USO: Revisiting Oil

Oil prices rise as demand worries fade – Yahoo! News

The U.S. government reported Wednesday that stockpiles of gasoline and distillates, which include heating oil and diesel fuel, dropped last week by a larger amount than analysts had forecast. Gasoline and distillate inventories are lower than they were at this time last year.Light, sweet crude for April delivery rose 17 cents to $61.63 a barrel in early afternoon trading on the New York Mercantile Exchange, after falling as low as $59.92 in electronic trading on the worry that U.S. and Chinese fuel demand growth could decelerate.

We’ve felt some pain with the recent decline in oil, as our position in the USO ETF is down more than 13% since we bought it.  Still, we held on, and part of the reason for the rising prices now is the change in weather that was all too predictable.

Still, what does the overall picture for supply and demand look like today? According to the EIA, total stocks have come down from record highs and are now approximately in line with the 20-year average.

oilinventory.jpg

However, we have never felt it made much sense to compare long-term averages in inventories to a generally rising trend in demand. Looking at the number of days the inventory will supply, the last two weeks have presented what may be a downside breakout for supplies (and thus present the possibility of an upside breakout for oil prices.) Note too that the economic slowdown fears would probably be reflected by a rising days of supply even if inventories were flat – so the declining days of supply pretty much washes out that excuse for prices to fall.

oildays.jpg

So we’re optimistic that our USO holding will recover its losses and then some.

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2 Comments on “USO: Revisiting Oil”

  1. You know we disagree on the utility of looking at days supply of crude, but I’ll try again.

    Marginal demand has been imported for some time. Crude imports about double over the time period of your chart. That means that crude stocks in the US are never going to speak to demand again. They may speak to supply-chain efficiency, or to speculation, or to geopolitical jitters, but not to demand.

    For that, take a gander at products. Once the crude is out of the ground, pipeline, or tanker, it gets turned into product. *That* may sit around, or may be sold immediately. Natural gas is similar, since it’s mostly consumed or stored. So, here are some EIA charts.

    Unleaded: http://tonto.eia.doe.gov/oog/info/twip/gtstusm.gif
    Distillates: http://tonto.eia.doe.gov/oog/info/twip/disstusm.gif
    Gas:
    http://tonto.eia.doe.gov/oog/info/ngs/ngs.gif

    Demand? Not falling off the map, but certainly not strong. Long term, sure, crude will go up. You could have said the same in 1982 and been just as right. Neither convinces me either to over- or underweight energy.

  2. Trent

    True, but just because the crude is imported doesn’t mean supply chain inventories are irrelevant. Lower inventories are going to make prices more susceptible to the “speculation or to geopolitical jitters.” And the degree to which there will be greater susceptibility will relate to the inventory days rather than levels.

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