USO: The Complex Is Becoming Increasingly Attractive

ETFS



Investment thesis

Since our last take on The United States Oil Fund LP (USO), the complex’s weakness seems to have faded, as new macro developments unfold.

Indeed, with U.S storage tightening over the last weeks, domestic demand for the black commodity remains sustained. Maximizing U.S sanctions on Iran’s crude oil export, curbing oil output in Russia and resuming trade talks between China and the U.S. are elements that should bring back the optimism on crude futures and USO shares.



Source : Tradingview

Stocks edge lower and storage seasonality for the month of September is likely to sustain the complex

During the week ending August 23, crude oil storage in the U.S. declined moderately, down 2.29% (w/w) to 427.8m barrels, whereas Cushing inventories decreased slighter, down 4.68% (w/w) to 40.3m barrels, providing a moderate support to crude oil futures and USO shares.

With that decline, U.S. crude storage tightens, establishing now only 1.6% or 6,842k barrels above the 5-year average and 5.4% or 21 959k barrels north of last year’s level.



Source: EIA, Oleum Research

In the last ten years, the monthly seasonality of crude oil storage sustained the appreciation of the black commodity, given that stocks withdrew an average of 1.5% in the month of September.



Source: Oleum Research

Recently, the U.S. crude oil balance enhanced significantly, thanks to plunging net imports, down 34.1% (w/w) to 2.91m barrels and the robust appreciation of U.S. crude exports, up 7.7% (w/w) to 3.02m.



Source: EIA, Oleum Research

Speculative positioning



Source: CFTC

According to the latest Commitment of Traders Report, net speculative length on Nymex crude oil futures declined moderately, down 5.54% (w/w) to 391,650 contracts. This decrease has been attributable to both long liquidations, down 2.93% (w/w) to 513,465 contracts and fresh short positioning, up 6.54% (w/w) to 121,815 contracts.

In the month of August, the bullish speculative momentum has slowly faded, with net bets declining 4.37% to 438.9m.

Yet, speculator length is still stretched to the upside and continues to sustain both the black commodity and USO shares.

Besides, long open interest continues to post a healthy figure, with longs representing 26.1% of the total interest on crude oil futures.

Since the beginning of the year, net bets on Nymex crude lifted robustly, up 41.2%, whereas USO’s YTD performance advanced only slightly, up 6.8% to $11.22 per share.

Macro developments

Crude oil prices recently benefited from the U.S. announced plan to intensify sanctions on Iran and this effort to apply maximum pressure to the Republic’s crude oil exports contributed to the actual rebound of crude oil futures.

Besides, global oil supply is expected to further decline following Russia’s energy minister Alexander Novak announcement, which said that his country’s monthly oil output would fall in September, providing additional support to crude oil and USO shares.

Furthermore, a new round of negotiations in the China – U.S. trade war is expected to start in the following weeks and this seems to be taken positively by market participants. Indeed and even if an intensification in the trade quarrel cannot be discarded, the market remains optimistic, already pricing in potential resolution of the yearly long trade dispute.

On the other side, the futures curve of crude oil considerably increased its backwardation slope on short-term maturities compared to August 27, indicating a positive roll-yield for USO. Nevertheless, in the long term, the complex is still evolving in contango, but the pattern remains mostly unchanged compared to the end of August



Conclusion

In this context, we are changing our positioning on USO, following the moderate crude oil storage decline seen this week and the unfriendly seasonal pattern of crude stocks for the month of September.

In spite of declining net speculative bets on crude oil futures, we believe that recent macro developments will completely offset it and that upcoming talks in the China – U.S trade dispute are likely to bring additional optimism, all of which provide tailwinds to global crude oil demand.

We look forward to reading your comments.

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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