Will US Crude Oil Hit $40 Next Week?

On June 22, 2017, WTI crude oil (USO) (OIIL) active futures’ implied volatility was 29.7%, up 1.7% compared to its 15-day average.

Usually, implied volatility and crude oil futures move in opposite directions. For example, in the week ended June 22, 2017, US crude oil’s implied volatility rose 6.4%, while US crude oil (DBO) (USL) August futures plunged 4.3%. Refer to part one of this series to know more about the factors that jolted crude oil prices between June 15 and June 22, 2017. The above graph outlines this inverse relationship.

In another such instance, on February 11, 2016, US crude oil active futures plunged to their 12-year low closing price. The next day, on February 12, 2017, US crude oil’s implied volatility spiked to 78.4%. From February 12, 2016, to date US crude oil active futures have surged 45.2%, while the implied volatility fell 62.1%.

Based on a normally distributed bell curve and implied volatility of 29.7%, US crude oil August futures could close between $40.98 and $44.50 per barrel in the next seven days. The standard deviation for the calculation was set at 1.0.  So there is a 68% likelihood that prices will settle in this range.

On June 22, 2017, US crude oil August futures made a low of $42.26 per barrel and settled at $42.74 per barrel. If crude oil’s free fall continues, then it could test the psychological level of $40. US crude oil at $40 per barrel could be a concern for energy ETFs like the ProShares Ultra Oil & Gas ETF (DIG) and the Fidelity MSCI Energy ETF (FENY). We already discussed the impact of crude oil on the energy ETFs in part three of this series.

Apart from the energy ETFs, WTI crude oil at $40 could drag equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA). We discussed the energy exposure of these equity indexes in part two of this series.