Buying Oil - be careful with the Oil etfs

[Andrew McP]

This is a very useful thread, especially as I just (finally!) got and sent off the ID needed to get a Selftrade account up & running. Now is definitely the time to be thinking hard... though I'll hardly be betting the farm. It's more of a hanging basket.

 

Andrew McP

[drbubb]

It just up now on FSU:

http://www.financialsense.com/fsu/editorials/2009/0115.html

 

ooks like it needs a chart or something

[Perishabull]

Got it, thanks. Brent has come down approx 37%, the OILB ETF is down 50% in the same period. I need to find better sites where I can get accurate prices on specific dates though.

[drbubb]

Got it, thanks. Brent has come down approx 37%, the OILB ETF is down 50% in the same period. I need to find better sites where I can get accurate prices on specific dates though.

 

Try Stockcharts.com

 

[drbubb]

Where Puts = Calls

 

ETF : Spot- : Feb07 : Mar07 : Apr07 xxx : Jan10 : Jan11

OIH : 71.71 : =====: =====: ==== xxxx: =====: 71.25

 

(Jan/11)

75.0c 20.70-21.65 : 21.30 // 75.0p 24.75-25.15 : 24.95

72.5c ==== ==== : 22.20 // 72.5p ==== ==== : 23.45

71.25 ==== ==== : 22.65 // 71.25 ==== ==== : 22.70 ==

70.0c 22.65-23.60 : 23.10 // 70.0c 21.75-22.15 : 21.95

 

ETF : Spot- : Feb07 : Mar07 : Apr07 xxx : Jan10 : Jan11

USO: 30.09 : =====: =====: ==== xxxx: =====: 31.75

 

(Jan/11)

35.0c 08.50-09.40 : 08.95 // 35.0p 12.60-13.10 : 12.85

32.5c ==== ==== : 09.90 // 32.5p ==== ==== : 11.25

31.75 ==== ==== : 10.35 // 31.75 ==== ==== : 10.45

30.0c 10.50-11.10 : 10.80 // 30.0c 09.40-09.90 : 09.65

 

http://bigcharts.marketwatch.com/quickchar...rs=5&bars=6

[The Traveller]

Hopefully I'm reading the technicals right because I became sorely tempted myself to grab a piece of the action with a looming double-bottom in crude prices. Not sure of my own 'turn' signal on MA Crossovers which appear to be a way off, RSI not particularly being indicative one-way or another.

 

Resigned myself to adopting wait-and-see, just when you think it can't go lower it does.

[drbubb]

I stuck my toe in oil today - see the DrB Diary

[Perishabull]

Where Puts = Calls

 

ETF : Spot- : Feb07 : Mar07 : Apr07 xxx : Jan10 : Jan11

OIH : 71.71 : =====: =====: ==== xxxx: =====: 71.25

 

(Jan/11)

75.0c 20.70-21.65 : 21.30 // 75.0p 24.75-25.15 : 24.95

72.5c ==== ==== : 22.20 // 72.5p ==== ==== : 23.45

71.25 ==== ==== : 22.65 // 71.25 ==== ==== : 22.70 ==

70.0c 22.65-23.60 : 23.10 // 70.0c 21.75-22.15 : 21.95

 

ETF : Spot- : Feb07 : Mar07 : Apr07 xxx : Jan10 : Jan11

USO: 30.09 : =====: =====: ==== xxxx: =====: 31.75

 

(Jan/11)

35.0c 08.50-09.40 : 08.95 // 35.0p 12.60-13.10 : 12.85

32.5c ==== ==== : 09.90 // 32.5p ==== ==== : 11.25

31.75 ==== ==== : 10.35 // 31.75 ==== ==== : 10.45

30.0c 10.50-11.10 : 10.80 // 30.0c 09.40-09.90 : 09.65

 

Dr Bubb, are you suggesting this could indicate a turn in sentiment?

 

Also, what are your thoughts on the put/call ratio as a tool? From what I've read so far, it could be useful in suggesting tops and bottoms. My broker is thinkorswim, the platform is great, but it doesn't have functionality that allows charting the put/call ratio over time. Do you know of any sites/platforms that might provide this?

[drbubb]

Dr Bubb, are you suggesting this could indicate a turn in sentiment?

 

Also, what are your thoughts on the put/call ratio as a tool? From what I've read so far, it could be useful in suggesting tops and bottoms. My broker is thinkorswim, the platform is great, but it doesn't have functionality that allows charting the put/call ratio over time. Do you know of any sites/platforms that might provide this?

 

I was juts parking some price data there so I could look at it later.

I will try to explain this data a little in a subsequent post.

 

Have a look at my comments on the DrB Diary thread, and you may see why I think Oil may be bottoming.

Basically, the recent price weakness has been limited to WTI, and that is partly driven by the expiration of the

February contract, which disappeared yesterday. Other oil prices were holding

 

[drbubb]

Here is what I am experimenting with : the OIH-to-WTI ratio.

By going out so far, I get a "cheaper" ratio than if I had stuck with a nearby Call.

Here's a comparison:

 

Month : Strike + Call Cost = Breakeven

July'09 $60 c. + $ 19.00 = $ 79.00

Jan.'10 $55 c. + $ 25.20 = $ 80.20

 

RATIOS : OIH / WTI

=====

Month : -WTI- : Brent : (W-Br) : OIH$71 : OIH$80 : OIH$79

Mar.09: 40.84 : 43.62 : ($2.82) : R - 1.74 : R - 1.96 : R - 1.93

Apr.09: 44.25 : 45.43 : ($1.18) : R - 1.60 : R - 1.81 : R - 1.79

May.09 46.56 : 47.13 : ($0.57) : R - 1.52 : R - 1.72 : R - 1.70

Jun.09: 48.28 : 48.65 : ($0.37) : R - 1.47 : R - 1.66 : R - 1.64

Sep.09 : 51.51 : 51.57 : ($0.06) : R - 1.38 : R - 1.55

Dec.09 : 54.13 : 53.98 :+$0.15 : R - 1.31 : R - 1.48

Jan.10 : 54.93 : 54.77 : +$0.16 : R - 1.29 : R - 1.46

Feb.10 : 55.71 : 55.51 :+$0.20 : R - 1.27 : R - 1.44

 

Source : WTI Closing prices

 

By purchasing the Jan.2010 call, I locked-in a price for OIH which yields a Ratio of 1.46 off the Jan.2010 WTI price. If and when I expect that WTI is ready to fall, I can short the Jan.2010 or Feb.2010 WTI contract, or alternatively, sell the USO etf, or buy a put on USO. The combination: a Call on OIH, and a short on Oil, would lock in an attractive OIH/WTI ratio.

 

Where has this ratio been ?

 

OIH-to-WTI Ratio : update

 

Buying this Ratio near 1.45 looks a fairly safe bet on the basis of the historical comparisons.

Recall that I am doing this because it is impossible to buy oil "below $40" except on very short term basis.

Even if I had a tanker to store it in, it would be expensive to maintain it there.

[drbubb]

How contango affects oil ETFs

Posted by Izabella Kaminska on Jan 22 09:07.

 

Hat tip to Abnormal Returns which draws attention to this oil post on Market Folly.com.

 

The Market Folly piece highlights why retail investors should most definitely be interested in the forward oil curve, and specifically whether it is in contango or not.

As the post explains, the performance of a fund like the US oil fund (USO) is largely dependent on three variables:

1) changes in the spot price of crude oil,

2) interest income on un-invested cash, and

3) the ‘roll yield’.

 

While the first two are easily understood by the retail investor, the roll yield is more troubling. Of course, when the market is in contango an index investor can lose irrespective of whether price moves at “face value” appear favourable. As you have to pay a premium to move into the ensuing monthly contract, a profit can only be achieved if the positive price moves are greater than the losses generated by the roll itself (the premium paid to remain in the position).

 

So while to many retail investors the low price of oil may look like an attractive buying opportunity, the current state of the market means, more than likely, they will generate a loss just because of the roll.

 

Consequently, a fund like the USO is not a good proxy for an oil-price position. As the Market Folly post explains (our emphasis):

 

The conclusion, at this stage of analysis, is that USO is not a direct play on the spot price of crude oil - it is, instead, a play on the spot price, forward prices, and the relationship between spot and forward (the slop of the futures curve). For a trader who is long USO, my instinct is that maintenance or aggravation of the contango in crude oil will cause impairment of the value of USO in relation to spot crude - whereas, any mitigation of the contango situation (including a shift to a flatter curve or backwardation) will enhance the performance of USO. I plan to study this issue more extensively. But, in the mean time, I will not consider USO to be a good proxy for the spot price of crude oil - and I will be particularly leery of participating in USO for anything other than a short term trade.”

 

And yet, investment in USO continues to grow. As Olivier Jakob at Petromatrix explained just a few weeks ago:

 

The size of investment in the ETF has recently grown to such a high level that it will need to roll in one day more than the GSCI in two days; and we do not think that the managers of the USO have the practical experience of rolling such a large position. Given the high Cushing stocks, the USO roll tomorrow to be followed by the GSCI roll and 2009 rebalancing, we would favor having any WTI length on March rather than Feb.

 

Interpretation? Retail investors are clearly not understanding the contango.

 

What’s more investors in the USO fund are potentially being doubly hurt; not only is the fund already faced with an uphill struggle of rolling a sizable position into a contango curve, it has chosen to do so all in one day with everyone knowing exactly the day it is doing so. That is not a good position for investors. To compare, both the S&P GSCI and recently UBS-taken-over AIG index roll over a number of days.

 

While Tuesday’s Nymex WTI roll from the February to the March contract may have seen the contango flatten a touch, it is still significant. Anyone interested can track it here on the Nymex website.

 

Related links:

Energy forward curves are tricky for Bloomberg - FT Alphaville

How contango affects crude oil ETFs - Market Folly

 

/see: http://ftalphaville.ft.com/blog/2009/01/22...fects-oil-etfs/

[GTG]

The powershares offerings look like better tracking tools:

The Long and Double Long ETNs are based on the Optimum Yield™ version of the Index and the Short and Double Short ETNs are based on the standard version of the Index. The Optimum Yield™ version of the index attempts to minimize the negative effects of contango and maximize the positive effects of backwardation by applying flexible roll rules to pick a new futures contract when a contract expires.

 

http://www.powersharesetns.com/products/crudeoil/

 

http://www.dbfunds.db.com/Notes/OIL/index.aspx

 

The DXO is currently using the July 09 crude contract CLN09 settled on 20th June.

 

Being a "note" one should be aware that the counterparty risk is with Deutsche Bank.

[ziknik]

It just up now on FSU:

http://www.financialsense.com/fsu/editorials/2009/0115.html

 

ooks like it needs a chart or something

 

Goldmans have copied your opinion

 

 

http://ftalphaville.ft.com/blog/2009/02/18...he-oil-markets/

 

A ‘cancer’ in the oil markets?

Posted by Izabella Kaminska on Feb 18 13:46.

 

Olivier Jakob at Petromatrix has commendably taken a strong stance against the USO ETF fund over the last few weeks, or rather, exposed to what degree the fund’s market inexperience is causing all sorts of mayhem for the WTI contract. All of this, he says, is because the fund has now achieved ‘’critical mass’.

 

Unsurprisingly, his Wednesday note shows a similarly strong view:

 

Despite the flat price weakness on crude oil, the contango on the expiring spread continues to narrow, in a pattern very similar to the previous expiry. The convergence of the expiring contract is now being done pre-expiry on a narrowing of the spread rather than post-expiry on a flat price basis. This re-enforces our view that the extreme contango on the WTI contract is primarily due to market distortions created by the USO WTI ETF. This cancer to the oil markets is however not yet over as positions in the USO were increased further yesterday and now reach 93′000 WTI April Futures contract.

 

Read in first on Petromatrix: in our weekly note of Feb 9th we advised that passive investors ought to be overweight oil equities/underweight the WTI ETF. Goldman Sachs has put out this week a research note advising clients to be overweight commodity equities/underweight the commodity, but they are not yet mentioning the distortions created by the ETF on the WTI markets. In a separate note, Goldman has advised taking profit on the short flat price at the back of the curve and turning instead to buying the long dated spreads Dec9/Dec11.

 

Jakob certainly has a point. What’s more, it is becoming increasingly obvious that investors in the fund are really confused on the matter of contango and how it affects them. The point they need to understand is that oil is not cheap even at these levels if they are holding the position long-term and losing successively on the rolls.

 

Note here the fund’s performance, which shows a 22 per cent decline in the month of December. Crude fell in December but not quite as much as that. Of course it’s got worse. Yesterday alone the fund was down 8.3 per cent, while WTI itself was down 6.88 per cent.

 

[littledavesab]

How contango affects oil ETFs

 

Funny I just found that while reading ft aplhaville and came here to post it, as it made the point very clearly ithat you DrB earlier on this thread.

 

I found it however via this which is also interesting

 

http://ftalphaville.ft.com/blog/2009/02/18...he-oil-markets/

 

Olivier Jakob at Petromatrix has commendably taken a strong stance against the USO ETF fund over the last few weeks, or rather, exposed to what degree the fund’s market inexperience is causing all sorts of mayhem for the WTI contract. All of this, he says, is because the fund has now achieved ‘’critical mass’.

 

Unsurprisingly, his Wednesday note shows a similarly strong view:

Despite the flat price weakness on crude oil, the contango on the expiring spread continues to narrow, in a pattern very similar to the previous expiry. The convergence of the expiring contract is now being done pre-expiry on a narrowing of the spread rather than post-expiry on a flat price basis. This re-enforces our view that the extreme contango on the WTI contract is primarily due to market distortions created by the USO WTI ETF. This cancer to the oil markets is however not yet over as positions in the USO were increased further yesterday and now reach 93′000 WTI April Futures contract.

 

Read in first on Petromatrix: in our weekly note of Feb 9th we advised that passive investors ought to be overweight oil equities/underweight the WTI ETF. Goldman Sachs has put out this week a research note advising clients to be overweight commodity equities/underweight the commodity, but they are not yet mentioning the distortions created by the ETF on the WTI markets. In a separate note, Goldman has advised taking profit on the short flat price at the back of the curve and turning instead to buying the long dated spreads Dec9/Dec11

 

 

[ologhai]

I would like a little (probably medium- to long-term) exposure to oil, and I have been considering doing so via the OILB ETF. Given the small amount of money involved at this stage, it doesn't really make sense to buy more than one 'stock' because of how much would be lost in trading costs.

 

I've read this thread a couple of times, but I'm floundering a little.

 

I suppose the key questions is, if I do want a little exposure to oil, is there really any sensible alternative to OILB (or similar ETF)?

[Walktothewater]

I would like a little (probably medium- to long-term) exposure to oil, and I have been considering doing so via the OILB ETF. Given the small amount of money involved at this stage, it doesn't really make sense to buy more than one 'stock' because of how much would be lost in trading costs.

 

I've read this thread a couple of times, but I'm floundering a little.

 

I suppose the key questions is, if I do want a little exposure to oil, is there really any sensible alternative to OILB (or similar ETF)?

 

Try PennWest energy trust (PWT.UN, PWE). Casey research recommending it as 12-18mth alternative to oil jnrs or ETFs, as long as oil stays <$70

 

AFAIK Dr Bubb has been trading PWE calls (see Diary thread)

 

 

[lupercal]

Despite the flat price weakness on crude oil, the contango on the expiring spread continues to narrow, in a pattern very similar to the previous expiry. The convergence of the expiring contract is now being done pre-expiry on a narrowing of the spread rather than post-expiry on a flat price basis

This re-enforces our view that the extreme contango on the WTI contract is primarily due to market distortions created by the USO WTI ETF. This cancer to the oil markets is however not yet over as positions in the USO were increased further yesterday and now reach 93′000 WTI April Futures contract.

 

Does this mean that the low spot price and higher price in the future is due to ETFs buying at the low level and then buying lots of next months positions just before the current positions come to a close. Rather than following the market the ETFs are altering it.

[littledavesab]

Does this mean that the low spot price and higher price in the future is due to ETFs buying at the low level and then buying lots of next months positions just before the current positions come to a close. Rather than following the market the ETFs are altering it.

 

It could well be

 

Back when oil topped out at $150 ish, there was also suggestion that the market had got skewed by spread betting firms and the like trying to hedge their short term bets by buying long term crude delivery contracts.

[drbubb]

Does this mean that the low spot price and higher price in the future is due to ETFs buying at the low level and then buying lots of next months positions just before the current positions come to a close. Rather than following the market the ETFs are altering it.

 

??

The market worked this way (big contango in a glut situation)

before the Etf was created

 

[GTG]

It's a shame about the super contango rendering the long ETFs pretty useless. I liked them because they are not correlated to the equities market and being bullish on oil but afraid of another decline in stocks I can't get any safe exposure to the price. I can't imagine the stocks not getting caught up in a big sell off, unless I'm missing something.

 

Anyone observed how well the powershares optimum yield ETN's I mentioned earlier on track the price?

[drbubb]

IT WORKED AS EXPECTED - ratio of USO to WTI slid sharply

 

Here's a look at the charts

 

: USO-to-WTI Crude Ratio ...................................................... : USO-to-OIH Ratio ...................................................... :

...

 

Nice move down in USO and Crude yesterday /Monday:

USO : $36.25 -1.72 / Pct Chg: -4.53%

WTI : $67.50 -2.52 / Pct chg: -3.60%

[OMG]

bumping this up.

 

I've been sitting on my hands this summer but would greatly appreciate an update of the current thinking on mid-long exposure in this market. I see that it's < $70 again today.