Oil’s implied volatility

On February 7, US crude oil’s implied volatility was 31.4%, which was ~10% 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 ~100.8%. Crude oil’s implied volatility has fallen ~58.2% since February 11, 2016.

Where US Crude Oil Could Be Next Week

Price forecast

On February 8–15, US crude oil futures should close between $50.52 and $54.76 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 31.4% and assumes a normal distribution of prices. On February 7, US crude oil March futures fell 2.5% and settled at $52.64 per barrel. The factors that we discussed in Part 1 might push US crude oil near the upper limit of our price forecast.

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 March futures fell 2.1%, UCO fell 5.1%, and USL fell 0.5%.

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