Jfonseca they are right.. You will loose time and time again when positions will be rolled forward. If you want to play it with ETF, then check DBO. This is where I am invested. They hold many contracts at the same time and OPTIMIZE roll. Check DBO vs USO.. While DBO made low at the same time USO did a few weeks back, it is now trading 15% above that low, while USO is almost at that low made back then.. One good spread trade could actually be to go long DBO and short USO.. But beware when spot rallies, USO will gain more and DBO will gain less. But on the long enough time now that contango is that steep, DBO should loose less. But those are really unprecedented times. I too was looking at the charts and how oil always rebounded and quickly moved back to 40$ etc.. But the problem now is that contango is soo steep you actually do not make any money on slow rise.. Crude would have to shoot up which currently it does not look to do so with demand down for quite some time.. I am still in DBO with most of my account, but I dont know how much longer I will stay in this trade, maybe its time to take losses and move on.. It really does not look too good for oil short to mid term and steep contango will eat all the profits..
A lot of arguments have been made about the impact of Contango on OIL ETFs. I have done a lot of back tests and the point is that if you believe that WTI will go to 40USD or higher (more than doubling its price) both USO, CRUD and LOIL seem to be good bets. BUT, they probably won’t be able to track OIL performance PERFECTLY! From these, LOIL is certainly the riskier bet, but also the one than might be able to almost match oil performance. LOIL performs best in a fast and direct OIL increase, without a lot of ups and downs. So I have made another back test in the period 2014 to 2017 when the OIL market was in contango. I assumed an investment of 1000USD in 2nd Jan 2014 and followed the evolution to 29th September 2017. WTI/USD 538,10 CL 541,39 USO 304,70 BCOMCLTR 324,49 CRUD 356,01 LOIL 64,15 If we analyze only the contango period when oil prices were increasing, roughly from 10th February 2016 to 17th February 2017 a 1000USD resulted in WTI/USD 1955,31 CL 1945,36 USO 1430,90 BCOMCLTR 1462,92 CRUD 1470,70 LOIL 1754,77 If we analyze only the backwardation period when oil prices were increasing, from 14th July 2009 to 29th April 2011 a 1000USD resulted in WTI/USD 1902,16 CL 1914,15 USO 1406,10 BCOMCLTR 1417,07 CRUD 1285,63 LOIL 1507,32 If we analyze a recent backwardation period when oil prices were increasing and the ETFs were already much more mature, from 21st December 2018 to 7th January 2020 a 1000USD resulted in WTI/USD 1440,11 CL 1375,30 USO 1372,00 BCOMCLTR 1379,13 CRUD 1377,08 LOIL 1596,32 Or in a much shorter time frame, from 21st December 2018 to 23rd April 2019 a 1000USD resulted in WTI/USD 1462,73 CL 1454,27 USO 1440,96 BCOMCLTR 1431,30 CRUD 1435,22 LOIL 1943,97
Well this is the problem. Price has to double and you will make like 20 % It was different in the previous contango situations, because price shoot up. I only looked at 2008 and 2009 just now and price of oil went from 40 to 80 in 1 year. So 100 % return? Well if you invested in DBO which optimizes roll and everything you made 45 %... Still a nice return for sure, but price had to double and this was in 1 year. Currently price is not 18 as you take into your calculations but 25$. Yes, may closed at 18, but now active contract is june trading at 25$.. And like everybody else showed you. If you believe price will go up, you can buy 1 year out futures currently trading at 35. Or 6 months out again trading at 34-35.. So if price goes back to 40$, how much do you make? Only the difference between 35$ to 40$, not the difference from current spot price.. This is the problem. You cannot buy SPOT! You only option is to buy futures contract which already trades with contango or lets call it premium. Price of 6 month out is already 35$, while current spot price is 20.. This means if oil actually does rise from 20/25 to 35 which it probably will, you make exactly 0$.. It has to go to at least 36$ for you to make a 1$ or 1.000$ per contract.. This is the problem.. Everyone know price is too low now and everyone want to make money on this so further out months are already bid up and there is no way for you to buy at spot and sell at 40$ other than to take delivery of oil and store it somewhere.. Or lease a tanker.. So again no backtest needs to be done.. All you need to do is to speculate on the price in 3 months or 6 months or 12 months and if you think oil will be higher than what futures are trading on that month not current spot, then buy it. I am also bullish on oil, I know price will not be at 20 or 25 for long, but unfortunatelly there is not way for me or you to make money betting it will rise from 20 to 30$.. It has to go up more than the difference on curvature.. And currently 1 mo out is 25, 2 months out is 30 and so on.. If you bet oil will be 30 in 2 month and it is, again, you make 0$.. It has to be higher. It has to be above 35 in 6 months or you again loose.. Hope it makes more sense now. You are fighting a steep curvature and if oil indeed does double in 1 year you can only make 20-30% return not more. Which is still nice, but again oil has to double in price for that.. Anything less and you will make pennies..
What ? I can absolutely guarantee you that you will realize a $10/BBL profit if you are long June CL futures at $25 and it goes to $35 before June expiration. https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_quotes_globex.html
This is not what I was talking about. I was talking about a few months out.. Sure if you buy now and it rises during the same month you are long you realize the profits. But I think most of people are aware that pressure on oil is down due to lockdowns around the world. So if you think price will be 30 in 3 months, you cannot make money out of that because 3 months out futures price is already at 30.. This is what I was trying to explain. Or if you think 6 month from now price will be 35$, not luck here either. It is already trading at 35$.. I am talking about now, this moment. Sure in 2 months this november futures can be trading at 28 and then go back up to 35 and you make money.. This is not the point of discussion what you write. The point is that slope is steep upward and oil rise is already priced in! So the only way to make money now is that you think price will be even higher. Markets think it will be 35, you think it will be 40 in 6 months, and you can pocket the difference. But OP and a lot of others are thinking oh nice oil is at 20$ now, I think it will be 35$ in 6 months, I can make 50% return If I buy it now and just hold until it rises..
Out-months reflect carrying costs as well consensus on future spot price. Is it possible to estimate how much of the far-month premium is actually an estimate of the spot price in the future, and how much of it is carrying costs?
You are myopic in your view. The market can also re-price the November contract to be lower....in which case you make money by being short.
Omg man, wtf is wrong with you? I was clearly talking about op post, being bullish. Of course you can make money 101 ways. You can also sell ATM and CL stays where it is and you make money. You can also sell volatility on CL and delta hedge it. You can also buy this oil and put it in the plastic bottle and sell on ebay and make money. Lol..