Key insights
- The author argues that the longer-term oil futures, represented by the $USL ETF, are undervalued due to the market's expectation of a quick resolution to supply chain disruptions. If the Strait of Hormuz closure persists, $USL is poised to benefit as future oil prices adjust upwards, potentially impacting energy sector equities.
While $USO and $BNO (ETFs which track the near term price of oil) have surged, I believe the opportunity is in the longer term price of oil which remains underpriced.
The Backwardation Gap
The market is currently in record-breaking backwardation. While May WTI trades near $110, August WTI is sitting at $80. This steep $30 drop indicates that the market expects a rapid return to normalcy, despite the extreme near term supply crunch.
Why $USL?
Front-Month ($USO/$BNO): Highly reactive to headlines, interventions via emergency reserve releases; much of the supply shock and war risk premium is already priced in.
12-Month Ladder ($USL): Invests in a ladder of the next 12 months of futures. It is currently priced on the assumption that the Strait reopens shortly.
The Thesis
I won’t go too deep on geopolitical analysis here, but the math is simple: If you believe the closure of the Strait of Hormuz will be a longer-term event, the back months are severely undervalued. $USL allows you to capture the correction as the market realizes "normalcy" isn't coming back anytime soon, and future dated oil needs to catch up to the spot price.