Oil’s implied volatility
On June 6, US crude oil’s implied volatility was 38.9%, which is 21.9% below its 15-day average. Usually, higher implied volatility could drag 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 ~100.6%. Crude oil’s implied volatility has fallen ~48.3% since February 11, 2016.
On June 7–13, US crude oil futures should close between $50.20 and $54.98 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 38.9% and assumes a normal distribution of prices. On June 6, US crude oil July futures rose 1.8% and settled at $52.59 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 to near $50, it might concern investors in these ETFs. In the trailing week, US crude oil July futures fell 7.1%, the ProShares Ultra Bloomberg Crude Oil ETF fell 11.9%, and the United States 12-Month Oil ETF fell 5.8%.
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.