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US Crude Oil: What to Expect by the End of May

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Oil’s implied volatility

On May 23, US crude oil’s implied volatility was 29.8%, which is 12% below 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 ~120.9%. Crude oil’s implied volatility has fallen ~60.4% since February 11, 2016.

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Price forecast

On May 24–31, US crude oil futures should close between $55.89 and $59.93 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 May 23, US crude oil July futures fell 5.7% and settled at $57.91 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 $55, it might concern investors in these ETFs. In the trailing week, US crude oil July futures fell 8.2%, the ProShares Ultra Bloomberg Crude Oil ETF fell 15.8%, and the United States 12-Month Oil ETF fell 7.9%.

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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