Oil: Crashing to 30 or to 20?

| About: The United (USO)
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A message to all oil bugs out there: oil broke $40 support and confirmed it yesterday. It's not a rollover effect of the U.S. OIL FUND ETF (NYSEARCA:USO) described in this article, the rollover happened on February 6. According to that article, USO now holds more than 20% of future oil contracts, which means that it holds shares of future oil contracts exceeding the size of the physical market for Texas tea. So, rollovers are over, and the price is going down. What's next?

I wrote here that I don't see any reasons for oil to bottom now. I also provided a chart of USO with very interesting downward triangle formation. Now this formation is broken down and a break is confirmed. That's a very bearish signal. Granted, USO doesn't represent oil exactly, because the effects of contango and rollover are killing this ETF right now. But together with fundamental data this signal is important anyway.

I think oil might go straight to $30 from here. And if it breaks that level, it can go even lower.

Please spare me lectures on how oil just can't be lower than $50 because it's a marginal cost of production. Many marginal producers sold their current production last year at prices between $100 and $140. They don't care about current price, they sold that oil already. Real marginal oil is coming from the Middle East, and real production costs on many fields there are still below $10.

How long can this low price last? I don't know. Unfortunately, not all oil producers are forthcoming about their hedging levels. One thing is for certain though: the future market is a market of future contracts, not a market of real commodity. If investors start leaving USO and similar ETFs in droves, they can drive prices down much, much more.

As usual, I retain the right to be wrong. But I haven't been wrong about oil since last May.

Full disclosure: at the time of publication author did not have any positions in USO. Positions can change any time.