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Forecasting US Crude Oil Prices

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Oil’s implied volatility

On May 9, US crude oil’s implied volatility was 28%, which is 12.9% above its 15-day average. Usually, lower implied volatility supports oil prices. The following chart shows the inverse relationship between oil prices and oil’s implied volatility. Since reaching a 12-year low in February 2016, US crude oil active futures have risen ~135.4%. Crude oil’s implied volatility has fallen ~62.7% since February 11, 2016.

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Price forecast

Between May 10 and May 17, US crude oil futures should close between $59.68 and $63.72 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 28% and assumes a normal distribution of prices. On May 9, US crude oil June futures fell 0.7% and settled at $61.7 per barrel.

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). If US crude oil falls below the psychologically important level of $60, it might concern investors in these ETFs. In the trailing week, US crude oil June futures fell 0.2%, the ProShares Ultra Bloomberg Crude Oil ETF rose 0.1%, and the United States 12-Month Oil ETF was unchanged.

Any changes in oil could be important for equity indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). The sentiment in oil and equity markets is often related.

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