Is $70 Possible for US Crude Oil Next Week?


Aug. 18 2020, Updated 6:21 a.m. ET

Oil’s implied volatility

On August 23, 2018, US crude oil’s implied volatility was 22%, ~6% below its 15-day average. The inverse relationship between oil prices and oil’s implied volatility is illustrated in the following graph. Since reaching a 12-year low in February 2016, US crude oil active futures have risen 158.8%. Crude oil’s implied volatility has fallen ~70.7% since February 11, 2016.

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Price forecast

Between August 24 and August 31, 2018, US crude oil futures could close between $65.92 and $69.74 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 22% and assumes a normal distribution of prices.

On August 23, 2018, US crude oil October futures were almost unchanged and settled at $67.83 per barrel.

Bullish factors, which we discussed in part one of this series, could increase US crude oil prices’ rise. If US crude oil prices rise to the higher limit of our price forecast, it would be the highest closing level for active US crude oil futures since July 30, 2018. The rise would be a positive development for equity indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). In the previous part, we analyzed oil’s relationship with these equity indexes.

WTI crude oil futures’ 50-day moving average is $68.93, which is almost $0.80 below the higher limit of our price forecast for next week. The level would be an important resistance zone for US crude oil.

Impact on ETFs and stocks

These price limits could be important for oil-tracking ETFs like the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12-Month Oil ETF (USL). In the trailing week, US crude oil October futures rose 4.5%, UCO rose 9%, and USL rose 4.3%.

During this period, Oasis Petroleum (OAS), Denbury Resources (DNR), and California Resources (CRC) rose 9.3%, 12.9%, and 18.1%, respectively, and outperformed other oil-weighted upstream stocks.


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