USO and a Bullish Case for Crude Oil

Now may be the right time for crude oil exposure through Marygold's United States Oil Fund.

The United States Oil Fund LP (USO), tracks crude oil futures prices higher and lower on the New York Mercantile Exchange (NYMEX). The continuous crude oil futures contract was flat in 2023 and into early 2024.  

Crude oil futures flirted with $100 per barrel in September 2023, compared to the peak of $130 per barrel they reached in March 2022. In April 2020, the volatile energy commodity traded at an all-time low below zero, with the nearby futures contract plunging to less than negative $40 per barrel. At the time, market participants with long positions had nowhere to store the petroleum during delivery periods for the expiring futures contract. Crude oil is a highly volatile commodity and has trended bearish since its 2022 peak.  

As the market begins 2024, seasonality continues to weigh on crude oil prices. Peak driving season occurs in spring and summer and gasoline represents the most ubiquitous oil product. Now may present a ripe time to consider crude oil exposure, while leaving plenty of room for further declines as oil can experience wide price variance. The reason: Prices often fall or rise to levels that defy rational, logical, and reasonable fundamental and technical analysis.  

USO and Falling Crude Prices 

After trading at a $132 per barrel high on March 7, 2022—less than two weeks after Russia invaded Ukraine—NYMEX crude oil futures prices dropped to a $63 low in March and May 2023. At roughly $72 on the nearby February NYMEX contract on Jan. 16, the energy commodity stood closer to the May 2023 trough than the 2022 peak.  

Crude oil prices fell as the nation sold unprecedented petroleum from the U.S. Strategic Petroleum Reserve (SPR). U.S. reserves declined from more than 600 million barrels in late 2021 to 372 million at this time last year and 355 million barrels as of Jan. 16. Meanwhile, Chinese economic weakness has caused global petroleum demand to fall, further weighing on prices. Moreover, crude prices tend to bottom out during winter due to seasonal demand lows for gasoline.  

The Bullish Case for Oil 

More than a few factors support crude oil in 2024. Seasonality means gasoline demand will jump over the coming months and peak in late spring and summer. The Biden administration also plans to replenish the SPR at prices between $67 and $72 per barrel, which will further support crude oil, in this case just below the current market price. Moreover, Russia and OPEC+, the international cartel, will likely cut production if prices continue to fall. Saudi Arabia requires $80 per barrel to balance its domestic budget and Russia needs the highest possible price to fund its war against Ukraine. Russia has used its commodity production as economic weapons against “unfriendly” countries that support Ukraine. Meanwhile, escalating tensions in the Middle East impact the logistics of transporting petroleum from producing to consuming countries.  

Stable to lower U.S. interest rates favor higher commodity prices and crude oil is no exception. The potential for a BRICS currency or local foreign exchange instruments in exchange for oil sales weakens the dollar’s role as the worldwide reserve currency. A weaker dollar supports higher raw material prices. What’s more, the BRICS nations—Brazil, Russia, India, China and South Africa—were joined this month by Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates.  

Finally, global energy demand could explode if the Chinese economy recovers and that would push prices much higher. The bottom line is that crude oil could have a limited downside, and its upside potential may take off in 2024. With petroleum at just less than $72 a barrel, risk-reward favors a higher price.  

As a seasonal and volatile commodity, crude bears careful observation. Its deferred delivery does not necessarily follow the nearby delivery month as prices go. Since price action along the oil curve is unstable, USO is not a candidate for long-term investors as it follows the nearby prices. Over time, USO has lost value. However, it does a reasonable job tracking crude oil’s short- and medium-term price action.  

At roughly $68 per share on Jan. 16, USO had $1.51 billion in assets under management. USO trades an average of 4.7 million shares daily and charges a 0.60% management fee.  

USO Outflows 

While it is still early in 2024, funds have flowed out of USO. 

The etf.com Fund Flows Tool shows that $53.75 million has flowed out of USO since the end of December 2023 through Jan. 11, 2024. More than $100 million flowed out on Jan. 10, when nearby NYMEX crude oil futures traded between $71.01 and $73.59 per barrel, closing near the session’s low.  

USO is only appropriate for short-to-medium term risk positions on the long side of the oil market because of the volatility of crude oil’s forward curve. USO has no leverage but can suffer from decay because of the spread differentials.  

Meanwhile, the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and its bearish counterpart ProShares UltraShort Bloomberg Crude Oil (SCO) are double-leveraged long and short products that magnify USO’s price action on the up and downside. UCO and SCO only work in short-term risk positions as they suffer from time decay and spread differentials.  

Thus as January and winter mean offseason for crude oil demand (with prices that reach seasonal lows) now is the ideal time to build a long position in petroleum. Peak driving season is just ahead, too. Combine that with the wars in Ukraine and the Middle East, and the potential for a rebound in China’s economy, and it amounts to a bullish outlook for the energy commodity that continues to power the world.