Reasons Why The United States Oil ETF Is A Sell
Summary 1-month return is -10.85%. Year-to-date return is -35.41%. USO is a Sell. Poor ROE for USO unsettles WTI crude oil investors. Upcoming OPEC meeting to provide no long-term relief. (click to enlarge) USO NYSE ARCA 3-Month Performance of Oil The United States Oil ETF (NYSEARCA: USO ) has been listed on the NYSE ARCA since 10 April 2006. The 30-day yield is 0% and the 12-month yield is 0%. The total net assets of the company are $2.80 billion. But the performance of USO has been anything but exemplary. With a year-to-date return of -35.58%, it is ranked among the poorer performing oil funds on the market. There is no price/earnings ratio to speak of either. The fund price is $13.11 (as at 30 November 2015) and the 52-week trading range spans $12.37 on the low end and $26.39 on the high end. The 1-year chart paints an even more disturbing picture in the sense that the stock has plunged 41.87% between November 30, 2014 and November 30, 2015, from $25.58 to the current trading price of $13.11. Here are some interesting metrics about United States Oil, to further illustrate why is a strong sell contender – despite the news of falling inventories, rising oil price projections, Fed rate hikes and declining WTI oil inventories for 2016 and beyond. Looking at the total market returns for the past 3 years we see the following: The year-to-date return is -35.58 % The 1-year return is -53.30 % The 3-year return is -25.87 % USO Fund Performance Overview More importantly, the performance of USO trails the performance of the index by almost 10%, with -26.14% for the year-to-date and an index year-to-date return of -15.43%. When compared to the S&P 500 index, the performance history of USO is equally bearish. The 10-year annualized return of the S&P 500 index is 6.84%, the five-year annualized return of the S&P 500 index is 13.69% and three-year annualized return of the S&P 500 index is 16.12%. USO has a significantly poorer performance record over 1 year, 3 years and 5 years. The worst year of course has been the period between November 2014 and November 2015 when the price of WTI crude oil dropped from over $120 per barrel to its current trading range in the region of $40 – $45 per barrel. Things to Look Out For in Coming Weeks As at 1 December 2015, the likelihood of a Fed rate hike following the December 15/16 Fed FOMC meeting is 76%. The dollar index is now over 100, and close to its 52-week high. The Euro for its part is faltering and is trading under the critical 1.06 support level. This is likely to decrease further when two things happen: the ECB decides to implement quantitative easing with additional stimulus measures to boost the money supply, and the Fed moves in the opposite direction with monetary tightening to increase interest rates. This will open up plenty of daylight between the euro and the dollar, sending the European currency closer to parity with the greenback. However, despite general market weakness in China and its impact on EM countries, we are seeing some positive movements in commodity prices around the world. Both gold and copper staged minor rallies, but the concern remains crude oil. In this vein, the USO fund will likely be driven lower on the back of several upcoming meetings and announcements by OPEC and non-OPEC producers. On Friday, 4 of December OPEC members will meet to discuss the issue of supply, demand and equilibrium prices for crude oil. For its part, WTI crude oil has been clinging to single digit gains over the past couple of days. The price of WTI crude oil dropped by 3.19% ($-1.33) over the past month. The price of Brent crude oil dropped 2.92% ($-1.31) since October 30, 2015. The 1-year forecast for WTI crude oil is $47 per barrel. For its part, United States Oil Fund of Delaware has the objective of having changes in its unit’s net asset values reflect the equivalent changes in the price of WTI crude oil from Cushing, Oklahoma. It operates as an oil futures price on the WTI crude oil futures on the NYMEX. The current fund managers are Ray Allen. How Crude Oil is Going to Be Impacted in the Weeks Ahead A big part of the problem with the oil markets is the oversupply. This is true of WTI crude oil, Brent crude oil and other crude oil suppliers. Oil companies are jockeying for position with one another, refusing to budge on market share considerations in favor of price considerations. A global supply glut is the order of the day and there are real concerns about a stronger USD, weakness in China and the possibility of a Fed rate hike. On the Nymex, crude oil for January delivery closed the week at $41.71 per barrel. This is now the fourth consecutive week of declines for oil futures traded in New York. For November alone, Nymex futures have declined by 10%. The EIA released a report detailing increases of 961K barrels of crude oil for its ninth consecutive gain in inventories. Now, US crude oil stockpiles stand at over 488 million barrels – the highest level in over 80 years. But it’s not only WTI crude oil that is feeling the pressure – it’s Brent crude oil too. On the ICE Futures Exchange in London, Brent crude oil retreated by 1.32% to close at $44.86. While there were some concerns about a potential conflagration between Russia and Turkey, that only led to a slight uptick in the oil price, but nothing strong enough to sustain higher prices. Concerns remain over the potential fallout of a larger regional war from Syria into Iraq, Iran, Jordan and other countries. But the most important upcoming announcement will be what is decided at the OPEC meeting on 4 December. This will be one of the most crucial meetings to take place in the final four weeks of 2015. Should OPEC member nations, led by Saudi Arabia, decide to cut output, the price of crude oil will rise moving into 2016. This will invariably have a positive effect on oil futures, oil funds like USO, and inflation rate targets for the US, the UK, the European Union, Japan and other countries. In fact, it is precisely the actions of the energy rich bodies like OPEC that can turn the global economy around. It is not that OPEC lacks the ability to effect change, it lacks the determination to do so. The majority of analysts – Banc De Binary among them – do not expect OPEC to come to any agreement about cutting oil production. That would be a blatant surrender to WTI and global pressures. There are low expectations ahead of this meeting, and even Russia – a key energy producer – has decided not to send an envoy. It is well-known that OPEC nations have deeper pockets to sustain plunging revenues and profits compared to WTI producers. It may well be a war of attrition taking place between both power blocs, but until such time as global demand is able to soak up global supply, prices will remain at historically low levels. US Oil Rig Count Expected by Baker Hughes on Friday Everyone is determined to defend market share at the expense of all else – even if it means putting themselves out of business. That is precisely what is happening with many oil producing countries around the world. High cost oil producers are feeling the pinch in a big way, and they are having to endure falling credit ratings, falling profitability and revenue streams, layoffs and the like. The bigger companies with lower costs of operations are now able to swallow up the smaller companies. Then of course there are the policy decisions of the European Central Bank and the Fed. The ECB is moving towards quantitative easing and the Fed is moving towards quantitative tightening. This will likely strengthen the greenback and make oil prices less affordable in an already flat-demand scenario. One of the things to look for this coming week will be the Baker Hughes report on US oil rig counts on Friday, 4 December. As greater numbers of oil rigs shutter operations, so US supply declines and inventories decline too. Falling numbers of US oil rigs in production is a double-edged sword for investors as it shows the US is incapable of maintaining operations at current prices. Falling numbers of US oil rigs will invariably be perceived negatively by investors in USO. Performance of Oil ETFs Exchange Traded Funds (ETFs) such as USO allow investors to access commodity markets for crude oil without actually taking futures contracts. Since USO has been one of the lower-ranked oil ETFs, it is worth considering other exchange traded funds. Among the strongest performers are the following crude oil ETFs on the US exchanges: The DB Crude Oil Dble Short ETN (NYSEARCA: DTO ) with a year-to-date return of 66.41% and a 5-year return of 140.02% The UltraShort DJ-UBS Crude Oil (NYSEARCA: SCO ) with a year-to-date return of 40.73% and a 5-year return of 102.05% The DB Crude Oil Short ETN (NYSEARCA: SZO ) with a year-to-date return of 35.66% and a 5-year return of 86.73% The United States Short Oil Fund (NYSEARCA: DNO ) with a year-to-date return of 31.98% and a 5-year return of 76.70% The VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) with a year-to-date return of 26.72% and a 3-year return of 183.02% The United States 12-Month Oil (US) with a year-to-date return of -30.24% and a 5-year return of -54.63% The Pure Beta Crude Oil ETN (NYSEARCA: OLEM ) with a year-to-date return of -33.39% and a 3-year return of -56.26% The DB Oil Fund (NYSEARCA: DBO ) with a year-to-date return of -35.29% and a 5-year return of -62.41% The DD Crude Oil Long ETN (NYSEARCA: OLO ) with a year-to-date return of -36.63% and a 5-year return of -60.39% The United States Oil Fund with a year-to-date return of -38.80% and a 5-year return of -67.48% The S&P GSCI Crude Oil Tot Red IDX ETN (NYSEARCA: OIL ) with a year-to-date return of -42.42% and a 5-year return of -71.32% The Ultra DJ-UBS Crude Oil (UCL) with a year-to-date return of -68.45% and a 5-year return of -93.18%
