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Implied Volatility: Where Will Crude Oil and Natural Gas Be in One Week?

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Crude oil’s implied volatility

Crude oil’s (USO) (OIIL) (USL) (SCO) implied volatility was 28.6% on January 20, 2017. Its 15-day average implied volatility is now 29.2%. Crude oil’s current implied volatility is 1.9% below its 15-day average.

Crude oil’s implied volatility rose to 47.9% on November 11, 2016. Since then, its implied volatility has fallen 40.2%. During this period, US crude oil active futures contracts have risen 14.4%. From January 13 to January 20, crude oil’s implied volatility fell 0.8%. During this period, West Texas Intermediate crude oil rose 0.1%.

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On the basis of a normally distributed bell curve, applying a standard deviation of one and an implied volatility of 28.6%, US crude oil March delivery futures could close in the price range of $51.11 to $55.33 per barrel in the next seven days. The probability of getting crude oil prices in this price range is 68%.

What about natural gas?

Natural gas’s (UNG) (DGAZ) (BOIL) (FCG) (UGAZ) (GASL) implied volatility was 45.1% on January 20, 2017. Its 15-day average implied volatility is 45.5%. Its current implied volatility is 0.8% below its 15-day average.

Natural gas’s implied volatility rose to 56.2% on November 14, 2016. Since then, it has fallen 19.8%. Since November 14, natural gas prices have risen 16.5%. Last week, natural gas futures fell 6.3%. Its implied volatility fell 1% during the week, and prices fell due to higher temperature forecasts that could impact gas’s winter heating demand.

Natural gas rigs rose by 6, reaching 142 in the week ended on January 20, 2017. The natural gas rig count is now at a one-year high, and rising natural gas rigs could be a concern for natural gas prices.

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On the basis of a normally distributed bell curve, applying a standard deviation of one, and an implied volatility of 45.1%, natural gas active futures could close in the price range of $3.00–$3.40 per MMBtu (million British thermal units) in the next seven days. The probability of getting crude oil prices in this price range over the next week is 68%.

Energy ETFs

The previous analysis could be important for natural gas-tracking ETFs such as the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), the Direxion Daily Natural Gas Related Bear 3X ETF (GASX), the United States Natural Gas ETF (UNG), and the Direxion Daily Natural Gas Related Bull 3X ETF (GASL).

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