The Oil Signal Not Seen Since 2013

Crude oil has been in the spotlight recently, amid hopes for a production freeze among major oil producers. In fact, Mohammed Barkindo, an Organization of the Petroleum Countries (OPEC) secretary general, today waxed optimistic on a deal to limit production ahead of the highly anticipated producer meeting on Nov. 30 (though some oil executives in non-OPEC Russia vow to keep pumping crude regardless). Against this backdrop -- and in spite of a historically rough few months ahead -- large speculators are diving into oil positions, and United States Oil Fund LP ETF (USO) options activity just sounded a signal not seen since 2013.

The latest Commitment of Traders (CoT) report indicates that large speculators have the biggest oil position since 2014. Of course, back then, crude oil futures were trading at nearly double their current price -- around the $100-per-barrel marker. This signals some exuberance among large speculators, possibly hoping for an OPEC deal.

Meanwhile, the USO daily put/call volume ratio jumped to 7.61 on Monday, marking just the third time since 2010 the ratio exceeded 7.0, according to Schaeffer's Quantitative Analyst Chris Prybal. The activity was driven by big buy-to-open action at the out-of-the-money April 2017 10-strike put.

Following the two other "signals" -- both in the third quarter of 2013 -- USO was much lower than usual, particularly at the four-month (84-day) marker. The exchange-traded fund (ETF) averaged a loss of 10.82% four months after its two elevated put/call volume signals, compared to its at-anytime average loss of 3.02%, going back to 2006. It's not much better going five months (126 days) forward, with USO averaging a loss of 8.53% -- more than twice its average anytime loss of 4.15%. Of course, considering there have been only two other instances of these elevated ratios, we can't jump to any concrete conclusions.

We should also note that the other two signals came in July and August, just before the seasonally worst time for USO. In fact, the ETF averages a negative monthly return in each month from August to January, according to Prybal. On the flip side, March is USO's best month, historically.

At last check, the shares of United States Oil Fund LP ETF (USO) were 0.5% higher at $11.43. The ETF has added close to 50% since its February all-time low of $7.67, though its upward momentum in May-July stalled in the overhead $12 region. In the short term, we'll be keeping an eye on USO and the energy sector as a whole, with the aforementioned OPEC meeting on tap and crude oil futures at a critical juncture over the next two quarters.

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