CME Crude Oil Long term long position

Discussion in 'Commodity Futures' started by shortbleu, Nov 26, 2009.

  1. Hi,

    I am a long term investor holding long positions for months to years.
    In February 2009, I bought a future CME MINY Crude Oil at around USD 45.5.
    Since February 2009, I rolled my future position several times (selling back the maturing contract and buying the next monthly / quarterly maturity) in order for me to keep my long position over the long term.

    Today's price is around USD 77.8 and in theory that would give a P&L of about USD500(77.8-45.5) = USD 16,150.

    In reality, my P&L is only around USD 11,200.

    Most of the difference between 16,150 and 11,200 is due to the fact I had to roll contracts from one maturity to another, i.e selling back the contract arriving at maturity at a cheaper price than the new contract I was buying. That is because the farer the maturity, the more expensive is the contract and therefore each time I roll, I am "losing" money or more precisely, I am making less money than I should have made, because the price is jumping up for each new maturity.

    How can a long term investor keep a long positon in WTI Crude Oil without the disadvantage of losing money each time he is rolling contracts?

    I decided to trade WTI Crude Oil using CME MINY futures because futures are a liquid instrument, there is a clearing house, the futures spreads are low and the commissions are low. However the cost or rolling the positions over the long term is ridiculously high!

    Is there a more efficient way to invest long term?
    Spead betting is out of question because spread betting companies charge an overnight interest rate each time you carry a long postion overnight and in the long term the cost can be very high.

    Trackers / ETFs are issued by banks and there is no clearing house, therefore if the bank goes bust, I lose all my money.

    So how should I invest, what investment vehicle should I use?

    Thank you.
  2. heech


    Don't buy the front month contract... Not that it would have made a real difference.

    You couldve bought the Dec contract back in Feb, and you would probably seen the same P&L you received from rolling.
  3. I assume (although I do not know) that ETF's need to roll contracts as well exposing them to the same type of "erosion" that you have suffered.

    But, I f I am incorrect in assuming that, and your only problem is exclusively counterparty raisk take a less emotional stance toward that risk. If you can have JPMORGAN CHASE or GS or BARCLAY as your counterparty you have not eliminated your risk but you have not much more risk than the clearing house. The fact is for these counterparties to go down their governments must be underwater.

    It is one thing to wear a belt and suspenders but it is another to wear two of each.

  4. Thanks to all for your inout on this thread.


    If you look at the future curve, you'll notice, the further the maturity, the higher the price of the future, so it does not matter a lot if you roll every month or every 2 month or every quarter, you will end up with more or less the same P&L.
    By rolling quaterly, you will pay less in execution fees, but you'll pay more in spread, so buying far maturity contract does not solve the problem unfortunately.

    Swan Noir,
    I made some research and you are absolutely correct, most ETFs or ETCs tracking crude oil have for underlying future contracts, therefore ETFs are also exposed to the contango and do no do better than people rolling control future positions.

    From what I've researched this week end, the best solution to have an exposure to crude oil while avoiding the erosion due to contango is to buy shares in oil companies. This means having a buy and hold strategy.
    Definitely something I need to look into.
  5. If you are truly bullish about oil looking out more than a year than you should not buy oil companies but companies who have large interests (in comparison to the size of THEIR company) in oil sands.

    These plays are very highly leveraged to the price of oil and once crude goes above 80 or $90 the shares (if you have picked the company carefully) have the potential to skyrocket.

  6. There are now many more ETF's available in the energy marketplace which can eliminate most of the costs incurred while rolling your position. I recently saw an interview with Mark Fisher on CNBC discussing this exact topic.

    Kevin P Kelly
  7. I, too am a long term futures contract investor. I am curious as to how you manage your risk in terms of losses. Do you just grind your teeth through the losses or you actually did close out positions and establish new ones @ a later date/ lower price?
  8. Shortbleu,

    First of all, nice trade.

    Methinks you're looking at this the wrong way.

    What was your margin requirement? 3,000 USD? You've made, what? 400% in your position in slightly over a year? And your complaint is...? :)

    Futures contracts DO carry interest (why would anyone give you or anyone else anything for free?). The difference with spread betting companies (apart from the counterparty risk and that these bitches will charge you a rate several times higher) is that with spread betting the contract is "continuous" so they will apply the interest overnight, whereas futures contracts have an expiry date and the interest is implied in the price (therefore the price difference when you roll them). ETF's also charge you interest (the one implied in the futures contracts), only they smooth it out with a continuous price series.

    The reason why the cutback (16 --> 11) seems so large is because you're leveraged 20 times. That is, you deposit as margin 5% or so of the full value of the contract, but pay interest on the full notional value of the contract (makes sense?).

    Other people will, if they haven't already, tell you of options, but options do take into account interest rates too, on top of many other factors that will only further drive you crazy (or not).

    Shares of oil companies and the price of oil, although somehow correlated, are completely different animals. Just take a look at shares of oil companies throughout the BP debacle and at the price of oil itself. The more specialized the companies are (say, oil sands) the higher the discrepancies will be [Note: I'm not saying that Swan Noir's idea of investing in oil sands is either good or bad - just that it's not the same as a plain vanilla long oil position].

    There are three things you need to understand:

    1) You are using a short-term speculating instrument (futures) for a long-term strategy.

    2) Your timing entering (excellent) and exiting (we'll see) the position is way more important than the cost of rolling over your position. If you had gotten out at two months ago at 83, you'd have more than those theoretical 16,000.

    3) Most traders seldom get such a good trade as this one of yours (congrats, enjoy it). Most traders rarely expect to turn 3,000 USD into a fortune (if that's what you're trying to do).

    It's a bitch that you can't go back and go long 10 full-size contracts :mad:

    Good luck

    PS: next time you pick a bottom in any market, please do not hesitate to let me know :)
  9. bone

    bone ET Sponsor

    USO, USL, UGA, and DBE are going to be affected by futures "roll yield" in order to comply with the terms and conditions of their prospectus. Crappier return in terms of capital use efficiency than rolling a futures position yourself. Remember, their roll TWAP might be worse than yours, and there is overhead, management fees, slippage, etc. etc. with ETFs.

    Run some correlation studies on XLE, XOP, IEZ, and PXJ and you will quickly find that their correlation to the futures prices or the spot and wellhead prices posted on Platt's just plain sucks. For example, BP stock would have to be a major component for any hydrocarbon-based energy index.

    In short, keep doing what you're doing and stop the whining.