Thursday, January 1, 2009

Stock Pick: United States Oil Fund (NYSE: USO)

Am I nuts? With oil dropping to one of its lowest points in years, why in the world would I be buying United States Oil Fund? (I will be when the market opens.)

1/1/09 Price Per Share: $33.10

United States Oil Fund, LP (USOF) is a commodity pool that issues limited partnership interests or units that may be purchased and sold on the American Stock Exchange (the AMEX). The Company invests in futures contracts for light, sweet crude oil and other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the New York Mercantile Exchange (NYMEX), International Currency Exchange (ICE) Futures or other United States and foreign exchanges (collectively, Oil Futures Contracts). It holds interests in other oil-related investments such as cash-settled options on Oil Futures Contracts, forward oil contracts, and oil-based over-the-counter transactions.

Trends in Recession
Bear with me so I can break the reason behind this pick. Oil is low now -- but the supply and demand cycle will look entirely different in 2009 and 2010. USO lost 56% its value in '08 largely matching the decline of oil prices but could potentially gain all of that back and then some if OPEC continues to drop production, if the global economy picks up steam in late '09 and 2010, and if we continue to have "peripheral" issues that affect oil prices: problems in the Middle East, piracy, etc.

At $33.10, knowing the potential turn around of the economy and the spike in demand in the future, at this price, it is a bargain.