose potential downside risks to future crude oil prices. As a result, the market's expectation about future crude oil price volatility has remained relatively high despite the recent downward trend in historical volatility.