Quick Thoughts on Oil ETFs Pre-OPEC Meeting


Oil prices have fallen the past month. This is not strictly supply and demand driven. With oil, there is far more that impacts spot prices.

Oil is impacted by oligopolies (America), cartel (OPEC) and Russia are protected by policy, capital and collusion. If oil were a free market, it would indeed be $50ish in price long-term.

However, supply is managed and demand destruction hasn’t begun yet – in fact, demand for oil will increase for years yet, so, the price can be manipulated. President Trump’s call for OPEC to pump more is what? It’s just a call for a different manipulated price of oil.

So, there’s a tug of war between economic needs of producers and of the rest of the economy. I have suggested we’ll see a “Goldilocks” price sustained around $80 per barrel. I put that under the category: “things that make sense, eventually happen.”

My thought is that tomorrow’s OPEC meeting is managed a lot like a Federal Reserve meeting – gentle language. What I expect is that added oil production comes in at the low-end of the range that people are looking at, which is 300k to 1m more barrels per day by year-end. 

If I am right, then oil prices will stop falling and turn around as inventories come down over the summer driving season. Welcome to managed markets. 

I think the argument for a “Goldilocks” price of oil continues to strengthen. OPEC and Russia won’t sink oil prices too far. Shale is important, but for the next year, production is capped around 11mbd due to transportation issues. 

With demand continuing to increase, getting to $80/b roughly seems imminent. Right now WTI is trading about $64/b. That implies a 25% upside between now and next summer in my opinion, possibly quicker. 

If investing in U.S. Oil 3x ETF (USOU) that means there is about a 75% upside. I am buying another tranche of USOU ahead of the meeting. 

Calls on (DBO) or (USO) can also be used, but remember, those expire, so right now you are paying for time value, but will lose it down the road. I prefer the levered USOU over options in this rare case. 

If the price of oil does have one more leg down, then I will wait for that momentum to end and add one last tranche of USOU then. 

Disclosure: I am/we are long USOU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor – https://bluemoundassetmanagement.com – however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.