"He also said oil would be $150-200 within 6-12 months from now and in 2012 the price of oil will escalate exponential
even higher when these scheduled wars take place."
- Lindsey WilliamsBUYING OIL - 2
Let's Look at the Oily chartsUSO
/ US Crude oil etf ... updateOIH
/ Oil Service Holders ... updateXLE
/ Major Oil Companies etf ... update
The first thing you will notice in looking at these charts is the relative underperformance of USO, the etf for Crude oil. I warned about this possibility in an article, Buying Oil
, published on Financial Sense back in Jan. 2009:"Bob": How do you go long oil at $40? Have you got a tanker to store it in?USO uses those contracts to hedge itself - and, since it must rolls its positions forward on a regular basis to prevent taking physical delivery, it is not easy to consistently do better than achieve the market prices.
Think of it as climbing a ladder. As each month goes by, USO sells one month's contract, and buys the next month forward. In the current market with its steep contango. there's a big premium to "roll forward" into the next available month. In other words, the space between the rungs is big, and it must pay up, to get onto the next month forward. In practice, management has some leeway, and they do not have to wait for the last days, or even the last month, to roll forward. But roll forward, they must, since they are not set up to take physical delivery.
Think about the impact this "rolling forward" behavior has upon USO's Net Asset Value.
Since USO has limited funds, when the the forward rungs in the price ladder are higher, it is going to have to buy only a smaller number of barrels each time that it rolls. So it might Buy March (at $46.07) and Sell Feb. (at $40.83)*. It is paying 12.8% more per barrel to roll, and so it will wind up owning 13% less oil, and there will be 13% less barrels backing each share of USO. This is why USO now trades at $32.37 per share, versus $40.83 per barrel for WTI. When it started, there was one barrel backing each share in USO. Now each USO share is backed by 0.703 barrels (using March's WTI price.) In addition, something that I am not factoring into these calculations is the cost of the transactions (small) and the administrative cost of running USO (not small.) That is why I say that you might even lose money with USO if the oil future curve stayed as it is now.
There was a big enough rise in crude oil, that USO holders did not actually lose money since 23 Jan. 2009, but the 16.5% rise from $32.33 to Friday's close of $37.65 pathetically underperforms the 89% WTI crude oil price rise from $46.07 to $87.01. XLE was better, rising from $47.06 to $62.31 , ie 32.4%%. And OIH was better still: up from $76.24 to $126.09 - 65.4%.
===== : WTI Oil : --USO-- : bbls : ---OIH-- : --XLE-- :
23 Jan : $46.07 : $32.33 : 0.702 : $ 76.24 : $47.06
05 Nov: $87.01 : $37.65 :0.422 : $126.09 : $62.31
change: +88.9%:+16.5%: -39% :+65.4% :+32.4%
There was a big enough rise in crude oil, that USO holders did not actually lose money since 23 Jan. 2009, but the rise from $32.33 to Friday's close of $37.65 pathetically underperforms the 89% WTI crude oil price rise from $46.07 to $87.01. XLE was better than the weak USO etf, rising from $47.06 to $62.31 , ie 32.4%%. And OIH was better still: up from $76.24 to $126.09; +65.4%.
Here's a chart showing the decay over time of the Ratio of USO to WTI Crude:
When I first saw these chart and data, I thought: Wonderful ! There's an obvious trade - Buy OIH and Sell USO, as USO declines relative to WTI, and OIH holds up better, I will make money. But then I decided I should first look at how the Ratio of OIH-to-USO performed. Here's the answer:
This shows clear cycles in the Ratio. And at the current level near: 3.4, we appear to be at the top of the cycle. It would be better to wait for the cycle to bottom (at near 2.8), and that should take at least a few weeks, if the historical pattern holds.
====== so take: USO as : :$32.00 : : $34.00 : : $36.00 : : $38.00
Expected OIH: High x 3.4: $108.80 : $115.60 : $122.40 : $129.20
Expected OIH: Low: x 2.8: $ 89.60. : $ 95.20. : $100.80 : $106.40
Looking at $36.00 as a sort of reasonable mean for USO,
A keY range for OIH is : $100 - $122OIH
/ Oil Service Holders etf ... update