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Position: Long Oil via etf USO

Earlier today we initiated a position in oil via the etf USO, which the United States Oil Fund.  With heightened geopolitical risk, oil will garner a more substantial price premium.  We believe one of the outcomes of the nuclear summit that President Obama is hosting in Washington this week is that there will be no real resolution on major nuclear proliferation issues.   The derivative impact of this will be that Iran will continue to disregard international sanctions and rhetoric as it relates to its nuclear reactors.  Thus this risk premium in oil should increase.

Last year, the primary factor driving the price of oil, and most commodities, was the US dollar.  As the dollar declined, commodities moved in an inverse correlation that was close to -0.85.  As with many global macro correlations, they do not last in perpetuity.  As we have outlined in the chart below, the US dollar is up year-to-date, and so is oil.  The primary driver this year for oil is likely the resumption, or acceleration, of global growth, which will strengthen the demand picture for oil.

In September of last year we released our Oil Black Book, and I wanted to a highlight an excerpt from that thesis as it relates to oil supply:

“Specifically, over the last four years the growth in global oil production has averaged 0.48% annually, while the prior four years averaged 1.78%. The long term average of global production growth, going back to 1965, is 2.29%.  The conclusion is simply this: the last five years have shown a dramatic decline in the year-over-year growth of oil production.”

Make no mistake about until we have meaningful advances in technology that displace our thirst for oil, the primary supply and demand factor driving the price of oil will be supply; and, globally, supply will remain tight in an environment of normal economic growth.

Daryl G. Jones

Managing Director

Long of Oil - USD Oil