The other day I stumbled upon a chart of the shares outstanding for the crude oil ETF: USO. To say there has been a slight uptick in the amount of oil speculating would be an understatement.

The shares outstanding has gone from 125 million to 435 million in less than a year. An increase of almost 250% in that short of time frame seems to scream crowded trade that should be avoided. Or does it?

Need to compare apples to apples

The rise in shares outstanding over the past year seems to dwarf the previous large rise during the 2008/9 credit crisis. But the price of USO at that point was much higher. So what does the recent increase look like compared to that period when measured on a dollar value basis?

By dollar value, the recent increase is actually less than the 2008 increase. Both rises are approximately the same, but the 2009 was just a tiny little bit larger.

The interesting part of that rise was that the price of crude oil bottomed at the same time as the dollar value outstanding topped.

If that same pattern repeats, then nothing should give the bulls greater hope than a dramatic decrease in the USO shares outstanding.

Seems strange and I would have expected the opposite, yet it is tough to argue with the facts. I guess the same pattern need not play out, but in the mean time, I am rooting for the USO shares outstanding to collapse.

Still a crude oil bull

I am still bullish on oil and expect it to grind higher. My preferred method of expressing that view is to be short crude oil puts at this elevated volatility level, and to be long energy company bonds. I am avoiding energy equities except for the very best companies with no debt.

This morning there was yet another example of how any slight uptick in the energy square will be met with equity dilution. Even though the price of their equity is hovering at two decade lows, Marathon Oil and Gas nevertheless issued $1.3 billion of new equity.

Tough to make money on energy stocks when every rally is met with tons of issuance.

Contrast that to the MRO bonds.

MRO stock is down 6% on the day while the bonds are up 7%. This phenomenon is going to play out over again and again. Don’t rush to buy energy equities, rush to buy their bonds…

Thanks for reading,
Kevin Muir
the MacroTourist