Oil price volatility hits extreme levels as S&P 500 tracks crude tick by tick

• Brent crude has risen 45% since the conflict started, exceeding the 30% median surge seen in previous major oil shocks including the 1990 Gulf War and 2003 Iraq War
• Daily oil price swings hit over 40% at the start of the week before moderating to 6%, with one-month implied volatility climbing above 100%
• Investor sentiment has turned sharply negative with equity positioning below neutral, high-yield bond funds seeing largest outflows in 11 months, and bearish sentiment at the 92nd percentile

Summary

Key Development: Oil price volatility has surged to extreme levels not seen since the COVID-19 pandemic following US and Israeli military strikes on Iran, with significant spillover effects across equity and credit markets.

Critical Data Points:

• Implied volatility in oil options exceeded 100% on a one-month basis
• Brent crude has risen over 45% since conflict began, surpassing the 30% median increase from previous oil shocks (1990 Gulf War, 2003 Iraq War, Russia-Ukraine invasion)
• Oil prices are approximately 56% above medium-term fair value, according to Deutsche Bank
• Daily oil price swings reached 40% early in the week before moderating to 6%
• The S&P 500 shows a 96% inverse correlation with oil since March 4, down roughly 5% during this period

Market Implications:

Investor positioning has deteriorated sharply, with equity positioning falling below neutral and discretionary investors at four-month lows. The AAII bull-bear sentiment spread hit its lowest level in four months, with bearish responses at the 92nd percentile.

Credit markets are experiencing stress: high-yield bond funds recorded their largest outflows in 11 months, while financial sector funds saw record redemptions. Investors are rotating into government bonds as a safe haven.

Outlook:

Despite current turbulence, Deutsche Bank maintains its year-end S&P 500 target of 8,000. The bank notes sustained volatility at current levels would require daily oil price movements of 6-7% to persist.