Oil Recovery Bashes Bears

Oil futures and the United States Oil Fund (USO) , which tracks West Texas Intermediate oil futures, closed modestly lower on Thursday, but recent price action in the commodity has been a bitter pill for traders that so eagerly bet against oil in recent weeks.

USO has cobbled together some solid showings over the past several weeks and if bullish oil traders have their way, USO will see more near-term upside.

USO has been somewhat steady following a sharp reversal last month that forced a spate of short covering. A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit. [Widening Contango Could Cut Into Popular Oil ETF’s Returns]

“On top of the recent price rally, Wednesday’s release of the weekly Energy Information Administration’s (EIA) energy stock report showed a surprise draw in Crude Oil inventories as domestic production is finally starting to see some cutbacks as drilling rig counts fall. However, before one becomes too bullish on Crude Prices we should note that U.S. Oil inventories are still at multi-decade highs and Oil products, such as Gasoline and Distillates, saw larger than expected builds,” according to Options Express. http://www.optionsxpress.com/

However, investors should be careful of getting caught up in oil’s recent strength because the commodity is still in a bear market and expectations for a significant recovery are muted. Looking ahead, we may be in for low oil prices for much longer than many anticipated. The Organization of Petroleum Exporting Countries, or OPEC, projects oil prices will rise by no more than $5 per barrel per year and will eventually reach $80 per barrel by 2020 or $100 per barrel by 2030 to 2040, Reuters reports.

Oil’s technicals are, however, improving.

“Prices have remained above the 20-day moving average during the formation of the Triangle pattern acting as support for the past couple of weeks. Trading volume has also declined during this time frame, which is consistent in the formation of this consolidation pattern. The 14-day RSI has turned positive with a current reading of 54.32,” notes Options Express.

United States Oil Fund

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.