Day: March 3, 2024

Goldman put out a analysis word final week suggesting that crude oil costs might vary within the $70 to $90 zone, reaching a peak of $87 by mid-year. Whereas something can occur and I don’t place a really excessive weight on any single sell-side store’s outlook, worth motion has turned extra constructive for black gold.

As geopolitical tensions within the Crimson Sea ease, although they’re nonetheless obvious, different macro drivers are at play within the oil patch. Late final week, considerably mushy US financial knowledge despatched Treasury yields decrease, which was seen as a boon for a lot of commodities. Whereas the immediate month of WTI crude oil touched $80, gold costs managed to notch an all-time excessive settle simply shy of $2100.

As for crude oil, I’m upgrading the Credit score Suisse X-Hyperlinks Crude Oil Shares Lined Name ETNs (NASDAQ:USOI). I see situations favorable over the subsequent few months for oil to steadily rise. It’s a scenario that ought to play properly for an extended oil place whereas promoting upside calls for the reason that technique usually advantages from impartial to barely rising costs on the underlier.

Goldman Sees Oil Peaking close to $87 by Mid-2024

In keeping with the word issuer, USOI provides traders publicity to an index that seeks to implement a coated name funding technique on Reference Oil Shares. The ETNs are senior, unsecured debt securities issued by Credit score Suisse AG, performing by means of its Nassau Department, that present a return linked to the efficiency of the value return model of the Credit score Suisse Nasdaq WTI Crude Oil FLOWSTM 106 Index.

The ETNs might pay a variable month-to-month coupon primarily based on the notional possibility premiums, if any, generated by the Index’s hypothetical month-to-month sale of name choices on the shares of the USO. In brief, USOI is lengthy near-term crude oil by means of USO and sells 6% out of the cash name choices on USO. It’s a small exchange-traded product with simply $336 million in belongings beneath administration and the annual expense ratio is excessive at 0.85% as of March 1, 2024.

What’s not perfect proper now, admittedly, is that implied volatility within the oil market is mild. Certainly, the Oil Volatility Index (OVX) has fallen under its pre-covid lows regardless of ongoing tensions within the Center East. Typically, the upper the implied volatility is, the extra possibility premium may be collected by a call-selling technique, leading to the next dividend yield for a product like USOI.

Nonetheless, with oil inching greater however with out an obvious catalyst for a serious transfer greater or decrease, the covered-call play ought to proceed to work. Again in December, I had a maintain score on the ETN. I anticipated an oil bounce, and that’s what we noticed, however was much less assured that good points could possibly be sustained. Now, 9% later, power market tendencies seem higher, therefore the improve.

Oil Volatility Has Declined Since October 2023

Oil Implied Volatility Muted

Looking by means of historical past, USOI usually outperforms the US Oil Fund ETF (USO) when the entrance month of WTI is flat to simply slowly growing. When a fast rise in oil is predicted, then merely proudly owning outright lengthy publicity to grease makes extra sense.

USOI Does Relative Nicely When WTI Trades Sideways To Barely Increased

Dividend traders are at all times interested in what the subsequent set of payouts will quantity to. For now, I’m not anticipating main distributions since oil volatility is muted. Nonetheless, an annualized yield north of 15% is completely inside attain.

USOI Annualized Yields by Month

A cautionary sign proper now could be seasonality. Together with Might and November, March has been a mushy month for USOI over the previous six years. After all, all the damaging returns may be attributed to March 2020 when USOI plunged 49% – that was instantly earlier than WTI dipped damaging.

USOI Bearish February By way of Might Developments A Danger

The Technical Take

With favorable macro situations, low volatility, and a mushy calendar stretch forward, USOI’s chart just isn’t all that spectacular. Admittedly, technical evaluation ought to be taken with a grain of salt on a yield-focused ETN like USOI for the reason that market worth will drop dramatically on every ex-dividend date. Nonetheless, discover within the chart under {that a} buying and selling vary could also be rising with key assist within the excessive $60s and resistance close to $86.

I highlighted the mid-$60s as an vital promoting spot in my write-up final 12 months, and USOI stays properly beneath it. However check out the RSI momentum indicator on the high of the chart – it’s in a bullish uptrend, which can auger for greater USOI costs forward. However with a long-term 200-day transferring common that’s negatively sloped, the broad pattern is decrease.

USOI: Help within the Excessive $60s, Enhancing RSI Momentum

Now let’s analyze the chart of prompt-month crude oil. You will note that WTI is above its 200dma after closing close to 4-month highs final week. Furthermore, I spot a possible bearish to bullish reversal sample, however resistance is all the way in which up at $95, and I don’t anticipate that to be examined any time quickly. Nonetheless, with a excessive quantity of quantity by worth under final Friday’s closing worth, there ought to be ample assist on pullbacks. Lastly, like with USOI, the RSI pattern is bullish.

General, each USOI and oil look constructive for my part as we head into springtime.

WTI Crude Oil: Bearish to Bullish Reversal In Play

The Backside Line

There are blended elements with USOI at present. Implied volatility being low will restrict the yield, however a sluggish and regular grind greater on oil by means of the summer time would assist USOI outperform USO together with offering constructive returns. That is my outlook, however I’ll you’ll want to keep watch over macro drivers that might alter the surroundings.