Leveraged Oil ETF UCO: Breaking Out; Crude Stabilizing; $20 Next

David Dierking

It was just a week or two ago that the oil market was melting down. The May 2020 crude oil futures contract fell to below -$40 per barrel as supplies and storage were maxed out and absolutely nobody wanted to buy. Producers were paying people to take crude supply off their hands!

One of the funds I watch closely is the ProShares Ultra Bloomberg Crude Oil Fund (UCO). It's designed to provide 2x the exposure to a basket of WTI crude oil futures contracts.

Like other oil funds, UCO got hammered recently and had to change its structure in order to even survive the meltdown. It updated its mandate to allow for exposure to longer-dated futures contracts and executed a 1:25 reverse split to avoid running into regulatory issues.

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But since the May contract implosion, the crude oil market is starting to stabilize. UCO bottomed out just below $12 on Tuesday, but has since risen by 25%.

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On top of that, buying interest and trading volume are starting to increase around the $14.50 level.

Now that states are beginning to reopen their economies - Georgia allowed certain businesses to reopen last week, Florida will begin next week and numerous others are developing plans - the huge supply/demand imbalance in crude will slowly start to come back into line.

With storage still essentially maxed out, it will be a while before all that inventory gets used. But when travel, trips to restaurants and even vacations slowly start picking up - both here in the U.S. and around the world - the demand for crude will steadily pick up as well.

This will undoubtedly be a slow road. I'm not calling for the return of $40 oil or anything like that, but I think a return to $25 isn't all that unreasonable.

The asset to watch here is the September 2020 futures contract. UCO moved away from the one-month contract and is now looking three months out. The move should reduce volatility and improve liquidity in the event that the June contract threatens to fall to $0 like the May contract did.

Given the changes to the fund's structure, the stabilization in the crude market and the slow global economic restart, I'd put a short-term price target of $20 on UCO.

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