Oil price volatility has reached levels not seen since the pandemic as markets grapple with the fallout from US and Israeli strikes on Iran, with equity investors increasingly caught in the slipstream.
Implied volatility in oil options has climbed above 100% on a one-month basis, surpassing peaks reached during the Russia-Ukraine war in 2022 and approaching levels last seen during the pandemic lockdown panic, according to Deutsche Bank strategists.
Brent crude has risen more than 45% since the start of the conflict, exceeding the median 30% surge seen in previous large oil shocks, including the 1990 Gulf War, the 2003 Iraq War and the Russian invasion of Ukraine.
Deutsche Bank estimates oil prices are now 56% above their medium-term fair value, a level of overvaluation exceeded only briefly during the peak of the Russia-Ukraine shock.
The bank's strategists note that daily price swings in oil soared to more than 40% at the start of the week before subsiding to a still elevated 6%, and that sustained volatility of this magnitude would require daily moves of 6-7% to persist.
The S&P 500 has tracked oil prices almost in lockstep since the attacks began, with the inverse correlation between the two markets running at 96% since 4 March. The US benchmark is down around 5% in response to the shock, broadly in line with the 5-6% drawdowns seen in previous large oil-related geopolitical events.
Beneath the surface, investor positioning has deteriorated sharply. Overall equity positioning has slipped below neutral, with discretionary investors now at a four-month low. Investor sentiment as measured by the American Association of Individual Investors (AAII) bull-bear spread has dropped to its lowest level in four months, with bearish responses hitting the 92nd percentile.
Credit markets are also showing stress, with high-yield bond funds recording their biggest outflows in 11 months, while financials sector funds saw record outflows. Government bond funds attracted fresh inflows as investors sought safety.
Deutsche Bank maintains a year-end S&P 500 target of 8,000, with 2026 earnings per share forecast at $320.