So I thought I was being clever back in the fall after watching oil get pummelled for several consecutive days and decided to buy some USO shares/units. I can recall it was when oil dropped below $40, and then I may have doubled down at $36. Long story short, I was looking for a quick bounce and small profit, then I’d be out. Had done it before a few times, and thought worst case scenario is I’m holding an asset that I expect over the much longer term to increase in value.
Sooo…I’m still holding it, and now oil is above where it was trading then, but my USO shares have not yet reached my purchase prices. There is probably some explanation and I’m just not knowledgable enough as to how these things work to understand. Can anyone help explain to me?
I understand that the original “trading” strategy is not a good one, so no need to beat that dead horse.
I’m in the same situation as you, it’s because of how much contango there is in the forward strip, and the effect it has when they roll the contracts. USO supposedly works in backwardation but not contango, lesson learned.
Here is a 2 year daily chart of USO Vs. WTI oil futures ( the purple line is futures). As you can see, the ETF roughly tracks oil well but sometimes it diverges some. Keep in mind, the ETF tracks daily percent moves, not neccessarily price. Case in point, the past few months. If you want to know why, I would consider that oil futuers are more liquid compaired to USO and that an ETF tracks it’s underlyling with various instruments. You would have to check the prospectus. Of couse, ETFs are known to decay, but that is more assoicated with the levered funds. I don’t believe USO is. The decay would be almost negligable on this time scale.
Even in the recent environment, hasn’t some degree of contago still been the dominant situation? (meaning USO would never work) I’m not sure, I have not been watching that particular aspect. I just took a look now and the contango seems mild (although, since I don’t look at it too often I’m not sure what yard stick to use) It is showing $47 by the end of the year and $55 by 2024… That seems pretty flat to me. Who is the contago/ backwardation expert out there?
it’s because of how the curve changed. in the fall, futures contracts were pricing $60-$70 a few years out, now they’re pricing in $55 in 2024. big difference! buying it now with a flattish curve may not be the worst idea if you’re bullish but buying it back in the fall, you had to be incredibly bullish (i.e. basically calling $100 oil in a few years, or at least calling that expectations for oil prices go to $100 in a few years).
p.s. don’t quote me on these numbers as i’m too lazy to do that kind of fact-checking for an internet forum and don’t have BB, but i’m fairly confident they’re in line with the trend and degree of change.
Any of you close to the Fort McMurray fires? As if things weren’t tough enough there lately, the town is burning down. I watched a Canadian TV show last night and caught the videos on the local news – really scary. That’s a huge oil producing region. It doesn’t look like the fire is where the oil sands projects are but if production is taken offline that would be pretty significant.
a couple of weeks after the fire is over and the roads cleaned up, i’m sure most oil sands projects will continue, maybe at lower than max capacity as workers find accomodations. there are a good number of nearby workforce accomodation camps, mostly operated by Black Diamond Group. that are at about half capacy right now. there will be room for workers but not so much for families. that said, workers will be found to keep production up and running, whether it’s previous workers or new workers. this will likely put a short-term floor on the price of oil though as a good 1/2 million barrels is cut off for a few weeks.
Connacher O&G just stated it is restarting production. it is the smallest mind you at 8k/bbls/day and they need to produce or they’ll go into bankruptcy, but maybe the production halt will only last a couple of days…
Black Diamond was up 10% from when I made a call on it yesterday and it is up another 17% today. it will be the likely choice to accomodate all those displaced from Fort Mac.
