On December 21, 2017, US crude oil futures’ implied volatility was 15.6%, the lowest seen since September 2, 2014. In the last trading session, the implied volatility was 17.5% below its 15-day average.
Supply-glut concerns dragged US crude oil (UCO) (DBO) (OIIL) futures to a 12-year low on February 11, 2016, with an implied volatility of 75.2%. From this multiyear low, oil prices rose more than 100%, while their implied volatility fell 79.3%. This inverse relationship between crude oil and its implied volatility is shown in the chart above.
Oil prices in the next week
Assuming that prices are normally distributed with an implied volatility of 15.6%, US crude oil active futures could close between $57.10 and $59.62 per barrel between December 22 and December 28, 2017. For this price range, the probability is 68% with a standard deviation of one.
On December 21, 2017, US crude oil February futures closed at $58.36 per barrel. If US crude oil moves towards the $60 level, it could benefit the S&P 500 (SPY) and Dow Jones Industrial Average (DIA) because these indexes have exposure to energy stocks. The Fidelity MSCI Energy ETF (FENY) and the other energy ETFs discussed in Part 3 could also gain with oil’s rise.