Is Oil Heading towards a New Year Low?

United States Oil (USO) resumed its downward trend as it fell by nearly 3% since the beginning of October. Let’s review some of the latest developments related to USO that could impact its direction and performance.

The chart shows the development in the price of oil and USO, in which both prices are normalized to the end of August. Both prices have declined in the past few weeks but USO has outperformed the price of oil by roughly 1%.  This gap in the performance between the two prices is mostly due to the current state in the oil futures markets, which is currently in Backwardation.

The chart above presents the changes in the gap among future contracts. Based on the above, the oil futures markets are still in Backwardation, even thought the gaps among these contracts have contracted in the past few weeks (compared to their state back in June). As long as the future markets remain in Backwardation, this is likely to keep USO outperforming the price of oil. So even if the market still expects oil to fall in the near term, USO will remain above oil prices.

The rest of this analysis is at Seeking Alpha

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