The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has traded modestly higher over the past month, but those modest gains are not enough to fend off some traders with bearish views on oil’s near-term outlook.
Despite oil’s recent upside, the long oil trade as attracted plenty of naysayers. However, 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.
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.