E-Mini Crude Oil Futures Volatility Forecast (27/06/2011)

The Crude Oil market has clearly been in the middle of a storm. In fact, futures prices have moved quite wildly throughout the entire week without giving any certainty about their movement in the upcoming days.

Specifically, the market opened at 93.05, rallied to 93.7 on Tuesday, touched 94.5 on Wednesday but it then sharply dropped in the last 2 days of the week because 91.8 and 91.3 have been the last price prints on Thursday and Friday respectively.

The current volatility is 2.38% (37% annualised) and the TGARCH plot is showing a curve which is still upward sloping which implies that the upcoming days could see an ulterior increase of the variance and therefore more wild swings.

However, it is worth noting that the short term explosion of volatility has been caused by the decision taken by the OPEC to increase the oil supply in order to fill the hole left by Libya. Additionally, the non-great global economic conditions forced the exporting countries to decrease oil prices primarily because the demand for oil was getting eroded by the excessive price.

The HyperVolatility team is moderately bearish E-Mini Crude Oil futures because, although we believe that the volatility is going to mean revert and collapse, the price should at first move sideways and then retest the 89.5 – 90 area.

Specifically, we do not believe there are going to be violent moves, however, the lateral oscillation of the price action will push the volatility down but many market participants will try to drag the price back on the historically biggest support/resistance level in the Oil market; that is $ 90 per barrel.

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