The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is up nearly 13% this month and some options traders are expecting more upside for the benchmark oil exchange traded fund (ETF).
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.
On Tuesday, “roughly 77,500 calls and 38,000 puts have traded on USO so far today — 1.8 times what’s usually seen at this point in the session. The May 14.50 call is most active, due to one trader buying to open a 25,000-contract block for an initial cash outlay of $275,000,” reports Schaeffer’s Investment Research.
An Epic Rally
Crude prices plunged 44% from a multi-year high in early October through the nadir on Christmas Eve as investors ditched energy in response to rising pessimism over global economic growth and potentially diminished demand across a range of commodities.
“However, the fund has rallied hard off its Dec. 26 17-month low of $9.23, up almost 50%,” according to Schaeffer’s. “This week’s 3.5% surge has USO clearing recent congestion near $13.50, which is also a 61.8% Fibonacci retracement of its fourth-quarter sell-off. And while it’s just Tuesday, the shares are pacing for an eight straight weekly win, which would mark the longest streak of its kind since early 2014.”
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Looking ahead, fundamentals are improving. The International Energy Agency projects consumption to increase each quarter of 2019 year-over-year, albeit at a slower-than-usual pace for the first quarter. Meanwhile, on the supply side, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have been cutting output. Additionally, U.S. sanctions on Iran and Venezuela have reduced further bets on international supplies.
Even with its stellar performance to start 2019, USO would need to gain another 15.76% to reclaim its 52-week high.
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