USO Fights Familiar Battles, On the Charts and Off

There are only a few weeks left in the calendar year, and the United States Oil Fund (USO) is running out of opportunities to stake its claim in positive ground for 2017. The fund's 2016 closing price of $11.72 wasn't surmounted on a weekly closing basis until as recently as Friday, Nov. 24 -- and last Friday's afternoon sell-off in equities effectively dashed USO's valiant morning attempt to string together two consecutive weekly settlements in positive year-to-date territory.

That said, USO's struggles in the $12 region are not a new phenomenon this year. Resistance here dates back to a bear gap in December 2015, and has since emerged as an impressively impenetrable ceiling. In 2016, the fund's highest weekly closing price checked in at $11.98, and the current 52-week high stands squarely at $12.00.

And if we look even farther back on USO's chart, we'll arrive at the July 2008 all-time weekly closing high of $117.39 (attained just prior to the rapid-fire implosion of the commodity bubble later that summer, and a few short months before the most chaotic days of the financial crisis). Given the significance of round-number returns from key historical price points as levels of support and/or resistance, we would be remiss not to observe that USO's current year-to-date breakeven level roughly coincides with a 90% decline from its record weekly closing high -- namely, $11.74.

At the same time USO saw its attempts to "go green" for 2017 stymied by this double-barreled technical hurdle, OPEC members were agreeing to extend production cuts through the end of 2018 in response to an ongoing oversupply in the market, with no plans to revisit output any sooner than June.

From a sentiment perspective, meanwhile, short interest on USO ramped up 12.1% in the latest reporting period to an all-time high of 74.47 million shares. Elsewhere, the "large speculators" tracked by the weekly Commitments of Traders (CoT) reports have amassed the largest long position ever on crude -- and this group has an unnerving tendency to mistime major moves.

With all of these various market forces seemingly stacked against USO, it may take Wall Street's equivalent of a "Christmas miracle" for the fund to end the year on a gain. But longer-term, we'd suggest that a sustained move above the $12 region would be legitimate cause for concern among the record crowd of USO shorts.