E-Mini Crude Oil Futures Volatility Forecast (27/09/2011)

E-Mini Crude Oil futures opened at 85.6 on Monday and remained around this level on Tuesday as well but on Wednesday the price action plunged to 84.6 whilst on Thursday a $4 dollar drop dragged futures prices to 80.2 and the week closed at 80.1 on Friday.

The actual volatility is 2.6% (41.2% in annual terms) and the TGARCH curve is evidently showing an upward sloping curve which seems to suggest that further volatility should be expected over the next trading hours. On the other hand, the current readings have been reached only 2-3 times over the past 5 months and all the time the curve surpassed this threshold the mean reverting pressure became so intense that the fluctuations rate “had to collapse” towards its medium term equilibrium point; that is 1.7% – 1.8 % (26.9% – 28.5% annualised).

The Crude Oil market is not following fundamentals anymore. The latest news regarding Crude Oil inventories and Cushing showed a massive draw which, in normal trading conditions, would have pushed the price up but clearly over the last week we “went through” the opposite scenario.

The HyperVolatility team is moderately bullish E-Mini Crude Oil futures because the volatility should probably mean revert and support the price action although some short term retracements are quite likely to occur, particularly in the first half of the week.

Futures prices, ceteris paribus, are likely to retest the $ 83 – 84 area but an ulterior macroeconomics shock would depreciate the Euro, appreciate the dollar and depress oil prices.

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