This post is about crude oil and USO/UCO. Sorry for any misspelled words or typos but I'm using voice to text. I asked this post be allowed to remain up even though it is not related to the Direxion daily energy bull 3x. I would however like to ask those more knowledgeable on the ERX, why it has romped up so much when the front month contract for WTI crude is $18/barrell? I realize this is a basket of petroleum companies and I would assume that earnings from these companies are going to be atrocious moving into the next 1-2 quarters. Anyone else expecting a substantial pullback on the ERX? Or is the ERX moving up in anticipation of the smaller recliners having no alternative but to file bankruptcy, leaving room for the majors to buy them out at Pennies on the dollar?
Ok...now my rant
The bottom line here is that the Saudi/Russia production cuts are simply too little, too late. Our Strategic Petroleum Reserves are presently at tank top levels and the majority of our ocean tankers are filled to capacity. Storage costs, contango, U.S. shale producers unwilling to cease production of WTI Crude and ofcourse the roll forward of USO/UCO expired contracts to the next front-month are creating substantial decay and loss for ANYONE long these ETFs
The world demand for crude oil used to be 100 million barrels per day.
That obviously is no longer the case and we are building up a surplus and our tanks are literally overflowing. Crude oil is literally cheaper than water at the moment oh, and what I don't think anyone understands is that Saudi Arabia is profitable pumping crude out of the ground and selling it for anywhere over $4.50 a barrel. So they don't really give a shit. I believe they produced 36% of OPEC oil. We produce around 12 million - 13 million barrels per day here in the United States. Our shale refineries need to shut down, as there simply is no where else to store the oil. Many refineries will have no choice but to file bankruptcy and of course consolidation will occur.
USO/UCO are they trade or swing trade vehicles exclusively. If one were to be inclined to buy and hold either one of these, it would be my opinion to wait for the June contract (/CLM20) to sell down to $20/barrell. It is presently $25/barrell and it is my opinion that crude oil may have another 10% - 15% Spike if the economy begins to reopen but it would be considered a bounce in a bear Market trend for crude oil. I do not understand nor comprehend at all how anybody on this forum or anywhere else thinks that crude oil it's a certain number and then a v-shaped recovery occurs. There's simply too much inventory here in the United States and we are suffering from a catastrophic midterm decline in demand that started many many months ago before the Coronavirus.
UCO is reverse splitting 1:25 on tuesday, and it is my firm belief that no one will be interested and it because it will be Trading in the $35 - $40 area. People like the cheapy price, not $35-$40 even though it's just a mathematical equation. Unlike a common stock, the reverse split here should actually maintain it's stated design by tracking the percentage gain of crude oil by a factor of 2.
The only time I would consider purchasing UCO is if crude is down 10% and UCO is down say 25% , for a short term bounce/realignment with the front month price.
The only other time I would consider purchasing either USO or UCO is when the bottom in oil falls out and heads toward $15/barrell. I'm not sure if we will get that low but U.S. shale producers would have to shut down completely at that point.
Again, the less seasoned crude oil investor or shall I say most people that are used to trading stocks and don't know much about crude Futures, are assuming you can purchase these ETFs and simply hold on to them. That is the furthest thing from the truth. By Design, these things literally can go to zero. Think about something for a moment. If crude oil goes from $20 to $10 , that is a 50% decline for the USO but a 100% decline on the UCO.
This means the UCO goes to zero and would need to reverse split again or be dissolved like so many of the other ETFs recently.
I will TRADE the UCO only because USO is too slow and can't get out of its own way.
I will GO LONG the UCO for a mid term hold when there is physical and convincing evidence that the global economy and the Nationwide economy is about to recover and we will begin to utilize our SPR ( strategic petroleum reserves).
Again, a month or so ago, I was not this knowledgeable about this particular ETF but through research and spending a great deal of time understanding the Dynamics of how this exchange traded fund loses money over the course of time come by due to contango and the forward role of an expired contract into the next front-month, it remains patently clear that it is a day trading or swing trading vehicle only until the price of crude oil stabilizes, makes a new base and then begins to reverse Trend to the upside. That is when you go long this for the mid to longer-term.
I know that you have sent me a lot of other messages and I will try to read those, time permitting. Let's create a nice list of ETFs as well as index funds exclusively designed to take advantage of the lower prices of crude oil with limited exposure to the effects of contango and forward roll.
