I'm still confused in this "in contango" thing. So are you...

First 7 Last

Share
Profile

Follow
BullishToTheSky

1,733 Posts.

136

17/04/20

10:06

Post #: 44094456
Share

Originally posted by corgifan: ↑

Everyone, you need to understand this product.

The oil market is currently in EXTREME CONTANGO (futures curve is upward sloping). This means this product is a very expensive (and therefore risky) to buy and hold in the current environment.

OOO trades futures to get its exposure to oil and needs to roll the futures during the month to maintain its exposure.

Example: Right now the spot futures contract for light sweet crude is approximately $20. The next month is $26. If the $6 spread stays, in just one month this fund will lose 23% (6/26). Yesterday the spread was 30% (ie its volatile). Right now that means the price of OOO will fall 23% in 1 month just to maintain its oil exposure (i.e. for you to break even in one month the price of oil will need to rise 23%). This is known as the cost of carry.

The oil market has been in contango for some time now.

Simple maths will tell you if contango lingers for another few months you'll dust most of your capital on holding costs alone e.g. 3 months will cost you over 50%.

So unless you know something about the oil market that no one else knows over a very short time frame this should be no more than a day/week trade.

Someone far smarter than me wrote this up better than I can explain, but I urge you to read the link below before buying.
https://seekingalpha.com/article/4337417-uso-strongly-decline-due-to-roll-yield

When contango goes away, different story. But right now you are literally getting eaten alive in holding costs every day.

Happy investing.

Expand

I'm still confused in this "in contango" thing.

So are you saying there's still a difference between the future price of oil and the spot price of oil? Does this also mean that you can only make money once you know where the bottom is?

I just thought you buy oil where you see you can make a profit. For example, If I buy 2000 units @$5.00 per share for $10000 with the expectation that this investment will be worth $20000 (or $10.00 per share) in 6 months from now if the oil price rises from $20 USD per barrel to $40 USD per barrel.

The above information is just an example. Just want to know what you guys actually mean.

OOO Price at posting: $19.36 Sentiment: None Disclosure: Not Held
3 Upvote

0 Great analysis

Reply

Top Stories

KGD

Kula picks up unexplored niobium play in Malawi, with surface samples logged

Trump chides Powell as Goldman call for calm. The RBA must be nervous

OSL

OncoSil wraps up recruitment for key pancreatic cancer trial

HotCopper Highlights, Week 27: G8 scalped, Domino’s drops the box, Gemlife brief hype & more

Listen: HotCopper Wire Podcast 016 – FY25 ended up not so bad... but Trump unpause is coming

There are more pages in this discussion • 166 more messages in this thread...

First 7 Last

Add to My Watchlist

What is My Watchlist?

A personalised tool to help users track selected stocks. Delivering real-time notifications on price updates, announcements, and performance stats on each to help make informed investment decisions.

I'm still confused in this "in contango" thing. So are you...

Top Stories

Kula picks up unexplored niobium play in Malawi, with surface samples logged

Trump chides Powell as Goldman call for calm. The RBA must be nervous

OncoSil wraps up recruitment for key pancreatic cancer trial

HotCopper Highlights, Week 27: G8 scalped, Domino’s drops the box, Gemlife brief hype & more

Listen: HotCopper Wire Podcast 016 – FY25 ended up not so bad... but Trump unpause is coming

Featured News