$70 Looks Difficult for US Crude Oil Next Week

Oil’s implied volatility

On September 6, US crude oil’s implied volatility was 24%, which is ~3.9% above 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 158.6%. Crude oil’s implied volatility has fallen ~68.1% since February 11, 2016.

$70 Looks Difficult for US Crude Oil Next Week

Price forecast

Between September 7 and September 14, 2018, US crude oil futures could close between $65.68 and $69.86 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 24% and assumes a normal distribution of prices.

On September 6, US crude oil October futures fell 1.4% and settled at $67.77 per barrel. If US crude oil reaches the upper limit of our price forecast, prices will still be below the psychologically important level of $70.

Bullish factors, which we discussed in part one, might reverse the US crude oil price decline. Any rise in oil could be a positive development for equity indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). The sentiments in oil and equity markets are often interrelated. WTI crude oil futures’ 20-day moving average of $67.79 could be an important support 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 fell 3.5%, UCO fell 5.6%, and USL fell 2.4%.

During this period, California Resources (CRC), Denbury Resources (DNR), and WPX Energy (WPX) fell 8.1%, 8.4%, and 9.3%, respectively, and underperformed other oil-weighted upstream stocks.