On July 20, 2017, US crude oil futures’ implied volatility was 27.2%, which was 4.2% below its 15-day moving average.
Crude oil (USO)(OIIL)(DBO) and its implied volatility generally move in opposite directions. For example, on February 23, 2017, US crude oil closed at its 2017 highest price. On the same day, implied volatility hit 23.9%—a relatively low level. Since then, oil prices have fallen 13.8% while implied volatility rose by the same percentage. In the trailing week also, US crude oil futures rose 1.4% and implied volatility fell 3.5%.
US crude oil active futures could settle between $45.09 and $48.75 per barrel in the next seven days. The price range was calculated assuming normally distributed prices and using oil’s implied volatility of 27.2%. Because the standard deviation was set to 1 during the calculation, there’s a 68% chance prices will close in this range in the coming week.
So, if the oil rig count falls in the week ended July 21, 2017, oil prices could easily break above the $48 mark in the next few trading sessions. Falling rigs could be a positive development for energy ETFs like the Fidelity MSCI Energy ETF (FENY) and the Energy Select Sector SPDR ETF (XLE).
Falling rigs would help boost crude oil prices and, therefore, boost broader market indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA), as we discussed in Part 2 of this series.