ETF Trends
ETF Trends

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil futures, had flirtations with improvement during the third quarter, but crude’s overall performance was not overly impressive. Now, traders’ enthusiasm for oil appears to be waning.

Investors should be careful of getting caught up in oil’s recent strength because the commodity is still in a bear market and expectations for a significant recovery are muted. Looking ahead, we may be in for low oil prices for much longer than many anticipated.

In late September, “a trader bet more than $5 million that the US Oil Fund ETF would fall back to all-time lows. Specifically, the trader bought more than 80,000 November 13.5-strike put options for $0.65 each. This is a bet that USO falls below $12.85 by November expiration, an 11 percent decline from where USO traded on Wednesday morning,” reports CNBC.

Specifically, USO tracks near month crude oil futures, swapping out contracts within two weeks of expiration for the next month contract. Consequently, in a contangoed market, USO would essentially be selling low and buying high, which may cut into performance. [Positioning for an Oil ETF Rebound? Watch For Contango.]

Alternatively, the PowerShares DB Oil Fund (NYSEArca: DBO) and United States 12 Month Oil Fund (NYSEArca: USL) provide exposure to WTI oil but include a different weighting methodology to limit the negative effects of contango. DBO can include contracts as far out as 13 months and dump contracts at any point. USL, on the other hand, ladders 12 months of contracts to diminish the effects of backwardation and contango.

“Speculators reduced their net-long position in West Texas Intermediate crude by 9.1 percent in the week ended Sept. 29, according to data from the Commodity Futures Trading Commission. Longs dropped from a 12-week high while shorts increased,” reports Mark Shenk for Bloomberg.

Organization of Petroleum Exporting Countries (OPEC) member states and other international oil-producing nations are not doing the commodity any favors by refusing to trim to production, which could provide some relief to prices.

“Russian oil output rose to a post-Soviet record last month as producers took advantage of the weak ruble to push ahead with drilling. The nation’s production of crude and condensate climbed to 10.74 million barrels a day, 1 percent more than a year earlier and topping a record set in June, according to data from the Energy Ministry’s CDU-TEK unit,” reports Bloomberg.

USO added $862.4 million in new assets in third quarter.

United States Oil Fund

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.