Why USO is a Bad Oil Recovery Play

USO - United States Oil Fund

With the influx of vaccine news the most beaten down “epicenter” stocks have begun steadily climbing back. Many investors are looking to find what recovery related investments they can jump into. While many travel related stocks have already reclaimed a large percentage of their past year’s decline, even with dilution in many cases, there are areas of the market that still have a long road to complete recovery investors may want to consider. Two such areas that have still the most to regain to get back to their pre-pandemic levels, are the oil sector and real estate sectors.

Investors seeking to play the oil recovery may be tempted to invest in United States Oil Fund (USO), the commodity ETF which tracks oil prices through oil future contracts. Trading currently in the low 30s, with pre-pandemic highs in the 120s, it may seem on the surface like a compelling trade.

However, digging a little deeper it’s unlikely USO will regain it’s previous highs. Prior to the April/May crude oil plunge which even got into negative priced oil future contracts, USO traded exclusively short dated, monthly WTI crude contracts. However, in light of that collapse USO made adjustments to their strategy, they would no longer hold and sell monthly contracts, they would also hold longer dates contracts which would be as long as a year out.

The fund has then made even more changes, where the contracts held are no longer exclusively crude oil. USO is now including light, sweet crude oil, other types of crude oil, diesel-heating oil, gasoline, natural gas, and other petroleum-based fuels.

USO vs Brent Crude Oil Correlation

Prior to the change, you can see that USO followed the price of crude oil closely. However, since there has been a large divergence between the two. And while the price of crude has been increasing recently, the relative price of USO lags far behind. Even if crude can eventually rebound, we would not expect USO to rebound higher than to the mid 40s and that is a best case scenario which may take years.

While we are not bullish on oil long term, and think clean and renewable energy is a superior long term investments, we do think there are several oil companies which may make a good mid-term investment as the epidemic comes to an end, and travel eventually rebounds – but USO is far from the best one.

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This site references only our opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.