USO fails to give investors long run exposure to Crude Oil: The cost incurred by USO of buying and selling futures contracts in terms of bid/ask spreads, commissions, volumes of trades, slippage and overhead costs is an extremely dangerous long term proposition. Investor capital is being destroyed at a rapid rate.
If you want exposure to crude oil without the extreme costs, do not use USO unless you are using very short time frames.
I'm glad I have advised this to anyone who has asked me over the past 6 years.
Further info to follow or feel free to post your thoughts on what vehicles to use to gain exposure to Crude Oil here.
Tim 10:14AM Friday, January 9, 2015
Comments
A-shot
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I hope all the good things you give come back to you one way or another. Really nice coverage here as well...i did not think of USO in that way, but im still green
bitn8
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I would use USO if it breaks lower, down into the single digits....it would be a prime opportunity for selling the extreme premium in there via covered calls or short puts.
Alternately, any extreme spike to the upside should send futures closer to backwardation. Looking at the futures calendar right (front month back month spread) right now, it is seriously getting crushed, but looking back farther it still could have some room to the downside. Anyone wanting to get long and not take a lot of risk could buy the front month and sell the back month. You can get even smaller and use less margin by butterflying the position and selling 1 more back and buying 1 third month. However, this spread does not move much and you would need a good spike to upside for it to come in.
docwesley90
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I am curious as to what you would recommend to get exposure to crude without contango/backwardation...I suspect this is the reason CL and USO decoupled.
Thanks.
bitn8
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Oil explorers stocks or you could use XOP, XLE ejc.
bitn8
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and it is contango not backwardation - along with all the other reasons the author mentioned - that kills these kind of equity efts because most the time future are in contango and positions have to be rolled, meaning selling the front month at a lower cost and buying the back month a higher cost. This causes a natural decay in the value of the eft even if the price of oil rises higher.
timwest
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Yes NathanielT - That is a much more clear explanation of the costs of rolling (selling and buying) the futures. In a bull market you get the extra lift from the front months moving up above the back months until after awhile people see that all you have to do is buy the back months and hold until expiration for a nearly-free profit. In a bear market you get the pain of selling the front month at a low price, only to buy the back month at a higher price and then again watch it slide into expiration, losing money even in a flat cash market. My next chart will show how the leveraged ETF's lose money constantly by trading volatility in an unfortunate way.
Marek99
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Great catch Tim, will never trade USO again,
I bet there's an intraday percentage lag too...
thanks!
GlenSurnamer
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What are your preferred ETFs for crude?
BizkitBR
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Thanks... I suspect you think UCO is just as bad or worse? ... What do you recommend for Oil?