Implied volatility and prices
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 44.4%. During that period, US crude oil futures contracts rose 7.7%. Between April 21 and April 28, 2017, crude oil’s implied volatility fell 1.7%. However, WTI (West Texas Intermediate) crude oil June futures fell 0.60% 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 26.6%, US crude oil futures for June delivery could close between $47.51 and $51.15 per barrel in the next seven days. The probability of crude oil prices closing in this price range is 68.0%. On April 28, 2017, WTI crude oil June futures closed at $49.33 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 potential price range for the week ahead.