Dayrate Volatility

The science fiction book series Dune centers on interplanetary politics over control of the Spice, which allows users to “fold time” and travel to different galaxies in ways that would be impossible otherwise. Spice is mined only on the planet Arrakis, also called Dune, where a cartel tries to control production and distribution of the Spice. Numerous sci-fi fans and critics have referenced the similarities between the Spice cartel and ARAMCO, the oil cartel controlled by Saudi Arabia.

The Dayrate is one the metrics used to calculate oil price trends, since increased demand will increase the dayrates for the finite number of available drilling rigs and softening prices will result in lower dayrates to lock in contracts to keep as many rigs as possible in use. While supply and demand are the ultimate market determinators, profit margins can be manipulated by ARAMCO cutting supply, since dayrates are fixed for the duration of their contracts, as are longer term storage and transportation costs.

But dayrates drink down gallons of volatility. A bomb goes off in the Middle East and blammo, a big spike in oil prices because the presumption among oil buyers will be that demand remains flat while supply gets suddenly constrained. The higher risk proffers new contract dayrate increases. Weather and ocean turbulence increase offshore rig dayrates as well. As you'd guess, MonthRate, YearRate and well, DecadeRate volatiliies are usually, um, less.