carbonates

My Oil Outlook

Your strategy certainly sounds valid and I agree that $58 oil seems a certain bet especially due to your #3 reason. But, I have followed USO since its conception and I concluded early on that it did not do a good job of following oil spot prices. I am still trying to understand why, but I just produced a graph comparing daily closing prices for WTI Cushing Spot with daily closing prices of USO over the last 3 years. What I see that bothers me is that USO has not followed the gains in spot oil prices for most of 2009 directly. USO has seen small net change while WTI spot has moved strongly upward. I don't know if this is because contango in the market is affecting USO, or something else. The bottom in WTI was 12/23/08 at $30.28 and USO closed at $30. USO made a bottom later on 2/18/09 at $22.86 while WTI was at $34.67. The disparity has continued to grow since then. This was the problem that kept me away from USO early on when it was still new.

I'm still more comfortable owning individual oil stocks, yet these certainly are not pure plays on oil and gas prices. I do use DUG as a very short term hedge against my oil stocks. At least with individual oil stocks I can pick and choose based on how well I understand their business efficiency. I'm still struggling to understand the price behavior of USO. For all I know, USO may have more upside potential than actual oil prices since USO is lagging behind oil at present.