USO: Black Gold Waiting to Erupt 33 comments
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Anybody holding a long position in USO has been absolutely decimated. The good news is no selling pressure will mount due to profit taking. There is simply none to take. The smart money might be slowly accumulating now, as the last three days of trading show signs of a basing formation being established. Friday's intraday reversal, on a spike in volume, could be a "clue" of a nearing capitulation. The shares are now 7% higher than their all time historical low of $22.74.
Further cuts in OPEC production coupled with spikes in activity, due to the unleashing of the stimulus package could alter the supply demand pattern more in favor of the bulls. China could restart their voracious appetite for energy. Lower gasoline prices have the tendency to prompt consumers to drive more, and we are nearing the heavy summer vacation driving season.
USO's bulging short position could create a huge wave of buying via short covering, if the shorts start to get nervous. The bears have experienced tremendous profits in USO, and getting greedy at this point would be darn right idiotic. They certainly do not want to see their profits go up in smoke, as an eruption of a "global crisis", occurring at any time, has the capacity to double the price of crude in less than a week. It is simply too risky to be short USO at this juncture, as its upside potential dwarfs its limited downside.
Be a contrarian: Crude has fallen an unprecedented amount. This has caused USO to implode nearly 80% from last year's highs. It has simply dropped too much in too short of a timeframe. Those who have the risk tolerance to buy now, set themselves up for the biggest reward. To exploit an over-reactive market, prudent buyers hone in on unpopular ideas, and USO 's sentiment is so negative at this juncture, it is clearly near an important turning point. The game is merely about buying low and selling high, and to do so, the investor must buy when an equity is unpopular and conversely sell, when it is popular. How else are you supposed to buy low and sell high? Easy to say, hard to do.
Bottom line: Do not be too tempted to catch a falling knife at this time, however we are getting very close to an appropriate entry point. If you look at USO's three month graph (sorry about the technical analysis) and create a declining tops line- you'll detect a potential breakout point near the $27 area. Sure you'll have to pay more, if you wait until that trigger point, but it will be worth it, as the trend will be in your favor (and you get what you pay for).
In other words, wait until Jed Clampett goes shooting for some food, and up through the ground come a bubbling crude. Translation: Place a buy stop order at $27.25 per share, sit back, and the first thing you know is : "you're a millionaire".
Disclosure: No position
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This article has 33 comments:
> jack
It can put Oil at 5-10$.
I will buy financials soon, Oil will look at 20$ good priced for a short term bounce to 27$.
Peak oil is indeed a fact. So too, is oil in the low $30 range. Oil will trade in this annoying $30-$60 range for some time until global demand begins once more to pressure supply.
Trading assumptions, both long and short, have resulted in many lost fortunes over the past 26 months. Spot the trend, up or down, and ride it out, but don't assume that USO at current levels is a great buy!
As USO's price is still below the (falling) 5, and 10 day MA's, and just managed to squeeze above the 15 day MA, the trend is still lower.
Rather than set an arbitrary entry point of a breakout >$27, why not wait until the 25 day MA is breached and held, irrespective of the price at that time? This would give a better indication of the trend!
I read SA authors elsewhere urging readers to jump in with VZ at $35, and that stock had been trading well below $30 over the past several months and is still descending at this writing. Some say the entry would be around $23 (?).
I read SA authors elsewhere urging folks to jump in with USO at the low $30's. Well?.
The reader might refresh his/her memories that Ms. Meredith Whitney said on TV in August 2008 that C at below $10 would be a "once-in-a-life-time buying opportunity". I bought some C at around $1.70 last Friday.
I think it would save you a bundle if you would recognize that entry price levels are still constantly being revised downward.
However, I am looking at for the first time some Canadian Trusts that do not trade here (USA) for the first time. Even with the devastation they have had in price and yield cuts, they now look to good to be further ignored.
I guess I'm in on oil and gas at this juncture too.
When the crowd, especially those of retail types, is betting against the underlying trend, it's pretty safe to trade along side the trend.
Contango
I am watching this carefully and considering buying USO when the monthly contract roll starts breaking even or better making a profit for the fund.
Please remember that a position in USO is NOT a position in Oil. It is a position in oil for near term delivery plus or minus the cost of rolling out to the next delivery month in order to AVOID taking delivery of any actual oil.
To me it seems quite quite conceivable that the spot price of oil could drift slowly up while the value of USO could continue to go down.
On Feb 22 02:29 PM Alvarez wrote:
> How in the world can you use "technical analysis" on USO when so
> much of its current under performance is due to extreme contango
> in the oil markets? Or not even mention this fundamental condition
> of the oil market which is the source of much of USO's loss this
> year relative to the broader oil market? If you must resort to technical
> analysis, at least use it on oil itself. The big issue facing USO
> as an oil play is the accounting issue of having to monthly roll
> over futures contracts in the face of contango, and given that condition
> no "basing formation" will hold.
Buyer beware!
photos1.blogger.com/x/...
In terms of full disclosure, I'm bullish on oil longer term, and about a month ago started slowly building a position with a 3-5 year time horizon in mind. To be perfectly blunt, I didn't spend enough time thinking through the contango implications until after I had made some (thankfully small) initial purchases. I still like the idea of slowly building a long position at these and lower levels, but am working through the best way to do this, perhaps combining USO and USL to some degree.
On Feb 22 07:10 PM boisterousbob wrote:
> Given that USO is hit hard by contango, does that mean it will benefit
> meaningfully from a return to backwardation?
>
> I am watching this carefully and considering buying USO when the
> monthly contract roll starts breaking even or better making a profit
> for the fund.
>
> Please remember that a position in USO is NOT a position in Oil.
> It is a position in oil for near term delivery plus or minus the
> cost of rolling out to the next delivery month in order to AVOID
> taking delivery of any actual oil.
>
> To me it seems quite quite conceivable that the spot price of oil
> could drift slowly up while the value of USO could continue to go
> down.
>
>
conversely, would anything short a reversal of the recession, or acute geopolitical crisis, be likely to result in backwardation?
On Feb 22 07:54 PM Alvarez wrote:
> You are right. Basically by buying USO you are taking a position
> both on the price of oil AND the shape of the oil futures curve.
> So long as the market remains in contango, at each month's roll over
> the owners of USO roll into a lower quantity of oil per share than
> they had the month before. While not exactly the same, in some ways
> a position in USO is reminiscent of a long term option in the way
> it suffers from time decay (again, so long as the market remains
> in contango).
>
> In terms of full disclosure, I'm bullish on oil longer term, and
> about a month ago started slowly building a position with a 3-5 year
> time horizon in mind. To be perfectly blunt, I didn't spend enough
> time thinking through the contango implications until after I had
> made some (thankfully small) initial purchases. I still like the
> idea of slowly building a long position at these and lower levels,
> but am working through the best way to do this, perhaps combining
> USO and USL to some degree.
>
> On Feb 22 07:10 PM boisterousbob wrote:
Say the current month was trading at $40 and the next month was trading at $45 (made up numbers), and the prices don't move at all between now and the current month expiration. When the time comes for them to roll over the contracts, their "entry price" for the new contracts would be $45. In essence, your cost basis has shifted to $45 oil, when you thought you bought into oil at $40. Should next month oil then trend down to $40, far from being flat on the position (as you might have expected) you would be down >10%.
Another way to look at it: to be long USO you need not only believe that the price of oil will go up, but also that it will go up more than what is already reflected in the futures curve. That's OK, as long as you know what you are getting into.
My understanding is that USL spreads its positions across futures covering the next 12 months, so it doesn't respond to contango in the same way. Of course, a position constructed using USL means buying oil for a higher effective price than is reflected in the oil spot market, increasing your risk to the downside.
On Feb 22 10:22 PM ktchnsnk wrote:
> so under what, if any, circumstances would the price of USO go up
> while contango is remains in effect?
>
> conversely, would anything short a reversal of the recession, or
> acute geopolitical crisis, be likely to result in backwardation?
>
Arent you the same guy who was here a couple months back pumping an "all in" play on USO at around $32?? What happened to that position? In your disclosures you list no position taken.... Anyway, back to the point at hand... Suggesting long on USO again? Really? From what Ive read here, even the oil bulls are extremely hesitant on an Oil ETF like USO...
Two things to me are absolutely laughable. One is that you site as one of your reasons in taking up a long position in USO the fact that
" Shares are now 7% off their all time Lows of $22.74"
You're kidding, right? First off, the funds inception was mid 2006. I wouldent get overly concerned about "historic" pricing here trying to value this ETF. This is the real kicker... you could have said the EXACT SAME THING nearly EVERY DAY since the middle of Nov last year when the ETF breached $43! Every day from then to its Feb 18 low where there was an intra-day rebound or next day rebound of 7% would lead to the exact same horse crap logic for jumping onboard!
Also, someone faults technicals as an illogical way to enter/exit this ETF due to the fact there is extreme contango in the oil markets... well, perhaps. But conango or not, I still see unraveling technicals with no end in site to the downside. You may want to become a millionare going long in USO, but the only place you are going to send investors by pumping USO is straight to the poorhouse.
The only logical course of action here is to the short side. Same as it was at $32.
On Feb 22 05:19 PM Joe Red wrote:
> What about the 80 million barrels of oil stored in the floating tankers
> ? See this weeks business week 3/2/09 pg. 14.
>
> Contango
On Feb 22 01:29 PM toomuchgas wrote:
> Every assets is approaching $0. The slide down will include some
> bumps up to fake us into buying. Government control is the end of
> a free enomomy.
I'm buying oil with money I don't need for a while
no brainer really, ...
On Feb 22 11:41 AM Perry1961 wrote:
> I've been bearish on oil and oil ETF's until now. But,a host of indicators
> say the recession is over. The LEI was up .4% last month,it's second
> consecutive gain. Jan. retail sales were up. The PPI was up .4%,for
> it's first positive number in 6 months. Existing home sales are up
> sharply. To top it off,gasoline and distillate fuel consumption grew
> y/y in the latest energy report. The crude oil inventory draw was
> a complete shock. OPEC is still cutting production. Another 800,000
> bpd will be shaved in the next two weeks. All these factors in combination
> are extremely bullish for oil. The snapback will be sharp. Figure
> in trillions in stimulus plans by governments around the world,and
> the stage is set for $200 oil in the next 2 years.
Oil represents a very good buy here, unlike housing or other really big purchase items, we use it every day as does most of the rest of the modern world which means we will work through the excess inventory whicle opec is cutting, I fear we will have a dramatic spike in oil prices in the not too distant future 12 months, 24 months etc because these cuts and because everyone did not stop driving or flying or heating there homes in the older cities where oil burners are prevalent.
Mostly we need higher oil prices to make green initiatives more attractive, after all most of us think with our pockets and secondly with our social or environmental concerns, just the truth.