I 
've held United States Oil(USO) for several years now in the belief that oil prices can generally only go up. I say generally because we all remember back in the summer of 2008 when gas prices sky rocketed, fueled by a mini-bubble in the price of crude oil, only to come back down again later that year. It was this bubble that peaked my interest. If a commodity is overpriced, eventually it's price will swing lower, and usually over correct. I thought this over correction would be a good time buy, and chose USO to be the investment vehicle. I haven't thought much about it since then, but recent events in the commodities market have caused me to doubt my USO investment. When values are going up and everything looks good, it's easy to ignore problems with and investment. I suspect that I haven't been getting what I thought I was from USO. Some questions that I would like to answer are: how accurately has USO actually tracked the price of crude oil, how it compares to the general market, and how it compares to alternative oil plays.
A little background about USO: It was created on April 10th, 2006. It's a Limited Partnership ETF with "The investment objective of [...] changes in percentage terms of its units’ net asset value (NAV) to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange (the NYMEX)." Quote source and image source is Google Finance. Basically what it means is that If oil prices go up by 10%, then the USO ETF should go up by that amount as well.
Some Crude History: For some reason finding commodity prices is a little more difficult than a historical stock price, but I came across this Crude Oil Price History table showing week-ending prices from 2006-Present, which is good enough for my purposes. A brief review of the table shows December 30th, 2006 prices of $61.04, a high point on July 4th, 2008 with a price of $145.29, a low point on January 16th, 2009 $36.51, and a current price of $105.40 as of March 25th, 2011. This jibes well with what I vaguely remember from several years ago. If you bought around the low price in 2009, you currently would be up about 288%. That would be pretty sweet! The graph shows the price history of crude and USO from 2007 to present.
Some even cruder history (mine): So I had this brilliant idea to buy after the oil price swings to the low end of the spectrum, but how well did the execution go? I currently have 70 shares of USO, with an average price of just under $31. Current share price is just over $42, which means my current gain is about 35%. The information my brokerage gives me supports that (37.03% by their calculations). That's not bad, but considering that I could have had 288%, what happened to my other 250%?
Maybe I didn't buy at the right time. Looking back at the price history it's very easy to see when you should have bought, but at the time you make the purchase it's hard to know. Here is my purchase history:
| Date of Purchase |
Shares bought |
Purchase Price |
Percent gain |
| 2009-01-02 |
5 |
$35.47 |
19.40% |
| 2009-01-07 |
3 |
$34.92 |
21.28% |
| 2009-01-07 |
3 |
$33.37 |
26.91% |
| 2009-01-13 |
3 |
$31.43 |
34.74% |
| 2009-01-26 |
6 |
$32.65 |
29.71% |
| 2009-02-04 |
14 |
$28.98 |
46.14% |
| 2009-02-09 |
13 |
$28.50 |
48.60% |
| 2009-03-06 |
14 |
$27.50 |
52.83% |
| 2011-02-09 |
9 |
$36.65 |
15.55% |
Holy mackerel of auto-complete! The bulk of my purchases occurred right around the low point in 2009. Another interesting thing you can see from the purchase history is that the price low point in USO appears to occur in March of 2009 vice January. A review of USO's price history shows the low point was actually in February, but there is not a huge discrepancy between prices.
A deeper look at USO vs Crude Oil. The graph of price history above clearly shows that USO does track crude prices. I took a closer look at several years worth of weekly data to figure out what is going on. Out of 200+ data points, I came up with this graph for Difference in the Percent Price Change of Crude Oil vs. Change in USO. A value from 0-1% means that for that week the change of USO's price was between 0-1% less than the change of crude oil. Less than 1% difference would mean it's tracking fairly close to the commodity. However, the majority of the price difference changes are greater than 1%, even as high as 19%! That is wildly out of sync with what USO's stated goal is. Looking at the numbers, we find that the value lag is greater than 1% over 50% of the time. For comparison I did the same calculation on SPY, which tracks the S&P 500 index. The difference was shocking. SPY deviated by more than 1% from it's index only 3% of the time, and the highest weekly deviation was less than 2%. By comparison USO is greatly under-performing (I know it's not an apples to apples comparison). Overall the standard deviation for USO is about 2%, which seems fairly small, except when you realize losing 2% a week is how you go from a potential 288% return to a 37% return. FYI, SPY's standard deviation is 0.30% Also, USO is under-performing against the general market. A quick comparison between USO vs the S&P 500 on Google Finance shows that USO is lagging by about 13% since January 2009. I would have been better off just buying VOO(If it had existed at the time).
Why USO lags the price of Oil. What separates USO from SPY is that USO cannot directly hold the commodities it wants to track, while SPY, which is based on large US stocks, can easily buy and sell equities to maintain parity with the general market(I won't go into details of how SPY works here). USO, on the other hand, plays the oil market by buying futures contracts, which are promises to pay a certain price for oil delivery at a future date. Since USO does not want to store oil, they must sell their oil contracts every month before the contracts are due. If the price of the oil contracts for delivery next month is higher than the actual delivery price(and it frequently is), this means they lose money every month just selling and buying contracts. The term for this unfavorable price difference is contango. This is actually spelled out in the USO prospectus, but I don't think I would have realized the impact of what that paragraph implied without seeing the results in action for myself. Here are some links with some more detail on why this is the true: How Contango Affects Crude Oil ETF's and ETN's (USO, OIL, DBO), and Commodity ETF Basics.
This post is running long so I'll do a Part 2 shortly. Next time week look at other alternatives.
