Outlook Negative For UCO As Global Energy Demand Worsens

David Dierking

The ProShares Ultra Bloomberg Crude Oil Fund (UCO) is down roughly 23% from its late August high as new coronavirus cases spike in Europe and sections of the U.S. causing global energy demand forecasts to weaken.

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Crude oil prices have managed to stay relatively steady throughout the post-COVID bear market, hanging tightly within a range of about $38 to $43 a barrel.

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But global energy demand over the next couple of quarters remains the biggest concern. The summer travel season is now behind us and the airline sector is primed for another pullback to fresh lows thanks to a poor industry outlook.

Passenger loads are still well over 50% below year-ago levels and now many of the airlines are simply struggling to stay afloat until conditions return to something resembling normal. Without a federal bailout, major airlines are being forced to make major layoffs to cut costs. American Airlines is planning around 19,000 job cuts, while United anticipates around 12,000. In total, the airline industry could see upwards of 50,000 jobs lost due to the pandemic slowdown.

Saudi Arabia's economy has taken a hit, but it shows no indications of slowing down production despite lower oil prices. The production cuts agreed to by OPEC members in an attempt to stall the downward pressure in oil prices seems tentatively intact for now, but they appear tenuous at best going forward with many oil dependent economies looking to augment other revenue shortfalls.

OPEC also recently trimmed its energy demand forecast for both 2020 and 2021. The group expects demand to drop 9.5 million bpd in 2020 compared to 2019 levels. OPEC expects demand to pick up again in 2021, but recently reduced its projection by another 0.4 million bpd to account for recent developments.

Conclusion

No reason to jump into any of the oil funds, such as UCO or the United States Oil Fund (USO). Prices are already seeing immense downward pressure and the economic environment doesn't look to significantly improve for another year or so.

That's not saying that oil prices couldn't rebound in 2021 once demand starts improving. But UCO especially, given its leveraged nature, figures to sustain significant damage between now and the point that we see that start to happen.

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