Extreme oil prices VS extreme volatility, which one will collapse first?

Questioning AI · Supply Gap Larger Than Geopolitical Premium, Where Does the Upward Pressure on Oil Prices Come From?

Oil prices are leading global market pricing at an unprecedented speed in recent years, with implied volatility soaring and causing market confusion. This intertwining of supply shocks and volatility crises is spreading to equities and interest rate markets. Investors are currently facing the question: “If short squeezes accelerate, can the market withstand it?”

The daily increase in oil prices has reached the largest recent sideways trading range, while at the same time, the short end of Brent crude options volatility curve continues to be heavily bought, with the market’s implied daily volatility approaching 6%—a level often associated with functional disorder.

JPMorgan analyst Kaneva pointed out that there is currently an approximate “missing supply” of 14.3 million barrels per day, while the market price of about $107 per barrel only implicitly reflects around 11 million barrels per day of supply disruptions, indicating that prices could still further upwardly revise.

Meanwhile, Bank of America’s bubble risk indicator has pushed Brent crude to the highest risk level, a signal that previously accurately captured the cyclical peaks of silver, gold, and the Korean KOSPI index.

The short-term divergence between oil prices and the S&P 500 (inverse) has expanded to extreme levels. If this divergence is repaired in a liquidity-sparse environment during the Easter holiday, market volatility could again intensify.

Supply Gap Larger Than Geopolitical Premium: Oil Prices Still Facing Upward Pressure

According to Kaneva’s analysis, the current market faces an approximate “missing supply” of 14.3 million barrels per day. The current market price of $107 per barrel implicitly includes about $40 of geopolitical premium, corresponding to roughly 11 million barrels per day of pricing disruptions.

This gap means that if the market ultimately converges toward the full 14.3 million barrels per day deficit, there is still room for further upward movement in oil prices.

From a technical perspective, oil prices have precisely rebounded at the intersection of a steep trendline and the 21-day moving average, forming the largest single bullish candlestick during consolidation. If the close can slightly move higher, the risk of further short squeeze will significantly increase.

It is worth noting that the RSI has already pulled back during consolidation, leaving ample room for further overbought conditions in the short term, and a clear top signal has not yet been issued from a technical standpoint.

Volatility Disorder: What Scenario Is the Market Pricing In?

The Brent crude volatility curve is currently under extreme pressure, with the short end being strongly bought, and the 25 delta call skew remaining high, while the 25 delta put skew is relatively subdued.

This combination clearly outlines the market’s directional preference: bullish investors are actively paying for upside tail risks, while demand for downside protection is noticeably cold.

When implied daily volatility reaches about 6%, systemic chaos is a normal reaction rather than an anomaly. Volatility shocks will not be digested overnight, and this disorderly state has already caused noticeable unease among investors.

The interest rate market has also not escaped this influence. Against the backdrop of such strong oil prices, yield pressures have not eased—in fact, they have persisted. This linkage further compresses the breathing space for risk assets.

Bubble Signals Sound: When Will the Reversal Come, and How Large Will It Be?

Bank of America’s bubble risk indicator currently ranks Brent crude as the highest-risk asset, a signal that previously marked the cyclical peaks of silver, gold, and the Korean KOSPI index.

Meanwhile, the short-term divergence between oil prices and the S&P 500 (inverse) has expanded to extreme levels. The market faces two possibilities:

First, the influence of oil prices as a core driver of stocks is weakening; second, this divergence will close sharply in a liquidity-sparse environment during the Easter holiday. The latter scenario implies greater immediate risk for equity investors.

This is no longer just about oil prices. When volatility is under extreme pressure, it forces all other assets to reprice—often violently.