US crude oil’s volatility
On November 22, 2017, US crude oil’s implied volatility was 23%—approximately 3% below its 15-day average.
US crude oil (DBO) (OIIL) and its implied volatility often have an inverse relationship, as you can see in the above graph.
On February 11, 2016, when US crude oil futures were at their 12-year low, the implied volatility was 75.2%. Between February 11, 2016, and November 22, 2017, US crude oil futures have recovered more than two-fold, while the implied volatility fell 69.4%.
On November 24–30, 2017, US crude oil active futures could close between $56.17 and $59.87 per barrel with a probability 68%. For this, we assume that prices are normally distributed. We also considered oil’s implied volatility of 23% and a standard deviation of one.
On November 22, 2017, US crude oil active futures settled at $58.02 per barrel—the highest closing price in 2017. Equity indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) could take cues from oil prices, as we discussed previously in this series. Energy ETFs like the Fidelity MSCI Energy ETF (FENY) and other ETFs discussed in the previous part could have a direct relationship with oil prices.