Cheapest way to bet on crude oil spot prices?

Discussion in 'Trading' started by tonyf, Mar 27, 2020 at 4:54 AM.

  1. tonyf


    WTI or Brent - what is the most cost effective way of making a rolling bet on the spot price?

    Say you want to buy oil at $25/gallon with a view of prices reverting back to $40 at some point, but you are not sure when.

    (p.s. answer to this question may sound obvious to some as futures, but I am equally looking for other offerings such as ETFs, CFDs.... to assess the cheapest option of placing that bet)
  2. cartmm


    I use ETFs. Both these track the WTI spot quite closely: USO in the US, CRUD.L in London.
  3. It's a barrel, not a gallon.

    The problem is, unless you are physically storing the oil, you can't just keep the spot price. If you are buying futures, rolling your contract upon expiration will be expensive based on the curve.

    Here are the prices for WTI:

    MAY 20 22.6
    JUN 20 25.71
    JLY 20 28.27
    AUG 20 29.85
    SEP 20 30.87
    OCT 20 31.62
    NOV 20 32.26
    DEC 20 32.79
    JAN 21 33.23
    FEB 21 33.64
    MAR 21 34.04
    APR 21 34.42
    MAY 21 34.81
    JUN 21 35.13
    JLY 21 35.4
    AUG 21 35.68
    SEP 21 35.96
    OCT 21 36.24
    NOV 21 36.54
    DEC 21 36.84
    JAN 22 37.06
    FEB 22 37.26
    MAR 22 37.47
    APR 22 37.68
    MAY 22 37.9
    JUN 22 38.1
    JLY 22 38.28
    AUG 22 38.45
    SEP 22 38.63
    OCT 22 38.8
    NOV 22 38.96
    DEC 22 39.13
    JAN 23 39.26
    FEB 23 39.41
    MAR 23 39.58
    APR 23 39.73
    MAY 23 39.87
    JUN 23 40.03
  4. Oil ETF's run into the same problem. All they are doing is holding futures contracts and rolling them.

    You can't buy oil right now based on how the curve is priced as a long term play without huge costs.
  5. cartmm


    Sure, ETFs are not free. There is a management fee, and for the oil ETFs there is a daily roll up to the slightly higher-priced contract and paying the bid/ask spread.

    But I wouldn't call it expensive because I get a decent exposure to the oil spot price with the convenience of not having to continually roll futures.

    I am holding USO and CRUD for similar reasons to OP. I think oil is decent value currently and want an easy way to bet on it going back to maybe $50-60 over 1-2 years. FroggerMan, if you have a better suggestion to achieve this, I would like to hear?

    I did a similar thing in 2016 when WTI went below $30 by buying USO. I am not sure how much I suffered in ETF costs, but my guess would be I still got 90-95% of the return of the future.
  6. Well, when USO rolls from the May to June contract you are going to lose 13.8% right there based on the current pricing. Meaning ignoring the management and trading fees, you need the spot price of oil to climb 13.8% to break even.

    I'm not saying there is a better option if you must have exposure but based on the current pricing curve, it is much more expensive now than it has been in years to hold USO long term.

    The market is telling us in June 2023, oil will be at $40 per barrel. If you think it will happen sooner, by all means go long oil.

    Read the prospectus and it will describe the potential cost of rolling the contracts:
  7. tonyf


    It sounds like buying battered E&P equity is cheaper that a direct exposure to the underlying commodity then?
  8. From the prospectus:

    "If the futures market is in contango, an investor would be buying a next month futures contract for a higher price than the current near month futures contract. Again, assuming the near month futures contract is $50 per barrel, the price of the next month futures contract might be $51 per barrel, or 2% more expensive than the front month futures contract. Hypothetically, and assuming no other changes, the value of the $51 next month futures contract would fall to $50 as it approaches expiration. In this example, the value of an investment in the second month would tend to underperform the spot price of crude oil. As a result, it would be possible for the new near month futures contract to rise only 10% while the spot price of crude oil may have risen a higher amount, e.g., 12%. Similarly, the spot price of crude oil could have fallen 10% while the value of an investment in the second month futures contract might have fallen another amount, e.g., 12%. Over time, if contango remained constant, this difference between the spot price and the futures contract price would continue to increase."

    My point is, we are in deep contango right now. I just want to make sure people understand the true cost of going long oil as a long term play based on the current market conditions.
    Axon likes this.
  9. If you are bullish on oil long term this would be a way to have exposure while avoiding the "contango" costs. Obviously you would be bringing in other risks such as solvency issues for the particular companies.

    In general, I would always recommend investing in the company rather than the commodity.
  10. orbit23


    Why would you want to buy oil? The fact it went down a lot doesn't make it a good buy. It's likely going down to 5$ a barrel.
    lovethetrade likes this.