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USO: When Oil Titans Clash, We Mortals Step Aside

Mar. 09, 2020 10:13 PM ETUnited States Oil Fund, LP ETF (USO)13 Comments
QuandaryFX profile picture


  • Crude prices recently experienced one of the largest changes ever reported as OPEC policy has essentially collapsed.
  • For the past few quarters my bias has been bullish due to production growth slowing as well as OPEC cuts remaining in place.
  • Due to the massive change in OPEC’s policy and approach, we must reassess our balances and at best maintain a neutral bias.

With the price of crude oil falling by around 50% on a year-to-date basis, shareholders in the United States Oil Fund (NYSEARCA:USO) have taken a beating as both supply and demand factors have strongly impacted the balance. In the following analysis, I detail why I believe now is a good time to stand aside from the crude markets and that for the next few weeks a neutral position on oil is likely the safest bet.

Crude Fundamentals

If you’ve been reading my articles for some time, you’re likely aware that I’ve been an oil bull for several quarters. The underlying reason for this bullishness rested primarily on two key supply variables: slowing production and OPEC cuts. Over the last 72 hours, however, there has been a substantial change along the OPEC front which has led to one of the largest daily declines in the price of oil ever recorded. Due to this incredible change in fundamentals, we are forced to reassess our supply and demand balance to make sure that it’s reflecting the latest information.

As previously mentioned, there were two variables driving my bullishness. The first of these was slowing production growth.

This variable very much remains a bullish piece of the crude balance. The underlying story here is that there has been a slew of bankruptcies across the productive crude regions. These bankruptcies have led to a slowdown in drilling activity as well as plummeting production growth rates across the regions.

The reason why this factor remains bullish is that even in a troubled economic environment, base crude demand increases in most years due to simple things like population growth or increased economic activity. This means that crude production must grow at an equivalent rate (or greater) or you will have shortages and the price of crude will rise.

This article was written by

QuandaryFX profile picture
I work within the trading and money management industry. I have been trading and investing for several years. My style is technical execution with a fundamental thesis in place. I rely heavily on statistical analysis of the correlations between fundamental changes and price movements for generating most ideas.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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