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Sharky
12-23-08, 09:41 PM
What are your favorite ways of trading long oil in the current market, and why?

Sharky
12-27-08, 05:58 PM
No one?

To get the ball rolling, here are a few possibilities (edited to include ideas from others too):

Futures, standard contract (1000 bbls, 35% margin, 3:1 leverage)
Futures, e-miNY contract (500 bbls, 35% margin, 3:1 leverage)
Futures options (ATM calls appx $6.50 for Apr 2008 @ 43.87)

ETFs/ETNs/LPs:

USO, oil commodity fund ETF (designed to track WTIC; fixed rollover into the next month), 0.45% management fee
OIL, iPath ETN
OLO, PowerShares ETN
DXO, PowerShares ETN, 2:1 leveraged
UCO, ProShares ETF, 2:1 leveraged
UOY, MacroShares $100 oil trust
DBE, PowerShares Energy Fund (includes WTI, Brent, heating oil and natural gas)
DBO, PowerShares Oil Fund (flexible rollover into the the next 12 months)
USL, United States 12 Month Oil Fund (averages out next 12 months futures contracts)
HOU.TO, Horizons BetaPro NYMEX Crude Oil Bull Plus ETF
XLE, Energy Select Sector SPDR (holds oil majors, service companies, etc)

There are also the oil majors, service companies, pipelines, etc. Here are a few of those:

XOM, Exxon Mobil
BP, BP Amoco
CVX, Chevron
COP, Conoco
RDS/A, Royal Dutch Shell
SLB, Schlumberger
BHI, Baker Hughes
RIG, Transocean
CHK, Chesapeake (nat gas)

Pipelines:

MMP, Magellan Midstream
EEP, Enbridge Energy
EPD, Enterprise Products
KMP, Kinder Morgan

Oil producers:

LINE, Linn Energy (100% hedged forward 3 years)

Royalty Trusts:

PBT, Permian Basin
BPT, BP Prudhoe Bay
DMLP, Dorchester Minerals

Mutual Funds:

ENPIX, ProFunds Oil and Gas

One issue with the commodity-based investments at the moment is the large contango from the current month to the next month out -- it makes rolling over fairly painful.

ax
12-30-08, 10:45 PM
Thanks for the info, Sharky. I've been looking at buying calls on USO $45s-$55s out to 1/11. Tracks the price of West Texas Crude minus about $8. Thought about pulling the trigger when it made it down to $27 the other day before the fighting began.

leegs
01-05-09, 09:39 PM
Sharky,

Thanks for the info. I've made some good money off of USO in the last week, and am going to put some more into OIL. Why those? I have no good reason. Anyway, your post outlining these possibilities was very helpful.

qwerty
01-13-09, 06:44 PM
Hey, Just found your post while looking to ask the following of the OIL ETN. Perhaps you'll permit me to add it to the discussion?

I recently bought some oil exposure using the OIL ETN.

Today I received from my broker the following document:

"Barclays IPath S&P GSCI Crude OIl Total Return index ETN -
Pricing Supplement to the Prospectus dated August 31st and the Prospectus Supplement dated September 3, 2007"

I'm glad I didn't get a copy of the original prospectus - this supplementary document is
0.5 inch thick. Pages are un-numbered and too many to count. Double sided, small font.

I am reminded of something some investment sage said about credit default swaps - he only had to look at the thickness of the contract specification and he knew they were trouble.

It gives me an uneasy feeling about this ETN.

Or is all this paper documentation just to get rid of the tree farms they planted as part of the carbon-offset for the index? LOL

metalman
01-13-09, 08:27 PM
Hey, Just found your post while looking to ask the following of the OIL ETN. Perhaps you'll permit me to add it to the discussion?

I recently bought some oil exposure using the OIL ETN.

Today I received from my broker the following document:

"Barclays IPath S&P GSCI Crude OIl Total Return index ETN -
Pricing Supplement to the Prospectus dated August 31st and the Prospectus Supplement dated September 3, 2007"

I'm glad I didn't get a copy of the original prospectus - this supplementary document is
0.5 inch thick. Pages are un-numbered and too many to count. Double sided, small font.

I am reminded of something some investment sage said about credit default swaps - he only had to look at the thickness of the contract specification and he knew they were trouble.

It gives me an uneasy feeling about this ETN.

Or is all this paper documentation just to get rid of the tree farms they planted as part of the carbon-offset for the index? LOL

you make a fine point. my guess? there will be a rash of reports some day that reveal most etfs and etns are... too good to be true.

Sharky
01-14-09, 02:58 AM
In the current market, the ETN / ETF approach doesn't seem very appealing. Between their high fees (0.75%) and the counterparty risk, there are other options that look better. Plus, with the still-large contango their fixed roll-over strategy can cost the fund money even when oil is going up (double-ouch on the leveraged funds).

I'm not back in the market yet, but at the moment a combination of the raw commodities (unleveraged) and the service companies seems best to me.

qwerty
01-14-09, 10:36 AM
Thanks for pointing out the downsides of the ETN/ETF (looking at the War and Peace sized prospectus, I can imaging 0.5% in fees goes to pay the lawyers)



I'm not back in the market yet, but at the moment a combination of the raw commodities (unleveraged) and the service companies seems best to me.

"raw commodities"? Are you going to fill a bunch of jerry cans? ;)

walenk
01-14-09, 01:02 PM
I've been looking for oil exposure in mutual fund form. The best I've found is Pro funds oil & gas, ENPIX. It's mostly big producers.
Anyone know any vehicle closer to the liquid?

Chris
01-14-09, 02:06 PM
I've been looking for oil exposure in mutual fund form. The best I've found is Pro funds oil & gas, ENPIX. It's mostly big producers.
Anyone know any vehicle closer to the liquid?

futures contract? :)

walenk
01-14-09, 02:13 PM
futures contract? :)

Tax-deferred account, it's gotta be a mutual fund.:(

qwerty
02-27-09, 09:57 AM
http://ftalphaville.ft.com/blog/2009/02/27/53030/regulator-probing-uso-oil-etf/

Several links in this story.

It is accused of having 20% of Nymex open interest.

Also link to the structured products which bank hang off of these.

jk
02-27-09, 10:27 AM
uso has major problems and doesn't track well.

from ftalphaville.com


The United States Oil Fund mystery (http://ftalphaville.ft.com/blog/2009/02/24/52836/the-united-states-oil-fund-mystery/)

Posted by Izabella Kaminska on Feb 24 13:18. Olivier Jakob at Petromatrix continues his crusade against the United States Oil Fund in his Tuesday note, an issue increasingly being picked up across the commodities and investment spectrum.
Jakob’s specific case is with the distortions being caused in the WTI market on account of the ETF’s size and predictability.

Olivier Jakob at Petromatrix continues his crusade against the United States Oil Fund in his Tuesday note, an issue increasingly being picked up across the commodities and investment spectrum.
Jakob’s specific case is with the distortions being caused in the WTI market on account of the ETF’s size and predictability. He notes people are already rolling positions from the front-month April contract and into May just to avoid the distortions. This is making the front-month contract somewhat of a farce, with a number of oil traders telling FT Alphaville the contract’s viability as a hedging instrument is truly in question. The volatility, meanwhile, is also immense relative to any other contracts further down the curve.
Consequently, Jakob calls it <big>a USO free-lunch</big>:
Open Interest data for Friday is confirming that positions are already being rolled into May. This is unusual to have positions being rolled so early before the next expiry but the USO has created a different crude oil market. The front timespread on WTI (Apr/May) is logically starting to weaken as length is taken out of April WTI and as traders start to position themselves for the USO free lunch. This in turn is making for a wider Brent premium to WTI and an improvement of the product crack. If Petrologistics is right on the level of compliance then given that WTI will remain for a while distorted on the USO rolls, this could make for an even wider prompt premium of Brent versus WTI and a strong rebound of US Gulf cash physical values during the roll of indices.
To make the point Jakob produces this rather nifty chart. He seems to have a point:
[chart shows huge and growing futures positions open interest owned by uso]

Of note, of course, is the exponential increase in the ETF’s open interest since November 2008

Of note too, is the fact <big>the industry happily front-runs the fund’s roll every month, presumably making a tidy profit from the distortations. Because of the nature of the contango, the ETF is also taking a loss on its NAV every time it rolls, leading to substantial underperformance versus the WTI contract which it is supposed to be tracking</big>. On Monday, for example, closed at a value of $23.32 per unit. That’s significantly below the Nymex WTI settlement of $38.44 on Monday. Returns for anyone invested in USO ETF units have therefore been dismal, and yet the fund community would have everyone believe a mass of investment demand, presumably from retail investors who know no better (because surely a professional would see the problem), is what is forcing the fund to issue increasingly more units, taking up ever more WTI contracts as it does.
Now there are three potential scenarios.
1) The fund really is in such high demand, and investor appetite is forcing the ETF’s general partner to purchase more WTI contracts so as to issue increasingly more units to maintain the units’ valuation in line with WTI to the degree set out by the prospectus.
Indeed, as the USO prospectus outlines (our emphasis):
As a specific benchmark, the General Partner endeavors to place USOF’s trades in Oil Futures Contracts and Other Oil Interests and otherwise manage USOF’s investments so that A will be within plus/minus 10 percent of B, where: • A is the average daily change in USOF’s NAV for any period of 30 successive valuation days, i.e., any day as of which USOF calculates its NAV, and • B is the average daily change in the price of the Benchmark Oil Futures Contract over the same period. The Benchmark Oil Futures Contract is changed, or ‘’rolled'’ from the near month contract to expire to the next month to expire during one day.
Which brings us to:
USOF invests in oil interests to the fullest extent possible without being leveraged or unable to satisfy its current or potential margin or collateral obligations with respect to its investments in Oil Futures Contracts and Other Oil Interests. The primary focus of the General Partner is the investment in Oil Futures Contracts and the management of its investments in short-term obligations of the United States of two years or less ('’Treasuries'’), cash and/or cash equivalents for margining purposes and as collateral.
And this:
USOF creates and redeems units only in blocks called Creation Baskets and Redemption Baskets, respectively. Only Authorized Purchasers may purchase or redeem Creation Baskets or Redemption Baskets. An Authorized Purchaser is under no obligation to create or redeem baskets, and an Authorized Purchaser is under no obligation to offer to the public units of any baskets it does create.
However, what we must add to scenario 1) is the fact that in the current contango market the ETF’s units are allowed to underperform WTI.
As the prospectus outlines:
Conversely, in the event of a crude oil futures market where near month contracts trade at a lower price than next month contracts, a situation described as ‘’contango'’ in the futures market, then absent the impact of the overall movement in crude oil prices the value of the benchmark contract would tend to decline as it approaches expiration. As a result the total return of the Benchmark Oil Futures Contract would tend to track lower. When compared to total return of other price indices, such as the spot price of crude oil, the impact of backwardation and contango may lead the total return of USOF’s NAV to vary significantly. In the event of a prolonged period of contango, and absent the impact of rising or falling oil prices, this could have a significant negative impact on USOF’s NAV and total return.
What that means, effectively, is that when deciding the fair value of the units the General Partner is obliged to reflect the losses incurred to the NAV via the fund’s roll. We know the losses are large as the fund is now worth some $4bn having been worth less than $1bn even last year (the bigger the fund the less effective its roll will be plus there are more contracts to take a loss on). We also know the losses are substantially more than what might normally be presumed under a contango structure because of the intensity of the “super contango” itself — particularly at the front end — as well as the related volatilty it is inducing in front-end spreads.
In the event of a perpetual contango and no new inflows this would presumably oblige the USO to self destruct eventually. Of course, such a “black-swan” scenario would have seemed distinctly unlikely in 2006 when the ETF’s methodology was first constructed — the depth and scale of the distortions being relatively unprecedented in recent WTI history. In the current climate, however, all manner of black-swan events are becoming distinctly more white-ish.
Interestingly, the mass new inflows happen to mirror the moment the WTI curve went into super-contango. This is a very fortunate coincidence for the fund, for it assures contango losses are diluted — a relative lifeline with every new issue. To explain - every new issue brings a new set of WTI positions which have not “lost out” due to previous consecutive negative rollovers.
Scenario 2) is that someone is methodically abusing the USO specifically to benefit from the profits incurred from front-running the fund in the WTI market itself. Of course, driving up the price of USO units to the extent that the fund is forced to increase its size 10-fold would be a costly operation for any one institution. It is possible there has been a systemic arbitrage opportunity unlocked by the trading community, all of whom - having identified an unsophisticated party in the oil markets — have decided to take advantage of their inexperience by doing exactly that. But there is one problem here, the situation would leave participants exposed to further downside in the USO. Perhaps it’s a risk some might be prepared to take, but it is a risk no less — even if selling-out is an option at any time due to the ETF’s liquidity.
And then there is a third factor, which may or may not be related. SEC filings show a mass spree of reverse convertible note issues linked to the USO (either outright or as a component) in the last few months. These have predominately been issued by Barclays, with a few by Morgan Stanley and one by RBC. An extensive but not exhaustive search of the filings by FT Alphaville identifies this rush of issuance only began in December 2008.
The issues have become increasingly frequent coming into February, with some referring to disclosed sums and others not. At the last count there were 11 issues by Barclays ranging between $1.5m and $2m when sums were disclosed - the latest dated Feb 23rd is here (http://www.sec.gov/Archives/edgar/data/312070/000119312509035190/dfwp.htm), and three issued by Morgan Stanley at sums of $4m and one undisclosed (http://www.sec.gov/Archives/edgar/data/895421/000095010309000198/dp12422_fwp-ps32.htm), one by Bank of Canada (http://www.sec.gov/Archives/edgar/data/1000275/000121465909000306/a21390424b5.txt) for an undisclosed sum and one at JP Morgan (http://www.sec.gov/Archives/edgar/data/19617/000089109209000818/e34613_fwp.htm) issued Feb 24th.
Reverse convertibles are effectively equity derivatives structured as short-term securities that allow the seller/dealer to minimise downside risk on equities they own, while maintaining the upside.
This could highlight the banks’ desire to limit an existing exposure to the USO, potentially one taken on intentionally by the bank for trading purposes, or possibly via the banks’ position as a market maker or authorized purchaser of the units, which it may or may not be having trouble shifting to market.
As far as the USO structure itself goes, as discussed above, it is the general partner who is actually charged with creating fresh units when needs be. According to the USO prospectus (http://www.unitedstatesoilfund.com/pdfs/uso-prospectus.pdf) the marketing agent then executes the order or “creation” of the units by soliciting orders, customers and customer funds in connection with the offering of the units. Accordin to USO this person is Kathryn D. Rooney, a registered representative of the Marketing Agent. From the prospectus:
Ms. Rooney is also the Director of Business Development for Ameristock Corporation, an affiliate of the General Partner, and is not an employee of the General Partner. As a consequence, she receives no compensation from the General Partner even though she is designated as the Marketing Manager of USOF. Any compensation she receives for her efforts on behalf of USOF is paid by the Marketing Agent. Previously, she worked at ALPS Mutual Fund Services, Inc. as a National Sales Director. She is also registered with the CFTC as an Associated Person of the General Partner. The offering of baskets is being made in compliance with Conduct Rule 2810 of FINRA. Accordingly, Authorized Purchasers will not make any sales to any account over which they have discretionary authority without the prior written approval of a purchaser of units.
By executing an Authorized Purchaser Agreement, an Authorized Purchaser becomes part of the group of parties eligible to purchase baskets from, and put baskets for redemption to, USOF. An Authorized Purchaser is under no obligation to create or redeem baskets, and an Authorized Purchaser is under no obligation to offer to the public units of any baskets it does create.

FT Alphaville has contacted Barclays and the USO by email seeking further explanation.

CanuckinTX
03-20-09, 09:13 AM
I like XLE - Energy Select SPDR Fund

The Energy Select Sector SPDRŽ Fund, before expenses, seeks to closely match the returns and characteristics of the Energy Select Sector Index (ticker: IXE). Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs (expenses are .21%)

Holdings:
As of 03/18/2009
Name Weight Shares Held
Exxon Mobil Corp 21.72% 14,074,538
Chevron Corp New 14.54% 9,783,801
Conocophillips 6.30% 7,378,279
Schlumberger Ltd 5.14% 5,370,414
Occidental Pete Corp 4.94% 3,898,176
Apache Corp 2.68% 1,851,649
Devon Energy Corp 2.53% 2,385,854
Xto Energy Inc 2.41% 3,294,538
Anadarko Pete Corp 2.40% 2,690,648
Hess Corp 2.31% 1,721,192

rachits
03-21-09, 01:01 PM
I've been investing the royalty trusts: PBT, BPT. They give a nice dividend as well, although they are taxed at income tax rates rather than cap gains rates.

Best to invest in them in your IRAs.

laphroaig
03-24-09, 05:44 PM
Until recently I hadn't thought there was much of a difference between the oil ETFs, and I'd traded both DBO and USO. Having sold my oil ETFs I started buying again early this year. Just dipping my toe in so far...

Google finance has a nice free comparison tool which easily shows how much the performance of these ETFs vary. For funds that are all supposed to be tracking the same thing, I found the variation quite shocking.

OIL (down 67.56% in 6 months, since 24 Sep 2008) appears to be the worst performer, even worse than USO (down 62.38%)

DBO (down 47.15%) and OLO (down 47.97%) do considerably better, actually slightly ahead of the West Texas Intermediate crude price they are supposed to track, which by my calculations is down 49.9% over the same 6 month period.

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chdet=1237928282421&chddm=49266&cmpto=NYSE:DBO;NYSE:OIL;NYSE:OLO&cmptzos=-18000;-18000;-18000&q=NYSE:USO&ntsp=0

Based on this, I was about to sell my USO and buy DBO, but then I looked at the shorter term...


In the last month, OIL is up 31.51%, USO up 29.37%

Whereas DBO is only up 24.78% and OLO up 24.21%

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chdet=1237929407625&chddm=7820&cmpto=NYSE:DBO;NYSE:OIL;NYSE:OLO&cmptzos=-18000;-18000;-18000&q=NYSE:USO&ntsp=0

Going back a bit further, it looks to me like USO/OIL tend to do better in a rising market, while DBO tends to do better when the oil price is falling. It's as if DBO is less leveraged (maybe this is a consequence of the fact that DBO buys a range of futures contracts over the next 12 months, whereas USO exclusively buys 1 month futures - I guess that would make USO more volatile?)

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chdet=1237930077265&chddm=213602&cmpto=NYSE:DBO;NYSE:OIL;NYSE:OLO&cmptzos=-18000;-18000;-18000&q=NYSE:USO&ntsp=0


jk's post worries me about holding USO, but I'm wondering if it might be a better bet than DBO or OLO if I am long oil.

I'm also a little bit skeptical that the market is dumb enough to invest $3.6 bn in USO (way more than any of the other ETNs/ETFs) if the fund is hemorrhaging money every month! It feels to me that the story can't be as simple as that...

Sharky
03-24-09, 07:36 PM
One approach I've used is to chart the derivatives or ETF/ETNs against crude prices. On stockcharts.com, for example, USO:$WTIC. What I'd like to see is a nice flat line, ideally trending up slightly -- unfortunately, the graphs show extreme volatility and a general downtrend, sometimes sharply so (particularly visible on the daily chart for USO:$WTIC).

Sharky
03-24-09, 08:25 PM
I've updated post #2 in this thread with several of the ideas that have been suggested.

I also added DMLP, a US-based partnership with honest management.

laphroaig
03-24-09, 08:37 PM
Thanks. Those are helpful charts.

What I see there is:
-- USO tracks $WTIC reasonably well until start of Dec 08. Has fallen 25% since then. Marked legs down at the start of each month are presumably the hit the fund takes on contract rollover.
-- OIL behaves much the same, with the same legs down visible.
-- OLO is all over the place, varying +/- 15%, but there looks to be a gradual upward trend against $WTIC
-- DBO has a nice steady upward trend until about Nov 08, then a big spike up of nearly 20%, which it has recently retraced. It's now back near its trend line.

The Dec 08 start of the USO decline corresponds well to the sharp rise in holdings of USO, as per the chart in the article jk posted. So I am starting to be persuaded that that monthly rollover hit on USO is real, and it's really not a very smart idea to stay in USO.

DBO is looking like the best alternative among the ETF/ETNs. Do you agree?

laphroaig
03-24-09, 09:29 PM
Interesting follow-on to the article jk posted...

http://ftalphaville.ft.com/blog/2009/03/09/53343/wti-back-on-top/

Izabella Kaminska has changed her opinion about who is buying USO.

Where previously she said investment demand was coming "presumably from retail investors who know no better (because surely a professional would see the problem)"

Now, she is of the opinion that...

"the share holders of the USO are in the majority sophisticated financial players who have the capacity as well to hedge their roll cost if they choose to do so"

I strongly recommend anyone holding USO who hasn't thought about the monthly rollover costs reads through Izabella Kamiska's articles on this ETF.

There are also some good comments on some of the articles, including discussion of why DBO has fewer rollover issues (because DBO buys futures contracts anywhere from 1-12 months out based on estimates of where the rollover costs will be lowest).

bargain
03-31-09, 01:46 PM
I would have thought that buying out of the money long range oil futures options are the way to go. This limits your downside risk to 100% and can give some nice leverage if you are willing to buy out of the money options.

Here you can see the options prices:
http://www.nymex.com/lsco_opt_cso.aspx

Chris
03-31-09, 04:56 PM
I would have thought that buying out of the money long range oil futures options are the way to go. This limits your downside risk to 100% and can give some nice leverage if you are willing to buy out of the money options.

Here you can see the options prices:
http://www.nymex.com/lsco_opt_cso.aspx

100% is a lot to potentially lose in what is likely to be the trade of the century. Plus there is the issue of timing. I suppose you could write some long-dated puts...but then in this environment...