Crude Oil Volatility

## Crude Oil Volatility — Full Methodology

### Volatility Regime Detection

1. **ATR regime:** Calculate ATR(14) on CL daily bars and compare to the 50-day SMA of ATR

2. **High-volatility regime:** ATR(14) > 1.3× its 50-day SMA → elevated vol, trending conditions

3. **Low-volatility regime:** ATR(14) < 0.7× its 50-day SMA → compressed vol, breakout imminent

### EIA Inventory Signal

1. **Weekly EIA report:** Every Wednesday at 10:30 AM ET, the EIA releases crude oil inventory data

2. **Bullish signal:** Actual draw exceeds consensus by ≥ 2 million barrels

3. **Bearish signal:** Actual build exceeds consensus by ≥ 2 million barrels

### Entry Criteria

1. Volatility regime is identified (high-vol for trend trades, low-vol for breakout trades)

2. EIA inventory surprise aligns with the trade direction

3. Price confirms: for long, price closes above 10-day SMA; for short, below 10-day SMA

4. Enter at the close on EIA report day or the following morning

### Exit Rules

- **Profit target:** 2× ATR(14) from entry

- **Stop loss:** 1× ATR(14) from entry

- **Time stop:** Exit after 10 trading days

- **Inventory reversal:** Exit if next week's EIA report contradicts the trade direction

### Position Sizing

- Risk 1% of portfolio per trade

- Use USO for simplicity or CL futures for better execution

- Commodity positions should be ≤ 10% of total portfolio

### Best Market Conditions

Works best during supply disruptions (OPEC cuts, geopolitical tensions) and demand shocks. The 2022 oil rally was ideal. Underperforms in balanced, range-bound oil markets where EIA reports don't surprise.

### Backtest Notes

Tested on CL/USO daily data + EIA inventory reports from Jan 2017 to Dec 2024. EIA data was sourced from the U.S. Energy Information Administration. Slippage on CL futures modeled at 1 tick.