Maybe It's Time To Buy The Tumbling Oil ETF

The United States Oil Fund LP (ETF) USO, which tracks front month West Texas Intermediate futures, has plunged nearly 39 percent year-to-date. That massive decline comes on the heels of USO's 2014 loss of 42.4 percent.

Yet, somehow, someway, USO keeps attracting assets. To be precise, the ETF's 2015 inflows haul currently stands north of $2.8 billion, good for one of the best year-to-date inflows tallies among all exchange traded products.

Clearly, investments in USO have been the ultimate good money after bad trade, but that also sets oil up to be, perhaps, the ultimate near-term contrarian trade. With money managers and other professionals barely willing to nibble at oil from the long side, the risk/reward in being long oil here is surprisingly favorable.

Related Link: Crude Oil Approaching $40

Long Oil Not As Negative As You May Think

“Crude oil positioning shows the smallest net-long by managed money in the last three years. Unless you are in the over-zealous camp calling for $20/barrel the risk-reward of pressing a short position is low quality. Additionally, given the time of year and the asymmetry in this product adding a short position ahead of OPEC is simply not responsible,” said Rareview Macro founder Neil Azous in a note out Tuesday.

While professional traders are light on crude futures and related fare, there is evidence to suggest market participants are embracing USO in the fourth quarter. More than $1.1 billion in fourth-quarter inflows to the ETF confirm as much.

OPEC's Upcoming Meeting

This week's meeting of the Organization of Petroleum Exporting Countries could be a catalyst for near-term upside in USO, particularly if there are mere hints of hawkish commentary from the cartel. Of course, it would really be helpful if Saudi Arabia, OPEC's largest producer and de facto kingpin, would imply it is willing to trim output to support prices.

“While we have no way to quantify this, our gut tells us that if OPEC is a complete failure, including no supply cut and a dovish text, the downside in the barrel for the front-month futures contract (CLF6) is $38.00. Conversely, if there is a positive surprise there is $10–15 of upside going into the end of the year. That is good a good risk-reward profile,” added Azous.

Betting On Oil

Some traders are showing they are comfortable making bullish bets on OPEC cooperation. In the current quarter, the VelocityShares 3x Long Crude ETN linked to the S&P GSCI UWTI, which seeks to deliver triple the daily performance of the S&P GSCI Crude Oil Index, has seen inflows of nearly $582 million. The ProShares Ultra DJ-UBS Crude Oil UCO, which attempts to deliver double the daily performance of the Bloomberg Crude Oil Sub-Index, has added $260.2 million in new assets.

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