OPEC’s Announcement and Oil Volatility

Just a few minutes ago I was taking a break from putting lights on the tree. A break for me does not involve checking the Lions – Bears score. My break involves checking in on the markets.   I was aware that OPEC was meeting today and that a big oil price move was possible based on the outcome of that meeting. It appears that OPEC members are happy to let oil prices move lower. I’ll leave the speculation of their motivation behind allowing oil prices to drop to the fundamental experts. My interest in the move today relates to volatility. It always comes back to volatility.

Wednesday the CBOE Crude Oil Volatility Index (OVX) finished Wednesday at 36.02, which is a pretty high level considering the average for OVX in 2014 is just a tad over 20. The chart below shows OVX in November and the constant move higher into the OPEC meeting.

OVX Daily

There is a common rule of thumb that is often cited when taking implied volatility and converting it to a one day move. Basically take the volatility index and divide it by 16, doing that with OVX near 36 gives us a single day move of about 2 1/3%. As I write this oil futures are down about 6 1/2%. OVX was expecting a big move, but not quite what we are seeing at the moment. Friday will be fun day to do a little more analysis on this move, for now I’m going back to stringing lights and preparing for Thanksgiving dinner.