Key Price Points for US Crude Oil after OPEC’s Decision



Oil’s implied volatility

On December 6, US crude oil’s implied volatility was 48.1%, which was 1.5% above its 15-day average. You can see the inverse relationship between oil prices and oil’s implied volatility is in the following graph. Since reaching a 12-year low in February 2016, US crude oil active futures have risen 96.5%. Crude oil’s implied volatility has fallen 36% since February 11, 2016.

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Price forecast

On December 7–14, US crude oil futures should close between $48.31 and $54.67 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 48.1% and assumes a normal distribution of prices. With OPEC’s decision on the production cut, which we discussed in Part 1, US crude oil might break this price range.

On December 6, US crude oil January futures fell 2.6% and settled at $51.49 per barrel. If US crude oil reaches the lower limit of our price forecast, it would be the lowest closing level for active US crude oil futures in 2018.

Any changes 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 related. In the previous part of this series, we analyzed the relationship between oil and the equity market.

Impact on ETFs

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 January futures rose 0.1%, UCO rose 1.1%, and USL rose 1.6%.


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