Where Are Crude Oil Prices Heading?



US crude oil’s implied volatility

Crude oil’s (USO) (OIIL) (USL) (SCO) implied volatility was 26.9% on February 3, 2017—6.4% 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 43.9%. During that period, US crude oil active futures contracts have risen 17.5%. From January 27 to February 3, 2017, crude oil’s implied volatility fell 5.1%. West Texas Intermediate crude oil rose 1.2%.

As you can see in the graph above, crude oil prices and implied volatility are, broadly, inversely related. When prices rise steadily, implied volatility tends to fall. On the other hand, sharp falls in prices have seen implied volatility spike.

In Part 1 of this series, we looked at the factors that impacted crude oil prices in the previous week.

Article continues below advertisement

Crude oil price forecast

On the basis of a normally distributed bell curve, applying a standard deviation of 1.0 and an implied volatility of 26.9%, US crude oil March delivery futures could close in the range of $51.82–$55.84 per barrel in the next seven days. The probability of crude oil prices within this price range is 68.0%.

Energy ETFs

Crude oil sentiment impacts ETFs such as the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), and the ProShares UltraShort Bloomberg Crude Oil (SCO).

In the next part of this series, we’ll take a look at natural gas’s implied volatility and its price forecast.


More From Market Realist