I don't trade futures. Is there a way to get strong correlation to the OIL price without buying futures? I want to buy and hold for 6 months or so. USO is a big joke, it seems. UCO is too leveraged to hold. What about OIIL - Credit Suisse's newish product? Other thoughts? Should I buy long-term oil futures, or perhaps call options on same?
USO is better now that the contango is flattening. When oil has steep contango you are not going to be able to hold longs without paying for the carry. There is no way around that. This is as tight as the curve has been in sometime. No reason why you can't hold USO.
https://www.elitetrader.com/et/atta...5/?temp_hash=cf49c0cbf76905601f8b7188d869f54c Here's the comparison of several oil ETF's ETN's
No. Here is what you need to understand. The cost of holding "spot" oil is the cost of oil itself, the interest cost and the actual cost of storage at Cushing or somewhere else. There is no "spot" price without the other two. So if you want to warehouse oil, which is actually what you are saying, you need to pay the total holding costs. If this were not the case, there would be a free arbitrage. I could buy your "free spot price of oil at X and sell the various financial products that are trading at X plus cost and capture the cost premium for free. That doesn't make any sense economically. So all futures, all ETFs and all swaps have to price in all the costs of holding oil.
Also, if prices rise, one would expect the contango to flatten more thereby minimizing your cost. If oil prices make new lows however, the contango could widen and increase your negative roll yield.
Sure, I get the cost of holding as a part of contango. That does not explain the variability of contango, however. Since holding costs are pretty stable, why isn't the future/spot differential stable? And why does oil occassionally hit backwardation? That seems strictly a market phenomenon. Anyway, USO does NOT track the price of oil well at all. If oil goes up slow and steady, it stays flat.
Holding costs are not stable. Where are you getting that from? Look, there is a huge tradeable market out there for moving oil into and out of storage as well as all the various blends. The cost to move oil from point A to point B whether by pipeline, rail, or cargo changes minute by minute. In fact, it's more volatile then the actual commodity itself. The freight market is exceptionally volatile. There is also an opportunity cost to move WTI "blend" into storage when one can blend it or transform the raw oil into something more valuable and sell that. There is a lot of economics that go into that forward curve. It definitely is NOT stable. Nor should it be. The oil markets go into backwardation due to the optionality of storage. When you have stockout conditions, markets have to become backwardated to entice storage holders to pull their oil out and put it on the market. The decision to do that can be solved by the value of the embedded call in storage. These are complicated decisions. If you are interested in this topic, do a google search on the convenience yield in oil. The convenience yield is the mathematical expression of the economic value of storing oil and it explains both the steepness in contango as well as why and when the market should become backwardated. Regarding USO, the fund holds a blend of front and deferred month contracts. It should NOT track spot oil but some combination of the front 2 contracts. Because of the roll yield, there will be a cost to holding this over time. Like I mentioned before, that roll yield is very tight right now so the cost is as small as it has been in years. But there still is a cost. There is no way around this. You have to pay to hold oil. If you can find a way to do it for free you will become a billionaire in a very short period of time.
I haven't studied those market structures and have no idea how to trade them. I understand them to be rather high risk. I didn't say I wouldn't, but if there is a simple way to get close to the same return, then I prefer it. Otherwise I have a large learning curve for a single buy and hold investment. It's just not my arena. I'm an options trader. I would get futures, but I don't understand the risk/reward parameters.