wtf is the contango effect? - Business, Finances and Investing Forum

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wtf is the contango effect?

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02-10-2009 , 10:29 AM

all_in_lam

old hand

Join Date: Sep 2005 Posts: 1,376

http://biz.yahoo.com/indexuniverse/0...2_id.html?.v=3

i currently own USO, and it says to switch to USL ..

can someone verify the validity of this article?

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02-10-2009 , 10:50 AM

Brons

Carpal \'Tunnel

Join Date: Mar 2007 Posts: 6,565

It is valid. But theoretically the contracts a year ahead could be in contango too.

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02-10-2009 , 10:51 AM

all_in_lam

old hand

Join Date: Sep 2005 Posts: 1,376

so is USL a better switch than USO?

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02-10-2009 , 10:54 AM

Brons

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Join Date: Mar 2007 Posts: 6,565

USL might have different negatives, but yes, the chance of contango on these contracts is smaller. Generally I think it's better to invest in an oil company than in an ETF thats losing money on contango. Oil companies can actually earn money on this.

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02-10-2009 , 05:00 PM

GittyUP

adept

Join Date: Dec 2006 Posts: 865

Why not just short USO given this info?

Spot prices would have to rise 15% or more in order to lose money. Seems like a good risk/reward given I believe spot prices will decline.

BTW Im a newbie when it comes to ETF's and futures.

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02-10-2009 , 05:16 PM

Jimbo

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Quote:

Originally Posted by all_in_lam

from my understand the contango effects lowers your exposure (i.e. number of futures you can buy). so this can also limit your losses, no?

No, contango simply means that futures for a specific commodity are trading at a higher price than the current spot price or for that matter closer futures compared to futures farther out in time.

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02-10-2009 , 05:19 PM

Yowserrrs

Pooh-Bah

Join Date: Nov 2007 Posts: 5,347

Quote:

Originally Posted by all_in_lam

http://biz.yahoo.com/indexuniverse/0...2_id.html?.v=3

i currently own USO, and it says to switch to USL ..

can someone verify the validity of this article?

Yes I can verify it.

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02-10-2009 , 05:30 PM

all_in_lam

old hand

Join Date: Sep 2005 Posts: 1,376

short USO and long USL and play off the contango market actually.

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02-10-2009 , 05:32 PM

all_in_lam

old hand

Join Date: Sep 2005 Posts: 1,376

so what should i be buying if i want to long crude directly, USL seems to also be subject to contango effect because it is only 12 months and not long term either

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02-10-2009 , 08:32 PM

#10

all_in_lam

old hand

Join Date: Sep 2005 Posts: 1,376

Quote:

Originally Posted by Brons

can you elaborate how oil companies benefit from contango.

and what companies have a good correlation to oil prices upward?

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02-10-2009 , 09:09 PM

#11

johnfortune1000

banned

Join Date: Mar 2008 Posts: 558

oil companies own, and thus can store millions of barrels of oil.

if oil looks bleak today at 30 bucks a barrel (just picking a number) then they can sell 10 million jan 2010 futures for 50/barrell. it costs about 12/barrell per YEAR to store oil (tanker costs, transport cost).

all they have to do is show up in oklahoma on jan 2010 with 10 million barrells and profit.

Quote:

Originally Posted by all_in_lam

can you elaborate how oil companies benefit from contango.

and what companies have a good correlation to oil prices upward?

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02-10-2009 , 10:11 PM

#12

cwsiggy

Pooh-Bah

Join Date: Oct 2004 Posts: 4,566

Any better ideas than USO or USL to trade the oil markets longer term?

I'm getting out of USO - can't stand it anymore. at least I made some money on my short march calls.

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02-10-2009 , 10:14 PM

#13

johnfortune1000

banned

Join Date: Mar 2008 Posts: 558

u dont have the stones for this game. buy some t-bills.

Quote:

Originally Posted by cwsiggy

Any better ideas than USO or USL to trade the oil markets longer term?

I'm getting out of USO - can't stand it anymore. at least I made some money on my short march calls.

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02-11-2009 , 05:07 AM

#14

Brons

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Join Date: Mar 2007 Posts: 6,565

Quote:

Originally Posted by all_in_lam

can you elaborate how oil companies benefit from contango.

and what companies have a good correlation to oil prices upward?

Oil companies just store their current oil instead of selling it. They might even buy oil on the market and sell a contract in the future against it.

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02-15-2009 , 04:22 PM

#15

Melkerson

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Two questions:

1. Can someone give me an idea of how often (historically) the oil futures market is in contango and how often it is in backwardation? From what I gather, the normal state is backwardation. Is this correct?

2. If USO underperforms the market in periods of contango, will it outperform in periods of backwardation?

Thanks for any insight on this. I couldn't find satisfactory answers after some googling.

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02-15-2009 , 06:46 PM

#16

DcifrThs

Chip Spewer

Join Date: Aug 2003 Posts: 15,812

Quote:

Originally Posted by Melkerson

historically, commodity markets tend to be in backwardation. this was presumably due to producers selling short in more volume than users/consumers hedging future input costs.

Barron

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02-16-2009 , 02:40 AM

#17

Melkerson

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Join Date: Nov 2008 Posts: 11,064

Quote:

Originally Posted by DcifrThs

historically, commodity markets tend to be in backwardation. this was presumably due to producers selling short in more volume than users/consumers hedging future input costs.

Barron

Thanks. Any idea on the second question. The research that I have done suggests that the answer is no, but I'm not sure I can explain why.

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