On January 4, 2018, US crude oil’s implied volatility was 17.9%—2.9% above its 15-day average.
Usually, oil (UCO) prices and the implied volatility are inversely related. In the last 30 trading sessions, US crude oil prices rose 9.1% and the implied volatility fell 21.5%. On December 22, 2017, the implied volatility fell to 15.5%—the lowest since September 2, 2014, or the lowest in more than three years. On January 4, 2018, US crude oil futures rose to the highest closing level in the last three years.
At a probability of 68%, US crude oil futures’ closing price could be between $60.47 and $63.55 per barrel until January 11, 2018. The model is based on the assumption that prices are normally distributed. The price range is based on oil’s current implied volatility of 17.9%.
On January 4, 2018, US crude oil futures were at $62.01 per barrel—a three-year high. However, investors expecting a big move in the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) based on higher oil prices should stay cautious. Similarly, investors in ETFs like the Fidelity MSCI Energy ETF (FENY) should stay cautious.