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Oil is up about a dollar this morning after gaining ahead of the GDP report. At $78.86 the November contract is creeping back towards the psychological "expensive" level of $80. While this rally is helping the energy stocks - S&P 500 energy +0.71% yesterday - don't get suckered into buying USO. As shown in the chart below, the United States Oil Fund pays a significant premium each month when it rolls out of (sells) the expiring futures contract and into (buys) next month's contract. Since the fund is always invested in the front month and never actually takes delivery of the physical crude, the ETF will always underperform when the commodity is in a state of contango. In essence USO has to sell its current holdings at $78.86 and buy its new investment at $80.10 (using current prices for the November and December oil futures contracts).
Most of the time both futures and options traders are willing to pay a higher premium for contracts expiring further into the future, therefore futures and options markets are usually in contango and any fund rolling through the front month will underperform. USO is fine to use as a trading vehicle for a day or a week, but for any investment or trade with a time horizon of more than one month you should seriously consider the stocks.
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Posted by: Mike Thomas | September 30, 2010 at 03:10 PM
It is so sad you guys have no clue what you are talking about. You don't even understand how something this simple works.
Posted by: Anon | September 30, 2010 at 04:55 PM
The only way to maintain a moderate sum of happiness in this life, is not to worry about the future or regret the past too much. Do you agree?
Posted by: Air Jordan | March 16, 2011 at 03:00 AM