The price movement of United States Oil Fund LP Units ( USO ) roughly tracks the movement in the price of spot crude oil on world markets. The strategy behind USO is stated as follows on the E-Trade website:
"The 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. The fund is non diversified."
Buying shares in USO presents a good way to invest in oil price movements without getting involved in crude oil futures contracts and the required futures contracts margin requirements and potential margin calls.
The 52 week range of USO is 23.40 - 119.17. As I write this on February 17, 2009 the price is 23.44. Crude oil prices have collapsed since last July from a high of $147 a barrel. The collapse is certainly related to the worldwide recession currently underway, perhaps depression in some countries, but is also heavily related to the unwinding of long oil positions by hedge funds, investment banks, and large speculators due to forced selling across all asset classes to meet margin calls in falling markets.
Therefore, at least some of the extent of the price decline reflects the effects of forced liquidation rather than a drastic shift in supply and demand factors. To be sure demand for crude oil in the US and in Europe has decreased somewhat as the effects of the recession reduced economic activity. The rate of growth in demand has decreased in China and India as well but not as much as you might think. The economies of China and India may slow down to "only" a 5% or 6% growth rate for this year but that rate of growth keeps demand for oil in those counties at a level that almost offsets any decline in the West.
At current prices USO is a way to play the next price spike in oil at low risk. You can be sure that not only America is hooked on oil but that almost the entire world shares the affliction. Politicians may blabber on about alternative energy sources, and in America becoming energy dependent within ten years, but who among informed people can believe them? There is just no way that alternative energy resources can make much of a dent in oil consumption within a time period, if ever, that can prevent a real scarcity of oil and resulting high prices.
Peak Oil is real, IMHO it has already occurred, and its consequences will soon be felt by all. We had a little taste of what it can bring when oil prices rose to $147 a barrel last July. At prices above $150 a barrel the airlines are toast, it will be difficult to find gasoline less than $6.00 a gallon if you can find it at all, supermarket shelves will be bare as trucks stop delivering the goods, and if you heat your home with fuel oil you had better be rich or you may freeze to death in a cold Winter. Perhaps for investors making money as oil prices rise will offset some of those problems.
Current low prices for oil actually insure another great price spike. At current prices oil exploration projects are being cancelled, worn out equipment is not being replaced, alternative energy projects are being curtailed, oil drilling rigs are not being constructed, and more expensive to extract oil fields are not being developed. Once economic activity turns even slightly higher, or a disruption in the production of oil occurs due to war, political unrest, terrorism in say Saudi Arabia or any other oil producing nation, the price of oil could seriously reverse and once again race to the upside.
I recommend buying USO at current levels and building a position at any price below $27.00. While we may well see new lows during this downturn as recession fears mount once oil prices reverse to the upside the move could be extremely sharp and you could see $50 oil again in a flash. For certain oil prices will never go to zero and will probably never even come close to zero. As with any commodity there is impressive intrinsic value in oil.
I think it is better to start accumulating positions now at attractive "blood in the street" prices rather then to chase after a price spike later. For patient investors this would offer the opportunity to buy near contract low prices and to see USO make new all time highs above $119.17 a share, probably within three years.
While buying USO now is a bit of bottom fishing I am confident that America and the world at large will be hooked on oil until the bitter end of civilization as we know it.
For sure, there will always be plenty of uses for oil, which is more than you can say for products produced by many industries. Even if there is a bit more blood in the street before oil prices turn around the next bull market in oil will likely offer a life changing rally for long term investors.
$23.55 (02/18/09)
