Oil Prices: Implied Volatility Suggests Upside Is Intact

Oil’s implied volatility

On June 27, US crude oil’s implied volatility was 33.7%—12.7% below its 15-day average. Lower implied volatility might support oil prices. In the trailing week, US crude oil futures rose 4.1%, while the implied volatility fell 12.7%.

Oil Prices: Implied Volatility Suggests Upside Is Intact

Since reaching a 12-year low in February 2016, US crude oil active futures have risen ~126.7%. Crude oil’s implied volatility has fallen ~55.2% since February 11, 2016.

Price forecast

Until July 4, US crude oil futures should close between $57.09 and $61.77 per barrel 68.0% of the time. The forecast is based on crude oil’s implied volatility of 33.7% and assumes a normal distribution of prices. However, any surprise announcement in the OPEC plus meeting might force oil to overshoot this price range. On June 27, US crude oil August futures rose 0.1% and settled at $59.43 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 rises above $60, it might please investors in these ETFs. In the trailing week, US crude oil active futures rose 4.1%, the ProShares Ultra Bloomberg Crude Oil ETF rose 7.4%, and the United States 12-Month Oil ETF rose 3.1%. Any changes in oil could be important for equity indexes like the S&P 500 (SPY) and the Dow Jones Industrial Average (DIA). The sentiment in oil and equity markets is often related.