US crude oil’s implied volatility
Crude oil’s implied volatility rose to 47.9% on November 11, 2016. Since then, its implied volatility has fallen 35.1%. During that period, US crude oil active futures contracts rose 5.8%. From March 3 to March 10, 2017, crude oil’s implied volatility rose 37.8%. West Texas Intermediate crude oil fell 9.1% during the week.
As you can see in the above graph, crude oil prices and implied volatility have been broadly inversely related. When prices rise steadily, implied volatility tends to fall. On the other hand, sharp falls in prices caused implied volatility to spike. In Part 1 of this series, we looked at the factors that impacted crude oil prices in the previous week.
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 31.1%, US crude oil futures for April delivery could close between $46.4 and $50.58 per barrel in the next seven days. The probability of crude oil prices closing in this price range is 68.0%. So, WTI crude oil prices might find it difficult to move above the $50 level this week. On March 10, 2017, WTI crude oil closed at $48.49 per barrel.
Crude oil–related sentiment can impact ETFs such as the United States Brent Oil ETF (BNO), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the Fidelity MSCI Energy ETF (FENY), the ProShares Ultra Bloomberg Crude Oil (UCO), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), 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.