Where US Crude Oil Might Head Next Week



Oil’s implied volatility

On January 10, US crude oil’s implied volatility was 40%, which was ~25% below its 15-day average. Usually, lower implied volatility might support oil prices. You can see the inverse relationship between oil prices and oil’s implied volatility in the following chart. Since reaching a 12-year low in February 2016, US crude oil active futures have risen ~100.6%. Crude oil’s implied volatility has fallen ~46.8% since February 11, 2016.

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Price forecast

On January 11–18, US crude oil futures should close between $49.89 and $55.29 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 40% and assumes a normal distribution of prices.

On January 10, US crude oil February futures rose 0.4% and settled at $52.59 per barrel. The factors that we discussed in Part 1 might pull US crude oil close to this level.

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 the 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 February futures rose 11.7%, UCO rose 23.5%, and USL rose 10.2%.


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