What is the story with USO and Oil?

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USO and oil both up on new 2015 highs

USO has been my primary Exchange Traded Fund (ETF) of choice while trading around the oil dips and rallies. So far, the predictable and long, drawn out moves have made for some easy profits for those who are patient. USO is defined by Yahoo Finance as, “The [USO ETF] investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.”

In knowing and understanding how fundamental catalysts directly impact globally traded commodities, there is a plethora of opportunity for a knowledgeable and risk adverse investor within these markets. Today, Oil made new 2015 highs for several different reasons, despite the big institutional calls for sub $40 per barrel oil. When evaluating the news and catalysts in play, it is critical to consider the sources. When large investment groups are pumping out biased articles, it is more than likely they have a stake in the direction of that “article.” What you need to look for as an investor, are the global events and catalysts that can’t be manipulated. Systematic risk types that will effect a commodity that is more prone to influence from supply and demand fluctuations. Middle East tensions and civil war in Yemen have had an impact on the volatility of oil prices for the past few weeks. As oil steadily rises in price, we have seen a reduction in supply chains and rig counts. Though inventories are still at record highs and not slowing enough to force a sharper move up in price from demand, forecasts now indicated that we will see a reduction in supply as we go into the season for peak use.

Where does oil go from here?

The Energy Information Administration reported on Wednesday, that crude inventories had risen by 5.3 million barrels from last week. This was 3.2 million barrels over the forecasts. As the whole world is well aware, oil is trading well below analyst targets for the 2015 year. Some speculate that we trade up to $65 per barrel by the end of the year, other suggest we continue range bound between $50 and $60 per barrel. Oil prices have remained over $50 per barrel for the entire month of April. As a trader and investor, I am long biased on Oil and USO and have been accumulating shares since December. As a result of global influence and supply and demand factors, this is a trade the requires patience. But, it would be silly to think that in a global economy so heavily dependent on oil, a finite resource, that we won’t see a continued move up as manufacturers and producers strive to stabilize their margins.

 

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