Oil’s implied volatility
On February 28, US crude oil’s implied volatility was 29.8%, which was almost on par with 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 ~118.3%. Crude oil’s implied volatility has fallen ~60.4% since February 11, 2016.
On March 1–8, US crude oil futures should close between $55.03 and $59.41 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 29.8% and assumes a normal distribution of prices. On February 28, US crude oil April futures rose 0.5% and settled at $57.22 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 oil and equity markets are often related. In the previous part of this series, we analyzed the relationship between oil and the equity market.