On January 18, 2018, US crude oil’s implied volatility was 17.9%, almost on par with its 15-day average.
Oil (UCO) (USO) (OIIL) prices and implied volatility often have an inverse relationship. For example in the trailing week, US crude oil futures rose 0.3% and implied volatility fell 1.6%. Moreover, this trend has been consistent since oil’s 12-year low in February 2016. The implied volatility fell 76.2% since that month, while US crude oil prices rose 144% over this time.
There is a 68% chance that US crude oil futures could settle between $62.36 and $65.54 per barrel between now and January 25, 2018. This forecast assumes prices are normally distributed and it is based on oil’s implied volatility of 17.9%.
On January 18, 2018, US crude oil prices were less than 1% below their three-year high. At the $65 level, not only would crude oil prices be higher than they’ve been in over three years, higher US crude oil prices could positively impact the energy components of the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). The same trend could be visible in energy ETFs like the Fidelity MSCI Energy ETF (FENY) and others we discussed in part three.