Tuesday’s ETF To Watch: United States Oil Fund (USO)

by on March 8, 2011 | ETFs Mentioned:

The opening day of the week saw equities take another tumble, as Libyan protests continue to dominate the news. Yesterday, Libyan leader Moammar Gadhafi’s forces fought against anti-government rebels outside of a major oil port in the country. Due to the increasingly violent and widespread protests in the major oil producing nation, traders have prepared for the worst case scenario for oil reserves. The rich oil supply once flowing out of Libya has been brought to an abrupt halt, and no one is sure how long it will last. Oil prices continue to surge on Libyan protests, as each day brings new post-recession highs for crude [see also February ETF Flows: Commodities Are Hot, Emerging Markets Are Not].

As the price per barrel of crude makes its way to $110 per barrel and beyond, costs at the pumps have been surging as well. Since the protests began in the Middle East, “pump prices have jumped an average of 39 cents per gallon” writes Chris Kahn. This brings gas prices up to near pre-recession levels, where oil saw its historic high settle around $140 per barrel. Libya sits on the largest proven oil reserves in Africa, and averaged exports of 1.5 million barrels per day. With that supply now completely cut off, the U.S. government may instate a temporary solution to meet demand and attempt to cap prices in the short-term [see also USO vs. BNO: Explaining The Big Gaps In Oil ETF Performance].

The U.S. government currently has an emergency reserve of oil that totals about 727 million barrels known as the Strategic Petroleum Reserve. Typically the reserve is only accessed in times of emergency, and there is much debate as to whether or not our current oil situation can be classified as an ‘emergency’. “American consumers are already suffering from high energy prices and the effects of the economic downturn…In the short term, considering releasing oil … could help prevent oil prices from escalating” wrote several lawmakers in favor of accessing the reserve. The Strategic Petroleum Reserve has been tapped into twice before, once in the early 90′s during the gulf war, and once just after Hurricane Katrina when numerous pipelines and refineries were severely damaged. During the first tap in 1991, oil prices declined 33%, and in 2005 during the second tap, oil prices saw a 9% drop in the U.S. [see also Egypt ETF Still In Limbo].

In light of these major oil concerns, today’s ETF to watch will be the United States Oil Fund (USO). This ETF tracks changes in the price of light, sweet crude oil, as measured by the changes in price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange. USO is one of the most popularly traded ETFs, making our list of Top 25 ETFs By Trading Volume, exchanging hands an average of over 12 million times a day. This ETF has enjoyed the surge in oil prices this year, as it has gained roughly 10% in 2011. Yesterday, this fund traded over 22 million shares, nearly twice its average, so it will be an important ETF to watch as the market unfolds today. Should the government announce plans to tap into the reserve it could push USO sharply lower at least in the short-term. If, however, the government decides to hold the reserves and if the situation in the Middle East continues to deteriorate, look for USO to continue its ascent higher on the day.

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Disclosure: No positions at time of writing.