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Implied Volatility Suggests Oil Could Reach This Price Next Week

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Oil’s implied volatility

On June 28, US crude oil’s implied volatility was 24.3%, 0.4% below its 15-day moving average. The inverse relationship between oil prices and oil’s implied volatility is illustrated in the graph below. Since reaching a 12-year low in February 2016, US crude oil active futures have risen 180.2%. Crude oil’s implied volatility fell ~66.7% between February 11, 2016, and June 28.

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Price forecast

Leading up to July 6, US crude oil futures could close between $71.16 and $75.74 per barrel. This forecast is based on crude oil’s implied volatility of 24.3% and assuming a normal distribution of prices and 68% probability.

On June 28, US crude oil August futures rose 0.9% and settled at ~$73.45 per barrel—the highest closing level for active US crude oil futures since November 26, 2014. Given the bullish momentum seen in the last few trading sessions, the week leading up to July 6 could see US crude oil prices near the $76 mark. By reaching this level, US crude oil would reach its highest closing price since November 21, 2014.

Effects on ETFs and stocks

The price limits could be important for oil-tracking ETFs such as the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12 Month Oil ETF (USL). Between June 21 and June 28, US crude oil August futures rose 12.1%, while UCO and USL rose 21.1% and 7.9%, respectively. California Resources (CRC), Denbury Resources (DNR), and Concho Resources (CXO) rose 15.5%, 13.4%, and 10.4%, respectively, outperforming other companies on our list of oil-weighted stocks.

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