USO is range-bound and mean-reverting: war and peace are both unstable extremes, the middle is stable.

Long and short interest show both sides selling into strength and buying weakness, repeatedly profiting.

The range should hold while Hormuz is unresolved, favoring trading the range.

Since the beginning of the Iran war, the USO (oil futures) ETF has been range-traded by both the longs and the shorts.

The graphs show that shares outstanding (the total float, or long interest) are negatively correlated with the price. This means the longs are selling on the way up and buying on the way down.

On the short side, we see the same pattern with short interest increasing on the way up and covering on the way down.

When we create a net exposure metric of long minus short, the relationship is even stronger. We estimate there is $30MM of USO to buy or sell for every 1-point move in USO alone, without counting trades in the oil futures market. The action of the market participants may be reinforcing the range.

The rationale is that USO is reflecting a stationary pattern with the price moving but not covering new ground and returning to the center.

Given the volatility, the normal range during the war should have been 67%; it has only been 40%.

Such repeating patterns appear when the middle is stable and the ends are unstable—a pendulum, or a half-pipe run in the Olympics. Graphed over time, it traces a sine wave.

In the USO case, what is being tracked is the Iran war. On the upside the situation is unstable, because neither party wants a prolonged or escalating war, so it is self-limiting.

On the downside, neither party can accept the other’s terms, so the peace talks are also unstable.

The middle situation, of neither war nor peace talks, is what the system keeps returning to. We see this in the repeated crossing of the 120 level.

XLE follows USO, with the same shorting on the way up and covering on the way down, and is also range-bound.

Investors can also play the range both long and short.

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