U.S. Oil Fund (NYSEArca: USO) is on a five-day rally as markets nervously await a possible U.S. military strike on Syria.
The ETF, which invests in crude futures, is up more than 3% so far this week. U.S. crude futures have traded above $112 a barrel this week.
“Syria isn’t a major oil producer — its output is less than 100,000 barrels a day vs. about 400,000 before its civil war started two years ago. But oil prices have been rising since July, when political upheaval Egypt sparked concerns about access to supply routes through the Suez Canal,” reports Gary Strauss for USA Today.
“The region was already under pressure before Syria’s uncertainty caused crude to spike. Civil unrest in Iraq is rising again — more than 1,000 Iraqis were killed in July, the highest monthly death toll since 2008,” according to the article.
USO is up nearly 16% the past three months.
“Investors should keep in mind that USO will not track spot oil prices,” says Morningstar analyst John Gabriel in a report on the ETF. “An understanding of the intricacies of trading futures contracts is required in order to avoid adverse investor experiences. Remember, USO represents a proxy for crude oil by holding futures contracts.”
When WTI oil futures are in a state of contango, as they have been for much of the past five years, “then USO’s performance will lag that of the spot price,” he added.
Chartoftheday.com points out that most oil price spikes have coincided with Middle East crises and often preceded or coincided with a U.S. recession.
“Also, rising oil/energy prices can, among other things, increase costs within the global economy’s supply/distribution chain and thereby contribute to inflation which can in turn encourage governments to halt or reduce any plans to stimulate the economy,” the service notes. “The logic behind this is that a Middle East crisis can potentially disrupt an already tight oil supply and thereby drive crude oil prices higher.”
