Implied volatility and prices

Crude oil’s (USO)(DBO)(USL)(OIIL) implied volatility was 21.8% on April 13, 2017—13.1% below its 15-day average.

How Far Can WTI Crude Oil Go this 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 cause 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’s implied volatility rose to 47.9% on November 11, 2016. Since then, its implied volatility has fallen 54.5%. During that period, US crude oil active futures contracts rose 16.1%. Between April 7 and 13, 2017, crude oil’s implied volatility fell 10.8%. WTI (West Texas Intermediate) crude oil May futures rose 1.8% during the 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 21.8%, US crude oil futures for May delivery could close between $51.57 and $54.79 per barrel in the next seven days. The probability of crude oil prices closing in this price range is 68.0%. On April 13, 2017, WTI crude oil closed at $53.18 per barrel.

Energy ETFs

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 potential price range for the week ahead.

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