Two terms one needs to know before investing in these products are contango and backwardation.
I will focus on USO because the /CL May future contracts (expired April 28th. As of today USO is holding ONLY /CLM26 or (June WTI Futures). This benefits traders greatly if the price of oil continues to rise or the oil futures curve stays in backwardation.
Sidnote:
-
CL stands for Crude Light
-
26 stands for the year (example: 2026 = 26, 2027 = 27)
-
The month of the future is represented by the letter beginning with F for January and Z for December
As the month proceeds they will roll these contracts daily into /CLN26 or July futures. Currently the price of /CLM26 (June futures) is $87.40 per contract vs. /CLN26 is $84.19.
Therefore, today if we use current prices USO will rebalance and buy July futures and sells June futures. The holders of USO currently benefit from that price difference of 3.7% (variable obviously day to day) for paying less for July futures contracts.
Summary: USO is a great option in backwardation while BNO (Brent Crude) I prefer because Brent and due to its holdings in two month futures (currently June & July) and its outperformance. I consider both to be pure oil speculation not long term investments. Buy XLE, XOP, VDE ETFs if you want exposure to oil companies.
Disclaimer: These ETFs are NOT long term holds. They are speculative trading ETFs and should be treated as such. I recommend stop losses and entering any trade with an entry & exit point in mind. If a trade is profitable I recommend putting on a trailing stop loss.
Benefits of Investing in USO (today) vs BNO during backwardation in WTI &Brent oil futures if your thesis is oil spot price will continue to remain above near month future prices.
byu/AdAny631 inoil
Posted by AdAny631
5 Comments
Yeah but WTI contracts are up tomorrow, so you buy USO to take full advantage of the short squeeze in WTI tomorrow.
HAHAHA
Bitcoin is the better and more ethical option
The thing is, you think it’s a lock and based on what I read it looks like a lock. But it’s not. If it was, the current futures prices would reflect that, and they don’t. The arbitrage would be getting eaten in advance.
In my experience during periods of crude being in backwardation if moves up. The reason for backwardation is the belief that the conditions that put the price at the current level will improve and prices will go lower. When the conditions don’t improve near and farther out delivery months move higher.
US oil is risky because if the USG decided to ban oil exports then the price of US oil will go down while the price of Brent will go up.