Macro Tsimmis

intelligently hedged investment

BUY United State Oil (USO)

Posted by intelledgement on Tue, 02 Jan 07

For the most part, the arguments in favor of this position are presented in our earlier writeup on IXC. We have just a couple of points to add.

First, while the name of this ETF is “United States Oil”—and the USA remains the largest consumer of oil of any country on the planet—it is really not USA consumption that is driving the price of oil at the margin these days. That is because our consumption is relatively stable and, therefore, predictable. It is the growth of the Asian economies—China and India in particular due to their scale and propensity to surprise us to the upside—that are constantly threatening to unbalance demand and supply in favor of the former. This could change if the USA economy falters significantly before Chinese consumption comes closer to catching up: in that case, a decline in USA oil demand would drive prices lower temporarily (for as long as a few years). We foresee that as a likely scenario, but probably not for several years, and almost certainly not before 2009. So for the nonce, expect to see the price of “USO” driven more by what happens in Beijing than Washington.

And speaking of driving the price of oil, expect the USO to be more volatile than the IXC. Because supply and demand are so finely balanced here with little excess productive capacity, any hint of material disruption on the supply side—hurricane damage to the Gulf Coast facilities, violence in Nigeria, threats by Iran to block the Straight of Hormuz to oil tankers, etcetera, etcetera—can cause oil prices to spike. Conversely any indication that demand might moderate can have a big dampening effect on the price per barrel. These moves are typically abrupt and short-lived breaks in what is otherwise a secular uptrend.

The United States Oil ETF is a commodity pool managed by the Victoria Bay Asset Management, LLC. USO’s investment objective is to reflect changes in the price of West Texas Intermediate (“WTI”) light, sweet crude oil, less the fund’s expenses. The fund pursues this objective through investments 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 the NYMEX, ICE Futures and other U.S. and foreign exchanges and other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and over-the-counter transactions that are based on the price of oil. The fund has been operating since April 2006.

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