Big Oil ETF - USO - Up 8% Over Past Month

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is up more than 8% over the past month. That could be one sign USO, one of the largest and most heavily traded commodities exchange traded products is doing its job, which is to be responsive to oil prices.

Year-to-date, USO is higher by nearly 20%. Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could prompt more upside for oil this year.

“The $2 billion United States Oil fund (USO), for example, promises to deliver exposure to oil prices on a day-to-day basis,” reports Crystal Kim for Barron’s. “It does that by holding West Texas Intermediate crude futures, but because crude oil futures contracts expire every month, the fund administrator is required to continuously sell the expiring contract and buy the next month’s futures.”

What’s Next for Oil, OPEC

Some market observers are so bullish that they expect oil to return to triple-digit prices, levels some OPEC members, including Saudi Arabia, would love to see.

Some traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.

USO “has been a remarkable actor in the past 12 months, tracking the price of West Texas Intermediate—the benchmark for oil in North America—with a 97% correlation to WTI prices,” according to Barron’s.

Since the start of the current quarter, traders have pulled $30 million from USO. Year-to-date, the ETF has seen outflows of just over $417 million.

For more information on the oil market, visit our energy category.

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.