Our USO ETF Holding Should Recover Sooner Rather Than Later

| About: The United (USO)

Yesterday's headlines report that oil prices rise as demand worries fade:

The U.S. government reported Wednesday that stockpiles of gasoline and distillates, which include heating oil and diesel fuel, dropped last week by a larger amount than analysts had forecast. Gasoline and distillate inventories are lower than they were at this time last year. Light, sweet crude for April delivery rose 17 cents to $61.63 a barrel in early afternoon trading on the New York Mercantile Exchange, after falling as low as $59.92 in electronic trading on the worry that U.S. and Chinese fuel demand growth could decelerate.

We’ve felt some pain with the recent decline in oil, as our position in the USO ETF is down more than 13% since we bought it.  Still, we held on, and part of the reason for the rising prices now is the change in weather that was all too predictable.

Still, what does the overall picture for supply and demand look like today? According to the EIA, total stocks have come down from record highs and are now approximately in line with the 20-year average.

oil invesntory

However, we have never felt it made much sense to compare long-term averages in inventories to a generally rising trend in demand. Looking at the number of days the inventory will supply, the last two weeks have presented what may be a downside breakout for supplies (and thus present the possibility of an upside breakout for oil prices). Note too that the economic slowdown fears would probably be reflected by a rising days of supply even if inventories were flat - so the declining days of supply pretty much washes out that excuse for prices to fall.

oil days

So we’re optimistic that our USO holding will recover its losses and then some.

Disclosure: author is long USO.

USO 1-yr chart:

USO 1-yr chart