Crude Oil’s Implied Volatility Suggests It Could Fall below $50



Oil’s implied volatility

Yesterday, US crude oil’s implied volatility was 41.3%, 14.4% above its 15-day average. Usually, higher implied volatility drags down oil prices, as shown in the chart below. Since reaching a 12-year low in February 2016, US crude oil active futures have risen ~99.5%. Crude oil’s implied volatility has fallen ~45.1% since February 11, 2016.

Article continues below advertisement

Price forecast

Up until June 20, US crude oil futures should close between $49.75 and $54.81 per barrel 68.0% of the time. This forecast is based on crude oil’s implied volatility of 38.9% and assumes a normal distribution of prices. Yesterday, US crude oil July futures rose 2.2% and settled at $52.28 per barrel.

These price limits could be important for oil-tracking ETFs such as the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12-Month Oil ETF (USL). If US crude oil falls below $50, it might concern investors in these ETFs. In the last week, US crude oil July futures have fallen 0.6%, the ProShares Ultra Bloomberg Crude Oil ETF has fallen 3.7%, and the United States 12-Month Oil ETF has fallen 0.9%. Any changes in oil could be important for equity indexes such as the S&P 500 (SPY) and Dow Jones Industrial Average (DIA), as sentiment in oil and equity markets is often related.


More From Market Realist