The Bottom Might Be In For Oil ETFs

The heavily traded and much maligned United States Oil Fund LP (ETF) USO, which tracks West Texas Intermediate futures, is up 8.6 percent over the past five days, while U.S. benchmark crude for March delivery is higher by 9.4 percent over the same period.

Under any circumstances, those are noteworthy performances, but this time around, traders and investors should be giving oil and the related exchange-traded products closer examination. The reason: Big gains for oil in short time frames do not come around all the time, and when those gains do occur, the signs are usually positive.

What Do These Big Gains Mean?

“The S&P GSCI (WTI) Crude Oil posted a 3-day gain of 14.4 percent ending Feb. 17, 2016. This is the biggest 3-day gain in about 6 months for the index, and gains of this magnitude have only happened near oil bottoms,” said S&P Dow Jones Indices global head of commodities Jodie Gunzberg in a recent note.

Related Link: How COntango Could Affect A Popular Oil ETF

Gunzberg's research pointed out that since 1990, the S&P GSCI (WTI) Crude Oil has only posted 15 three-day gains of 14 percent or more. While such showings occurred three times last year, prior to that, it had not happened since 2009.

USO's recent bullishness is a relief for those that have put money into the flailing ETF. Year-to-date, over $1.3 billion has flowed into USO, putting it just outside of this year's top 10 asset-gathering ETFs.

Sure, some of USO's recent rally is attributable to talk of Saudi Arabia and Russia, two of the world's largest producers, reducing output. And that good cheer is likely to be tempered, as there is no sign that U.S. shale producers are going to follow suit. This time around, U.S. production really does matter.

The Importance Of U.S. Production

“After the index hit its lowest since Nov 4, 2003, on Jan. 20, 2016, it capitulated, reaching near that level again, a few days ago on Feb. 11. Then oil spiked on news of the possibility of a production freeze from OPEC and non-OPEC producers, but quickly waned after hopes diminished and the reality of the lack of potential impact hit.

“OPEC has the ability to be the swing producer given its large market share, spare capacity, low production costs and capability of acting alone or in a cartel; however, U.S. inventories need to be low for it to matter,” added Gunzberg.