Oil Prices and ETF's

Discussion in 'ETFs' started by Hulio, Aug 23, 2010.

  1. Hulio


    It'll be obvious before reading too much of my post that I am a newb to what I am talking about. Nonetheless, if anyone can educate me a bit, I would be very appreciative.

    I feel that the price of oil (and natural gas) are undervalued and would like to benefit from that fact if I am indeed correct. Everyone tells me to invest in oil companies on the stock market when I say this. But my question is this:

    If the crystal ball in my head says (making up totally random numbers here for arguments sake) that oil prices will rise 50% over a certain amount of time and stock prices of oil companies will rise 25% in the same amount of time, then how best would one benefit from this?

    I was hoping it would be as simple as investing in a fund where the combined capital was used simply to buy oil and you would be able to buy into and out of the fund as desired. But I am learning this is not the case. To benefit from a predicted rise in oil prices, is an ETF the way to go? How leveraged are these usually (now I'm just being lazy to not look that up myself)? How close is the correlation between fluctuations in oil prices and fluctuations in oil ETF's?

    As I said, I am a complete newb and may not even be asking the right questions. Any advice welcome... Thanks!
  2. If you truly believe this then buy DIG or OIH. Good luck
  3. unfortunately ETF's are a bad proxy for commodity investments in general. That is due to the cotango effect between future contracts that those ETF's buy. Cotango is when the forward contract is priced higher than the current contract, so when it reaches expiration you'll have to either have lesser contracts or spend a whole lot more to have the same number of contracts...
  4. Hulio


    All right. These are the things I guess I am wanting to learn. So, maybe the question I would like to ask is... at times when a person feels that oil prices will rise, how does one cash in on this? Is buying stocks in oil companies the only way to go? Is there no way to benefit directly and proportionally to the rise in oil prices?
  5. Buy the commodity, CL, for every dollar oil moves, is a 1000 dollar change to your account. I haven't looked at how much margin you need lately, but it's probably
    Y around 5000 per contract. Or could buy the mini contract QM, which is exactly half of the big contract
  6. The MacroShares have a maturity of 20 years from the original offering date, but as with all ETFs investors can sell their shares throughout the trading day.
    If investors hold the shares until maturity, they will receive a final distribution based on the ending value of the shares.
    However, the shares can be terminated by Claymore earlier if oil prices show a big swing to the upside or downside. For example, if oil prices start at $60, the "down" shares would run out of assets if oil prices rose to $120. Put simply, assets are pledged until the well runs dry.