Buying USO Is a No-Brainer 59 comments
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USO has imploded. Its 76% drop from its highs of $119 to $28 borders on insanity. Actually, let me rephrase that, it does not border on insanity, it is insanity! The market is pricing the commodity, as if cars will no longer need gasoline. The analysts are starting to come out of the woodwork with outrageous predictions of Sub $1 gasoline prices and $10 a barrel oil, just like they did six months ago when some of these "snake oil" salesmen were forecasting crude to rise to $200, $500 or even $1000 a barrel, in an attempt to make a name for themselves. It's time to be a contrarian and go long against the crowd.
Time to try and catch a falling knife: I usually don't recommend trying to pick a bottom, but with USO's extreme oversold condition, it is a definite buy at these give away levels. The shares have simply dropped too much in too short of a time representing a more than compelling opportunity. IF USO continues to fall, I would simply buy more to dollar cost average. The upside potential simply dwarfs the downside risk at this juncture. I suspect the downside potential is about $5, while the upside is more like $30.
Help from Shorts: USO is heavily shorted, and virtually anyone with a short position has paper gains. This is a good thing because all these short positions will eventually need to "buy to cover" in order to book their profits. This represents a massive amount of potential demand for the shares and the ultimate case for a massive short squeeze to occur.
Bottom line: This is a no brainer buy. It offers the chance to more than double your money in a relatively short period of time with minimal downside exposure. Contrary to popular demand, oil is not becoming obsolete. Will we never see an international crisis again? Will OPEC continue to fail miserably? Will China and India cease to grow? Will we stop driving? I don't think so, therefore, I am backing up the truck on this one.
Disclosure: Long USO
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This article has 59 comments:
In these uncertain times, I would not build a position but rather "ride the upwave" when it arrives for example when the 20d sma crosses the 50d sma, preferably when the 50d sma is flattish or sloping up. This is a "technical" approach as opposed to a fundamental approach which means I will put in stop loss, and also I may buy at higher levels than at present. [I haven't checked the sma levels at time of writing but this is the tentative concept I have].
Noticed Alan says agree in principle to buy USO but premature now.
I have actually made a loss trading USO months ago buying at relatively high levels [oh in mind at the time was "peak oil" and usd 200 forecast by Goldman]but got stopped out after some 20% loss on the position. Since then I have been following behaviour of USO with interest but haven't made any trades. At some point there are bound to good trading opportunities because oil is a finite resource and it can't keep dropping. The bull/bear cycle will return but traders' timing is the issue.
Oil will not stay down in the dumps forever but getting long here is a mistake IMO
Oil overshot to the upside; now it is overshooting to the downside.
2009 will be tough, but oil will make its rebound somewhere mid-to-late 2009 and from there on its going up. We won't see it back to $35 again unless we give up fossil fuels foregood.
A very good indicator for oil prices is the oil service industry, it tends to forecast the price of oil some 6 months in advance. Make your investment based on this given and you'll time the market swing in oil reasonably well if things work out positively in 2009/2010.
Merry Christmas
I'd be wary of oil price forecasts from the industry..in many cases these forecasts are really threshold price levels where they either drill and sell or might as well go play golf.
It's VERY interesting how we are at prices of two headline commodities..oil and gold..one spot market HUGE, the other miniscule in comparison..yet each commands tons of investor interest and opinion..AND BOTH ARE AT LEVELS..TODAY..XMAS 2008...SOME OF US WILL NEVER SEE AGAIN.
All that assumed, of course, that a commodity is a commodity, meaning the world has all the supply it needs at marginal cost/revenue.
This time Boone Pickins and others said it was different and that the world simply did not have the physical capacity to produce sufficient amounts to meet the 86 million barrels per day demand. For now and the next few years at least, that is not the case as demand seems to have fallen off a cliff.
What does all this mean for societies today? It means as long as demand is exceeded by supply capacity, you should be able to find the bottom in oil prices by looking at the price in 1999 in today's dollars adjusted a little for marginal drilling costs. Expect to see the $20s before it turns back up. Same should be true for copper and other commodities with demand challenges. Several years hence, prices will soar for oil and copper as inflation escalates. but not for a good while.
I don't think there will be an upswing in demand until 2010, when various ecomomies start showing signs of life, however tepid they might be. At that point, increased demand might bump into lower production, caused by the cutbacks in EP caused by the current slump in price, which might well cause a sharp reversal in prices.
That might end some of this paper trading antics.
The investment objective of USO is for changes in percentage terms of the units’ net asset value to reflect the changes in percentage terms of the spot price of West Texas Intermediate (“WTI”) light, sweet crude oil delivered to Cushing, Oklahoma (“WTI light, sweet crude oil”), less USO’s expenses.
Three little words that explain so much. But just because the crude price has come down doesn't make it a compelling buy. After all, oil is only down two thirds; using the same logic, one could argue that copper and aluminum pricing is even more compelling, down 90%. But the demand isn't there, even at these prices.
There were massive crude inventory builds at $42, even spilling over into previously idle oil tankers, now used for storage. That doesn't bode well for a strong rally in the short term.
Doubting OPEC's ability to effect the market is a mistake. The latest cuts even if only if partially enacted are more than enough to turn prices around soon.
It takes a little time to pull the excess inventory out of the system, but once it happens we are likely to see another price shock..... upward ... and much higher, and very quickly.
This drop is temporary, and it has made so many complacent.... This is a dangerous scenario and a rough roller coaster ride is ahead if we don't learn how close supply and demand really is.
Read my reasoning why that happened:
tinyurl.com/7lg4gx
Right now the best sector to be in is shipping. Have a look at DRYS.
USO sells the current month's contract and purchases the next month's contract 2 weeks prior to the expiration of the current month contract no matter what the price of the contracts, and as long as the future contracts are priced higher than the current month contract, that amount of price appreciation will never benefit the NAV of USO. Why do you think their are so many shorts on USO - only a fool would buy USO under the present conditions. Wait until the forward month contract prices come down, or the current month contract price stops dropping so precipitously, so that the contango decreases and when USO rolls out of the current month contract it can buy the next month's contract at relativley the same price or a much smaller premium. Until then, USO will not benefit in price appreciation and will even continue to lose NAV if the current month contract price simply stabilizes.
There will be a time to buy oil producers but not until well after the big guys like XOM return to their 1995 price levels.
If you don't believe it then you simply do not understand what the term "deflationary depression" means.
i agree with milton friedman, you can find the oil price bottom by looking at the 1998-1999 price adjusted for inflation as long as production capacity exceeds demand, regardless of what OPEC does.
don't see how $10 is possible but low $20s look very likely and a break below $20 is hardly implausible. oil will go back up when global growth returns. problem is, this is not a normal cyclical downturn, it is a permanent deleveraging haircut.
what i don't understand is how oil bulls find $20 oil shocking. we were half of that in every investor's lifetime.
if your want a no brainer, ie something that is at unsustainable and unprecedented levels, look at long treasury rates. buy TBT, go away for 10 years, and watch your money outperform.
sportsguy
Who's to say oil and commodities won't face a lost decade? They rode the tails of easy credit just like everything else. The scarcity meme only works when supply and demand are tight. And considering that this is the worst downturn since Jimmy Stewart hailed glad tidings to the movie house, supply and demand are not going to be tight for some time.
Its easy to see why commodities look so good...for the past 8 or 9 years, they've been multi-baggers...but so has Chinese growth. I'm still wondering who China is going to export to, esp. given that the majority of their growth is geared for exporting only. The ravenous demand out of china was merely the inputs necessary for their massive exports to the Western world.
If anyone learns anything in this mess, its that you shouldn't extrapolate at extremes. Commodity demand reached a pinnacle (along with credit) and investors continue to extrapolate that demand trend, which is clearly a thing of the past (along with credit). That's the variant view.
In the near term, supplies in storage are creeping up, world-wide demand will likely decrease in 2009, and speculators can't get credit. In addition, the oil producing countries (e.g., Russia) need cash, and have a history of cheating on production quotas. So, I can't see in reason for crude to rise.
But, in the longer term, I think crude will become a good investment. But in the meantime, I'll hold my DTO.
On Dec 26 10:18 AM Simmons wrote:
> On his Investment Outlook for 2009 Jim Rogers said that Oil would
> Comeback.
>
> jimrogers-investments....
On Dec 26 02:17 AM lookbeforeUleap wrote:
> A simple warning for all who expect to make a killing going long
> on USO. I suggest you read the USO prospectus and familiarize yourselves
> with the methodology used by USO to make the Nymex contract investments,
> and the effects of contango. As the fund manager said, even if the
> price of the current month contract stabilizes at the price the previous
> month settled at, USO investors will lose 30% each month since the
> forward month contracts are all priced at over $40. The contango
> was more than $9 at the expiration of the January delivery contract
> on 12/19/08 - so if the February deliver contract simply maintains
> the $33 price that the January contract settled at, the purchaser
> of the February contract on 12/19/08 will have a loss of $9 even
> though the February delivery contract settled at the same price as
> the January delivery contract.
>
> USO sells the current month's contract and purchases the next month's
> contract 2 weeks prior to the expiration of the current month contract
> no matter what the price of the contracts, and as long as the future
> contracts are priced higher than the current month contract, that
> amount of price appreciation will never benefit the NAV of USO. Why
> do you think their are so many shorts on USO - only a fool would
> buy USO under the present conditions. Wait until the forward month
> contract prices come down, or the current month contract price stops
> dropping so precipitously, so that the contango decreases and when
> USO rolls out of the current month contract it can buy the next month's
> contract at relativley the same price or a much smaller premium.
> Until then, USO will not benefit in price appreciation and will even
> continue to lose NAV if the current month contract price simply stabilizes.
>
>
Just add to your position in your Roth.
To whoever may read this:
If you are thinking of buying USO based on the advice given in this article, please do your "homework" first.
I think some of the posters holding USO might be better served holding USL. The charts look almost the same up until November, but USL has been falling somewhat less since then:
stockcharts.com/charts...
An article discussing the differences between USO and USL is located at:
seekingalpha.com/artic...
To support this I point to today's action in Gold and oil. Gold had a big pop around 2pm from 850 to 871 on massive volume. But so did oil. Oil closed at 37.71 up 2.36. On a percentage basis, Oil outperformed today by a LOT. Just something to roll around in your head...
PS The same ratio analysis suggests that silver might be well-positioned also.
Seeing this level of volume during a holiday week is certainly food for thought that there is widespread interest at this price level.
On Dec 26 02:17 AM lookbeforeUleap wrote:
> A simple warning for all who expect to make a killing going long
> on USO. I suggest you read the USO prospectus and familiarize yourselves
> with the methodology used by USO to make the Nymex contract investments,
> and the effects of contango. As the fund manager said, even if the
> price of the current month contract stabilizes at the price the previous
> month settled at, USO investors will lose 30% each month since the
> forward month contracts are all priced at over $40. The contango
> was more than $9 at the expiration of the January delivery contract
> on 12/19/08 - so if the February deliver contract simply maintains
> the $33 price that the January contract settled at, the purchaser
> of the February contract on 12/19/08 will have a loss of $9 even
> though the February delivery contract settled at the same price as
> the January delivery contract.
>
> USO sells the current month's contract and purchases the next month's
> contract 2 weeks prior to the expiration of the current month contract
> no matter what the price of the contracts, and as long as the future
> contracts are priced higher than the current month contract, that
> amount of price appreciation will never benefit the NAV of USO.
> Why do you think their are so many shorts on USO - only a fool would
> buy USO under the present conditions. Wait until the forward month
> contract prices come down, or the current month contract price stops
> dropping so precipitously, so that the contango decreases and when
> USO rolls out of the current month contract it can buy the next month's
> contract at relativley the same price or a much smaller premium.
> Until then, USO will not benefit in price appreciation and will even
> continue to lose NAV if the current month contract price simply stabilizes.
>
>
Only likely scenario is and will be very high inflation or even hyper-inflation which will drive the price of Oil, Gold, Metals and other commodities to the moon.
Got Gold, Got Oil !?
> Nothing is a "no brainer" in investing. That sort of cavelier and
> careless attitude has lost a lot of people money in this environment.
Bravo.
And what does "no-brainer" mean? That you have no brains for opening the position? How I hate that phrase.
Everyone knows that one day commodities will be a huge winner again. Duh. That's always been true in the past, and even more so in the future. But WHAT to buy and more importantly WHEN to buy it is another story completely.
The fixation on the amount of price decline reminds me of people buying the financials in 2008 because "they can't go lower". Oops. If there's one thing to learn from the past year, it's that there's no sucha thing as "too low". Cheap does not mean low relative price!!! How many value managers (read: Bill Miller) got creamed buying stocks that were lower-priced but NOT cheap (i.e. good value).
You'd better have a rock-solid strategy mapped out, low or no leverage, and plenty of patience if you take positions now. And no matter how much they've fallen - they can fall much more. Oil falls to $25/bbl - not impossible by any means - it's still quite a haircut from current prices. I make no predictions on prices of commodities. Sadly, unlike almost everyone else, I am not able to predict the future.
At this point, I think people should focus on managing risk and getting through the sh*tstorm - rather than swinging for fences. Not the time to be a hero.
For the faint of heart, a six or 12 month option strategy might be the better play.
Zach
zachstocks.com
2010 should be good for USO.
What i don't understand is how jim rogers is calling for rampant inflation in the same breath that he is talking about how banks are gigantic black holes. Those two phenomenon are mutually exclusive.
The fed. government borrowing is offsetting the contraction in credit demand in other parts of the economy. According to ML's Dave Rosenberg, fed gov't debt has grown 7% yoy from 3% a year ago...yet corporate debt growth has slowed from 11% to 9%...household hebt has fallen to 4% from 8% yoy and muni borrowing has also been whacked in half from 10% to 5%. All told total credit growth of the economy, which a year ago was 8.5% has slowed to 6.7%...even with the massive fiscal stimulus out of washington. The efforts of the fed are still not enough to offset the debt vaporization process. For example, consumers saved $370bn in Sept and Oct alone...4x the previous rate...add another $125bn extracted from equity markets during those two months and you have half a trillion. In addition, cash on balance sheets of banks has surged 165% yoy, yet C&I loan growth is still negative. simply put, banks are the gate keepers to the money supply. If the gate keepers are half dead, they are not going to be opening the gates.
So its still absolutely baffeling to me why jim rogers is calling for rampant inflation while at the same time claiming that the financial sector in the US is ruined. The ruination of the financial sector at this point disallows the prospect of the hyper-inflation a lot of people are blindly, and non-rigorously calling for.
etf.stock-encyclopedia...
On Dec 26 02:17 AM lookbeforeUleap wrote:
> A simple warning for all who expect to make a killing going long
> on USO. I suggest you read the USO prospectus and familiarize yourselves
> with the methodology used by USO to make the Nymex contract investments,
> and the effects of contango. As the fund manager said, even if the
> price of the current month contract stabilizes at the price the previous
> month settled at, USO investors will lose 30% each month since the
> forward month contracts are all priced at over $40. The contango
> was more than $9 at the expiration of the January delivery contract
> on 12/19/08 - so if the February deliver contract simply maintains
> the $33 price that the January contract settled at, the purchaser
> of the February contract on 12/19/08 will have a loss of $9 even
> though the February delivery contract settled at the same price as
> the January delivery contract.
>
> USO sells the current month's contract and purchases the next month's
> contract 2 weeks prior to the expiration of the current month contract
> no matter what the price of the contracts, and as long as the future
> contracts are priced higher than the current month contract, that
> amount of price appreciation will never benefit the NAV of USO. Why
> do you think their are so many shorts on USO - only a fool would
> buy USO under the present conditions. Wait until the forward month
> contract prices come down, or the current month contract price stops
> dropping so precipitously, so that the contango decreases and when
> USO rolls out of the current month contract it can buy the next month's
> contract at relativley the same price or a much smaller premium.
> Until then, USO will not benefit in price appreciation and will even
On Dec 25 08:36 AM BoulderEllen wrote:
> I agree oil will be higher - but the time frame is the problem.
> I have been buying LEAPS on USO - Jan(11) 105 or 110 CALLS... +/-
> $2.00 a share...so 10 contract is $2000 and controls 1000 shares
> of stock. As the price of USO goes down, the calls go down, I add
> to my position. Alot less risk and I have 2 years to watch it happen
> - or take advantage of a potential political blimp.
1. Is Contango (or "Super Contango" ) a good thing for a stock investor in USO ?
2. How does the roll over of futures contract affect the price of USO ? Given that oil is in contango now.
Appreciate any input.