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USO Bet on Oil Curve Repricing and the Strategic Reserve Nearing Constraints
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Hello everyone,
As you may have seen in the daily thread, I am very interested in oil right now. I thought I would write a quick post to discuss oil futures and share my ideas. For this post I'll be bringing up the first 6 oil futures contracts, from USOIL to CLGH027 (Mar2027).
As many of you know, we are in backwardation, a barrel of oil today costs more than oil in the future. This happens when there's an immediate disruption. Like the one we've experienced in the Strait of Hormuz, a strait that has been closed for a very long time. I don't personally see the supply. What I do see is a world burning it's reserves as fast as they possibly can in refiners running at full capacity. Diesel is soaring.
The SPR is down to 293.4 Million barrels of oil. That sounds like a lot. Except in reality they need congressional approval in order to draw below national defense limits.
Credit to u/MarmotFullofWoe for an incredible graph. They have been producing them regularly
Since the MOU went up in flames the SPR draws have started to creep back up in size. This week we were back to drawing 5.2 million barrels and the week before 6 million barrels. This is probably because the situation in the strait has re-emerged. That means we have 8-12 weeks before the SPR hits the floor.
That said, lets look at what the market actually thinks might happen. We are in backwardation right now. That's undeniable. What I want to suggest, and what I believe, is that the curve is going to uninvert or it is all going to rise. If the entire futures curve is rising that means there's a bullish market in the thing itself, oil, as a thing in the world is going up in price far into the future.
When I look at these contracts, I see higher and higher prices. I see contracts that are rapidly approaching their "peak war" time levels. One of which has actually surpassed the front end price.
Basically, the market is coming around to the idea that the current supply picture is going to continue into the future, or get worse.
I say it could possibly get worse because if you look at the oil futures contracts, the deferred barrels, barrels in the future, are rising faster than the upfront prices.
There's an open question of momentum, does the back end of the curve continue to outpace and cause it to invert, or are we approaching a great flattening? Additionally, October barrels are being priced higher than the ones today. There's already one contract that's not backwardation.
What I am worried about, and why I have a position in oil, is that we could be moving into the following curve (numbers modified by hand as a suggestion of shape--not real value)
If this mess was getting resolved, you would see a front end collapse in prices. The market would say that the situation itself was becoming resolved. That situation would look like:
Front End Collapse - The Issue resolved and supply is restored
In my opinion this is the anatomy of an oil shock and a potential crisis. It isn't the immediate backwardation that creates a problem, it's the structural repricing. It's the change in the futures curve of oil. If we were getting out of this, the front end contracts would crater and the back end just would start to flatten out (not saying long term, but that's what the moment would look like imo).
The problem is that the front end isn't collapsing. The back end is rallying.
Psychologically, a real oil shock (not a one time event) occurs in stages:
- Shock (exiting here)
- Strong backwardation in the curve -- worry about oil barrels today
- Persistence (entering here)
- Entire curve rises; back end out performs -- worry that the problem is going on too long; oil barrels tomorrow
- Regime Acceptance
- Flattening of the curve -- market contends with the idea that the problem doesn't normalize and persists
- Future Scarcity / Structural Repricing
- Back end rising through the front -- market sees a tighter, more expensive future (structural scarcity)
TL;DR So what do I think? I think the oil market is in serious trouble. I've been following this trade since things kicked off, and I believe a second leg is forming. A leg that could get very out of control as an SPR hits the floor creating a "second" oil shock as millions of barrels once again get removed from a market where gasoline and diesel are very tight. I don't know exactly when this happens, but I believe it has started to happen because of the rising contract prices and their relative gains to one another.
I am looking for a significant event should the strait not happen. Personally, I think it is the most interesting and rare trade in the market today. We've never had an oil situation like this before. No one has any real idea what will happen. It could resolve, it could also get incredibly out of control. I think the market is sleeping on this because the required action for it to be true, is a crash. They would have to exit their positions in large numbers, but their greed keeps them in the market. Everyone is thinking that they will be able to get out before it happens.
I think this trade is probably very binary. So this isn't a recommendation to follow my trade. I do think though that everyone should be thinking about this oil issue and what it means as we move towards 2027. Things are going to get cold.
One last thought -- not all crude from the SPR is the same. We are drawing significantly more sweet crude than sour. So there's a lot of questions around where the real floor is for each type.
One other thing to add about the SPR. These caverns are becoming increasingly unstable. These are not metal drums out in a field we are drawing from. They are caves of salt. We push water into the caves in order to push the oil out. Over the years, many of the support structures in these caves has dissolved away. There is a real potential for collapse. Read up on it if you didn't know about them. They are very interesting.
My position proof. I may try and roll my contracts into June, but I haven't decided. Either way this is what I am holding right now. I am planning on holding until there's real proof that this is resolved or a front end collapse happens. I genuinely hope that we get out of this. It just doesn't look like we actually are.
USO 210c 3/19/2027 x126
The poster focuses on the United States Oil Fund (USO), with the core thesis that continued disruptions to shipping through the Strait of Hormuz, tightness in refined products, and the rapid drawdown of the U.S. Strategic Petroleum Reserve (SPR) are turning a one-off supply shock into a structural repricing across the futures curve. The evidence begins with inventories: as of August 14, 2026, the SPR held approximately 293.4 million barrels, after declining by approximately 6.11 million barrels and 5.27 million barrels over the two most recent weeks. Extrapolating the past four weeks' average draw of 4.5 million barrels per week, one chart argues that if releases continue at the current pace, inventories could fall to the current authorized-scenario line of approximately 243 million barrels around the end of October. Another table shows that, as of August 7, inventories included approximately 105.3 million barrels of sweet crude and 193.4 million barrels of sour crude. Based on this, the poster emphasizes that the usable inventory 'floors' differ by crude grade and that faster depletion of sweet crude could first create a mismatch in refinery feedstocks. The second part of the thesis concerns the futures curve: in the post's chart, the prompt reference price is approximately $86.63, the October 2026 contract is approximately $87.06, and the contracts from November through March 2027 then decline sequentially to $85.16, $83.02, $81.05, $79.37, and $77.97. The overall curve remains in clear backwardation, although October is slightly above the current reference price. The poster argues that the key issue is not the current backwardation itself, but that deferred prices are rising relatively faster while the front end has not materially collapsed. This could indicate that the market is transitioning from an 'immediate shock' to a 'persistent shortage,' potentially followed by an upward shift of the entire curve, curve flattening, or even a structural scarcity phase in which deferred contracts rise above prompt contracts. The post also uses a manually modified deferred curve rising to $90-$120 to illustrate an extreme scenario, and a hypothetical chart with the front end falling to $80 and deferred contracts at approximately $72-$73 to show what a supply recovery should look like. These images are scenario illustrations, not forecasting models or actual quotes. The trade expression consists of 126 USO call options with a $210 strike expiring March 19, 2027. The screenshot also shows 1 call option with a $137 strike expiring October 16, 2026. The total option position is worth approximately $52,300, with cumulative unrealized gains of approximately $15,000. There is no formal price target or valuation model, but the OP states in the comments that if crude oil rebalances relative to diesel crack spreads, oil prices may need to rise by approximately 50%-70%. Major catalysts include continued disruption in the Strait, SPR releases reaching policy or operational constraints, China resuming imports, high diesel prices forcing refiners to compete for crude, and continued outperformance by deferred contracts. The opposing scenario includes a diplomatic resolution, a rapid decline in front-end oil prices, demand destruction, export restrictions, or refining-capacity bottlenecks depressing WTI. The most important flaw is that the thesis directly interprets higher deferred prices as evidence of permanent scarcity without presenting a complete time series of curve changes, while also understating global supply growth, Chinese demand, government intervention, and USO's product structure. In particular, the deeply out-of-the-money $210 calls also require an oil-price shock large enough to be transmitted to USO and to occur before expiration. A decline in volatility, time-value decay, and policy-related news could therefore produce a poor option outcome even if the macro direction is correct.
The discussion remains bullish-leaning, but with clear disagreement. Supporters believe the market is underestimating the duration of the conflict, refining crack spreads, and longer-dated supply risks; bears emphasize that high oil prices could trigger a recession and demand destruction, while questioning the size of the supply-demand gap. The SPR remains a focal point: some believe Congress will continue releasing reserves to “delay the problem,” while the OP maintains that the remaining reserves are critical for wartime security and that drawing them down further would signal strategic weakness; another commenter notes that IEA members theoretically still have roughly one billion barrels of emergency reserves. The community is also concerned that government intervention, news, and tweets could sharply pressure futures, potentially distorting traditional indicators; Chinese tanker traffic, demand, and inventories are still viewed as more important than the SPR. The instrument and timing risks of deep out-of-the-money USO options remain unresolved.
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