Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

USO Crude Oil ETF May NOT Offer You the Best Returns

Commodities / Exchange Traded Funds Oct 10, 2010 - 02:52 PM GMT

By: Jared_Levy


Best Financial Markets Analysis ArticleFor most investors, buying and selling futures contracts may not be their cup of tea. I think futures provide not only diversity, but also a “pure play” vehicle for many commodities like crude oil, gold, silver and many others. I will tell you upfront that they do require a little bit of education and guidance.

But I’ve spent years in the options and futures market. In fact, I was a market maker. So I can give you all the guidance you need. (And you can always learn more about trading options by viewing our FREE four-part options trading course on our media page.)

The average investor, who is not yet comfortable with futures, can usually trade ETFs like USO, GLD, SLV and others as a proxy for buying the actual futures contract.

While these funds may offer an easy barrier to entry to trade commodities and other non-stock securities, there are considerations you must take into account before trading any ETF.

Check the ETF Fees
Most ETFs charge a “management” or “administrative” fee to investors who buy the shares. Fees vary depending on how “active” the management has to be and other factors. Some fees can be quite steep. The aforementioned ETFs are moderate in their fee structure.

You can check out the ETF websites for details:

GLD (and more) -
SLV (and more) -

Crude Oil, USO… and Something Called “Contango”
The USO is an extremely popular ETF that many investors use if they want to invest in crude oil.

There is one problem with USO. You see, the USO buys and sells front-month futures contracts only. In the futures markets, there are futures for many months going out years in time. Each and every month, the USO must sell their contracts that are expiring and buy next month’s contracts, because that is what is in the fund’s prospectus. This action is called “rolling” and the dates are listed on USO’s website.

The issue with rolling each month is something called “contango,” which is natural for crude oil. Contango is the phenomenon that futures further out in time are more expensive than futures expiring in the current month. Contango is typical in crude because it costs money to store, ship and insure oil and those costs are built into prices over time. Sometimes contango gets extremely steep, with $10+ dollars in difference within a year’s time.

So if the futures prices are more expensive from month to month, the USO fund may experience what is called a “negative roll yield.”

Here is what it looks like (this is a small example; the USO trades tens of thousands of futures contracts each month):

You have 10 contracts of crude oil in October that you can sell for $80 – you net $800.

You MUST buy $800 worth of the next month’s contracts, which are trading at $85; this means you can only afford to buy 9 contracts (balance goes into cash, which is invested in short-term Treasuries, which are essentially yielding NOTHING now).

Now let’s assume that crude rallies $10 to $95 (you own 9 contracts at $85).

You would make $90 (9 contracts x $10), where the month before you would have made $100 on the same price advance.

This does also mean that you would lose less if it dropped, but if the USO continues to go higher and higher and the contango gets more steep (which happens quite a bit) you will NOT make the returns you may expect!

While the roll doesn’t make you “lose” money necessarily, it may slow the rate at which the USO responds to movements in the long term in crude oil -- this is the key to this article.

Crude Oil Investment Alternatives
If you think crude oil is going to continue to rise, there are publicly traded companies that are involved in the entire process of getting the oil from the earth to the consumer -- from drilling and production names to transporters, to refiners, and finally to the sellers of oil and distillate products. They all have their place in the proverbial “crude food chain” and all are sensitive to changes in oil prices, some more than others

If we start first with getting the oil from the earth, you have different ways of harvesting it. The most expensive and not-as-common method is the Canadian oil sands production, which may cost up to $70-$80 per barrel just to produce. Deepwater drilling -- the process used in the BP Deepwater Horizon rig disaster in April 2010 -- costs about $50-$60 per barrel. The shallow-water drillers using jack-up-type rigs can get oil out of the ground for cheaper still.

Then there are the oil-producing countries, pulling directly from the ground on land. In the Middle East, the raw cost to produce a barrel of oil is around $20-$30, but many of these countries (other than the U.S.) subsidize social programs and offer other benefits to citizens, directly from production, so their "real" cost is likely closer to $55 per barrel.

As the price of oil drops, programs like oil sand refining and deepwater drilling become less viable, which is part of the reason companies like Suncor Energy (SU:NYSE), which develops and mines the Canadian oils, and Transocean Ltd. (RIG:NYSE), which has large exposure to deepwater rigs, may see their stock prices drop exponentially as well.

So when you select your investments, choose wisely… and always read the fine print. And if you do want to invest in USO, one method to gain back some of the potential “negative roll yield” is to sell “out of the money” covered calls against your stock!

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Source :

By Jared Levy

Jared Levy is Co-Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.

Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange's youngest-ever members to become a market maker on three major U.S. exchanges.

He has been featured in several industry publications and won an Emmy for his daily video "Trader Cast." Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.

Copyright © 2010, Taipan Publishing Group

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in