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Trade of the Day: U.S. Oil Fund L.P. (USO)

Even in a bullish market, puts have a place

   

Today, we’re opening a new bearish trade on United States Oil Fund LP (NYSE:USO). It turns out that OPEC has been pumping more Brent crude than had originally been anticipated last month. That is likely to put some pressure to the downside on oil prices globally including West Texas Intermediate (WTI), which USO indexes. In addition, industrial production and investment declined a little more than expected in China over the weekend. As the consumer of 11% of the world’s oil production, Chinese growth is critical for higher prices. Traders are already moving into bearish positions in oil on the news and technically speaking, a decline back to $32 on USO is likely.

We still remain relatively bullish on the stock market in general, but oil prices can often trend opposite to stock trends because of the influence of the supply-side. Inflation expectations also remain very low. Commodity prices in general are expected to be soft and trending lower as long as that is the case. We will see additional inflation data this week that should help add some pressure to energy and commodity prices in the short term despite overall optimism in the economy.

Recommendation: Buy to open’ the USO June 33.50 Puts (USO130622P00033500).

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