The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has lost nearly 1% over the past month as bullish enthusiasm for oil exchange traded products has waned and investors have digested unappealing inventories data.
However, the less-than-encouraging headlines are not preventing some traders from making bullish bets on USO. USO has been somewhat steady following a sharp reversal in September that forced a spate of short covering. A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit. [Widening Contango Could Cut Into Popular Oil ETF’s Returns]
“Data from the CFTC’s (U.S. Commodity Futures Trading Commission) commitment of traders report Friday showed that managed money traders, which largely refers to hedge fund activity, showed some 27,694 short contracts were added last week. These are essentially traders taking bets that the price of oil will fall and compared to 7,073 long contracts that were added in the week ending October 27,” reports CNBC.
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.
“U.S. crude has largely stayed below the $50 mark for more than three months, but call options on the United States Oil Fund (USO), typically used for placing bullish bets on shares of the fund, have seen a big uptick since October,” reports Reuters. “Calls outnumber puts by a 1.3-to-1 margin, the highest in three years, according to options analytics firm Trade Alert. That growing preference for the calls is a departure from the norm.”
There are reasons for investors to be cautious with volatile energy ETFs. Moreover, if oil prices falls to new lows and the shale industry is unable to turn a profit, the highly leveraged industry may find it harder to repay debt obligations.
With the U.S. dollar strengthening and the Federal Reserve looking at tightening its monetary policy, the various U.S. market sectors and related exchange traded funds could behave differently in a strong USD environment.
“Calls on USO shares rising above $20 by mid-January represent the largest block of open interest in the fund’s options. The last time the shares were at $20, U.S. crude was touching $60 a barrel. On Wednesday, U.S. oil futures were trading at $47.62 a barrel,” according to Reuters.
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.