The United States Oil Fund LP (NYSE:USO) is one of the top ways for traders to bet on or against higher oil prices and it turns out investors are pouring into both sides.
A recent report from S3 Partners Director of Research Leon Gross explains how the fund is mostly “range-bound and mean-reverting.”
“Since the beginning of the Iran war, the USO (oil futures) ETF has been range-traded by both the longs and the shorts,” Gross wrote.
A graph tracking the fund back to March shows that longs sell as the fund price rises and buy when the price falls. Short interest tends to increase as prices rise, with investors covering on the way down.
“Long and short interest show both sides selling into strength and buying weakness, repeatedly profiting,” he added.
Essentially, as the price of the fund moves close enough to a key level, $120 in this case, longs have already sold and shorts pile in before the price goes back down.
“War and peace are both unstable extremes,” Gross said. “The middle is stable.”
Charts shared by S3 Partners show that the fund’s price has continued to climb or drop only so far before returning mostly to the mean level, time after time.
What Happens Next
S3 Partners expects this trend to continue, as the upside is “unstable” because neither party wants a prolonged war. Likewise, the lower levels face limits as peace talks have broken down time after time, sending the price higher.
According to Gross, the range should hold while Hormuz remains “unresolved, favoring trading the range.”
He also observed a similar trend with the State Street Energy Select Sector SPDR ETF (NYSE:XLE), which is trading range-bound, adding, “Investors can also play the range both long and short.”
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