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Memo to Energy Investors—Watch for Rising Crude Oil Production

PART:
1 2 3 4 5
Part 4
Memo to Energy Investors—Watch for Rising Crude Oil Production PART 4 OF 5

US Crude Oil: A Look at How Far Prices Can Move Next Week

WTI crude oil’s implied volatility

On July 13, 2017, US crude oil’s implied volatility fell 3.1% compared to its 15-day moving average, settling at 28.2%.

US crude oil futures and implied volatility frequently moved inversely in the recent past. In the week ended July 13, 2017, US crude oil (DBO) (USL) active futures rose 1.2%, while its implied volatility fell 3.5%. US crude oil’s implied volatility reached 78.4% on February 12, 2016, the highest since 2013. 

US Crude Oil: A Look at How Far Prices Can Move Next Week

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On February 11, 2016, US crude oil active futures settled at their 12-year low. Since then, oil’s implied volatility fell 64.0%, while oil prices have gained 56.5%. This inverse relationship can be seen in the chart above.

Crude oil prices

There is a 68% chance that US crude oil active futures could close between $44.28 and $47.88 per barrel in the next seven days. This price range is derived assuming normally distributed prices, with a standard deviation of 1 and crude oil’s implied volatility of 28.2%.

US crude oil active futures closed at $46.08 per barrel on July 13, 2017. The announcement of the US crude oil rig count could be the key to US crude oil futures. If the oil rig count rises, then the $44 level could be tested. 

Moreover, rising oil production around the world could cap oil’s movement above the $47 mark. We discussed crude oil production in Part 1 of this series.

These key price levels for crude oil should also be important for energy ETFs such as the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE) in the coming week.

The broader equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) could take some cues from these important price levels for crude oil because of their exposure to energy stocks. We explored this topic in Part 2 of this series.

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