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Old 03-03-2009, 11:43 AM   #21
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like the IRS will ever figure it out
Not unless you're audited. But isn't that true about a lot of other fudging on your taxes, too?
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Old 03-16-2009, 02:01 PM   #22
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If you don't know (and I admit that I don't know) how contango and backwardation will go in the future, would it make sense to buy both USO and USL? Would that reduce the problem and cause your total investment to more closely track the actual price of crude?

How about UGA, which tracks gasoline prices? I can't find out how contango effects that one.
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Old 03-16-2009, 03:14 PM   #23
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If you don't know (and I admit that I don't know) how contango and backwardation will go in the future, would it make sense to buy both USO and USL? Would that reduce the problem and cause your total investment to more closely track the actual price of crude.
Could be. I'm no expert, but I would think that USL would be less volatile than USO, both on the downside and the upside.
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Old 03-16-2009, 06:48 PM   #24
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Could be. I'm no expert, but I would think that USL would be less volatile than USO, both on the downside and the upside.
That's what I thought, but I seem to remember a story about how USO went down more than oil went down last Fall.
We appreciate how you took one for the team last year, but we don't want to duplicate your experience.
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Old 03-16-2009, 08:08 PM   #25
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I think there is a fallacy in comparing the performance of ETF's, like USO and USL, to the spot price of oil. When one looks at the spot price of oil, he is looking at the front month's futures contract. However, when the spot price six months from now is compared to today's price it is computed as a simple ratio, as if there were no storage and financing costs. Thus, it is impossible for anyone to actually match the performance of spot oil as calculated. To do so, you would have to store the oil for free in your back yard. Typically, storage costs run around 1.5 cents per day per barrel, or about $0.45 per month. In addition there is a financing cost representing the opportunity cost on the money tied up in holding a barrel of oil. At 6% with spot oil price at $45 per barrel, this would be another $0.23 per month. Together, these costs represent about $0.70 per month, which means next month's futures should trade $0.70 higher than this month's (i.e. the spot price), and so on. Thus oil for delivery one year in the future, if efficiently priced, should trade $8.40 above today's price (approximately where it is today). In theory, the financing cost should be able to be recovered by investing the money collateralizing the futures in short-term fixed income securities. In reality, this is usually not possible due to the difference in borrowing and lending rates.

There will always be contango in an efficiently priced futures curve, due to these financing and storage costs. This contango will necessarily lead to a frictional loss in your position. This friction is simply the cost of carry. Holding USO or USL will simply realize this loss. If the futures curve is efficient, either ETF should track spot oil as best as is physically possible. If the futures curve is inefficiently priced, one should hold either USO or USL depending upon whether the futures curve is rich or cheap relative to the cost of carry. A month ago the futures curve was overpriced, i.e. it was possible to buy spot oil (the front month contract) and sell it forward, store the oil and deliver it in the future and make an arbitrage profit. The contango has narrowed to the point where this trade is less profitable. That is why USO has outperformed USL over the past month.

IMO, the trade that should have been done a month ago, was buy USO and sell USL short. This trade would have earned approximately 10% over the past month, as the contango narrowed toward fair value. Should the futures curve go into backwardation, one should buy USL and short USO. When the futures curve is fairly priced, it doesn't matter which ETF you hold, as both will perfom identically, but neither will match the performance of spot oil the way it is calculated, because the calculation as done in practice doesn't include the cost of carry.
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Old 03-16-2009, 09:39 PM   #26
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Just this evening I found a graph on Yahoo that compared USO and USL (along with some others), you could change the time period from the last day to the last several years; it looked to me like USL was doing better over the last year, or six months, or one month. Can someone find the site and post a link so I can look again?
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Old 03-16-2009, 09:54 PM   #27
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Originally Posted by Gearhead Jim View Post
Just this evening I found a graph on Yahoo that compared USO and USL (along with some others), you could change the time period from the last day to the last several years; it looked to me like USL was doing better over the last year, or six months, or one month. Can someone find the site and post a link so I can look again?
USL outperformed USO over the past six and 12 months as the oil futures curve went into an overpriced contango. However, over the past month, USO has outperformed USL as the contango narrowed. Just take a look at closing price data on Yahoo to confirm this (I actually posted some numbers on your other thread). The data is here:

USO

USL
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Old 03-16-2009, 10:05 PM   #28
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I'm not disputing your facts, I'm just trying to get the URL for future use. Can anyone post a link to the comparison graph? It allowed you to enter one or several ETF symbols.
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Old 03-16-2009, 10:16 PM   #29
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I'm not disputing your facts, I'm just trying to get the URL for future use. Can anyone post a link to the comparison graph? It allowed you to enter one or several ETF symbols.
Use this link

USO vs USL

and change the from date in the box below the lower right corner of the graph to 2/11/2009 and hit return
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Old 03-17-2009, 08:21 AM   #30
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I think a better comparison to the price action of USO and USL might be the 50-day and 200-day moving averages on a stock chart. The 50-day chart is more volatile and is likely to move more sharply higher or lower than the 200. When a market rises, the 50 day average rises relative to the 200 and when the market falls, the 50 falls relative to the 200.

So it might be with the USO/USL comparison, but with the size of the contango being the factor, not specifically the price action. When contango is rising, USO falls relative to USL and when it's dropping, USO rises relative to USL. Looking at the chart, USO is clearly somewhat more volatile than USL.
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Old 03-17-2009, 02:00 PM   #31
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Use this link

USO vs USL

and change the from date in the box below the lower right corner of the graph to 2/11/2009 and hit return

That's what i was looking for, thanks.
I entered DBO onto the chart and it seemed to perform similar to USL; less volitile than USO. How do USL and DBO compare/differ?

One commenter wrote that contango is more common than backwardation in the oil markets. If true, that would mean that any oil ETF has a built in degradation over time, USL or DBO might limit the damage but would not eliminate it.

I'm looking for a way to profit/protect from what I believe to be an inevitable rise in oil prices in the coming years. Oil companies themselves are vulnerable to any government (including the current U.S. administration) that thinks they are making "too much" money, so their profits might remain flat while oil tripples in price. ETF's have problems we have been discussing. Oil exploration or drilling companies might be a good proxy, I wonder how much the "too much" profit attitude will effect them?
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Old 03-17-2009, 03:22 PM   #32
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How about UGA, which tracks gasoline prices? I can't find out how contango effects that one.
It uses futures contracts too, I think, so I would imagine it could have some contango as well.

UGA has been on fire recently. Guess I'd better go fill up the gas tank today...
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Old 03-17-2009, 04:31 PM   #33
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UGA has been on fire recently. Guess I'd better go fill up the gas tank today...
En fuego! Those spot prices at the pump are going to be rough.
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Old 04-06-2009, 05:25 PM   #34
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I found this post on SeakingAlpha pretty interesting.
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Our good friend Jim Cramer went on a rant on Thursday night on Mad Money about the shortcomings on the United States Oil Fund (USO).
According to the digest at TheStreet.com:
"Cramer took aim at the United States Oil ETF in particular, calling the fund simply a travesty.
Cramer said the United States Oil Fund is not what it promises. The fund does not track the price of crude as it claims. Since the fund's [inception], crude oil has fallen 23%, yet the fund is down almost twice that at 54%. Just this year, oil is up 18%, but the United States Oil Fund is down 6%. This fund has nothing to do with oil at all, he said.
Cramer said the problem with the fund is that it doesn't buy oil, and instead buys oil futures. Since oil futures expire, the fund rolls over its contracts every month, incurring costs and expenses it'll never recover. Cramer said while the operations of the fund are legal, and listed in the [prospectus], investors need to steer clear at all costs."
As anyone who reads my blog knows, for better or worse, I've been writing extensively about the differences between USO, its sister fund USL and spot crude oil. As a general rule, I like that Cramer is at least talking about the fact that USO will not perfectly track the spot price of crude. That's an important message to get across.
As someone who bought USO without fully understanding the difference I think this is an important message.

I wrote April 30 calls against my USO position I am hoping they get called.

The question I still have is if I think Oil will be significantly higher (120-150) barrel in 3+ years from now what is the best investment vehicle to use?
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Old 04-06-2009, 06:48 PM   #35
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...
The question I still have is if I think Oil will be significantly higher (120-150) barrel in 3+ years from now what is the best investment vehicle to use?
As you can see from my previous posts in this thread and others, I've been asking the same question.
People say that an energy fund would be a good proxy for oil, but I've already mentioned my fear that the current regime will really sock it to the oil companies when their profits head upward. More significantly, comparing VDE to USO/USL/UGA/DBO charts for the last 2 years, VDE seems to have had a lot less pop than the oil-only funds.
So, I'm still looking.
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Old 04-06-2009, 06:51 PM   #36
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Another interesting article on the topic
USL, USO and the Contango Collapse -- Seeking Alpha
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