Oil’s implied volatility
On August 9, US crude oil’s implied volatility was 23.1%, which was ~1.3% below its 15-day 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 154.9%. Crude oil’s implied volatility has fallen ~69.3% since February 11, 2016.
Between today and August 17, US crude oil futures could close between $64.83 and $68.79 per barrel 68.0% of the time. This forecast is based on crude oil’s implied volatility of 23.1% and assuming a normal distribution of prices.
On August 9, September US crude oil futures fell 0.2% and settled at $66.81 per barrel. This is the lowest closing level for active US crude oil futures since June 21. Bullish factors, which we discussed in the first part of this series, could limit US crude oil prices’ decline. WTI crude oil futures’ 100-day moving average is $68.20, which is almost $0.50 below the upper limit of our price forecast for the next week.
The effect on ETFs and stocks
These 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). In the trailing week, the US crude oil September futures fell 3.1%, UCO fell 6.5%, and USL fell 1.8%.
During this period, Occidental Petroleum Corporation (OXY), WPX Energy (WPX), and Carrizo Oil & Gas (CRZO) fell 5.4%, 6.3%, and 12.0%, respectively, underperforming other oil-weighted upstream stocks.