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Company U.S. Oil Fund (NYSE: USO)
Submitted By: JakilaTheHun
Member Rating: 99.94
Submitted On: 4/8/2011
Stock Price At Short Recommendation: $45.12

U.S. Oil Fund Profile

Star Rating **
Market Cap $1.9 billion
2x Bets ProShares Ultra Oil & Gas (NYSE: DIG)
ProShares Ultrashort Oil & Gas (NYSE: DUG)
ProShares Ultra DJ-UBS Crude Oil (NYSE: UCO)
ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO)
3x Bets Direxion Daily Energy Bull 3X (NYSE: ERX)
Direxion Daily Energy Bear3X (NYSE: ERY)

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch :
I've expressed my views on oil before, but my general thesis is that at over $120/barrel at Brent, it's unsustainably high. It's in the $120-$125 range on Brent right now, so I don't think it's necessarily in danger of imminent collapse, but I do believe that long-term gains at this price are extremely limited. Moreover, in the event of a market pullback / crash / double-dip recession, we'll probably see oil fall faster than the broader S&P.

There are several reasons why I don't believe oil can hold up at these levels:

(1) Trucking becomes much less economical vs. rail, meaning that more business shifts to rail, and oil demand is weakened
(2) High oil prices are a drag on the US (and Chinese) economy, which creates a greater possibility for rapid demand destruction
(3) People start to flock to hybrid sedans / coupes with higher oil prices, which weakens overall demand for oil over the long-run
(4) The more expensive oil gets, the more attractive natural gas looks in comparison, causing further potential for oil weakness,
(5) In general, high oil prices stimulate demand for natural gas, nuclear power, and alternative energy, causing further long-term demand destruction for oil,
(6) Likewise, high oil stimulates technological innovation in areas that reduce oil consumption,
(7) Pressure will begin to mount on policymakers to expand mass transit with higher oil
(8) We'll see more oil supply coming from high-cost sources such as the Canadian oil sands

Overall, there are a whole host of factors working to (a) decrease demand for oil and (b) increase supply once prices get this high. Any movement upwards exacerbates these factors exponentially once you tip over the $120-$130/barrel range.

Overall, I see shorting oil as a good hedge right now and I believe it will underperform the S&P at these levels.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.