Thursday, August 18, 2016

USO not the way to trade oil unless short term

stolen somewhere.

Spot Crude Oil: +26.2%

Crude ETF: -0.1%

see more: roll yield and more roll yield.

"The US Oil Fund (Ticker: USO) holds long positions in West Texas Intermediate crude oil futures contracts, and rolls these contracts forward each month. Like most futures traders, USO buys futures with leverage, putting up a small portion of the money to buy the contracts. The rest of the money is invested in Treasuries, which generates interest income for the fund.
Three factors play a role in determining the performance of USO: 1) changes in the spot price of crude oil, 2) interest income on un-invested cash, and 3) the 'roll yield'. The first two factors are easily understood, but the third factor, 'roll yield' should be examined further in order to determine the extent, if any, to which traders of USO will be surprised by its performance in relation to spot crude oil.
First some background: Oil futures are available for each month of the year, so you can buy a futures contract right now which gives you the right to buy oil in February 2009, March 2009, April 2009, and so on. Currently, the price of oil in February 2009 is less than the price of oil in April 2009, a condition which is referred to as 'contango'. (If the opposite were true, the market for crude oil would be in backwardation.) Most commodity funds, including the US Oil Fund (USO) buy what is called the 'near month' contract and, because they do not want to take physical delivery of the commodity, they sell the current month's contract before it expires and buy into next month's contract. This process is called 'rolling forward', and it can result in the ETF paying up if the forward month contract is higher than the current month (contango), or cashing out if the opposition condition exists (backwardation).
good read: