$3.6bn crude bet puts price on stupidity

[narafa]

Just imagine what happens if the futures curve remains constant for a few months. e.g. near month = 30, far month = 35. Every time you roll you are realizing a loss of $5.

It's not exactly like this. You don't lose the $5 difference, you lose the difference between the price that you rolled over at (In your example $35) and the price you close out later when the contract nears expiration, which should be close to the spot price.

When closing out the position later, it can be at any price, can be at $20 or it can be at $35. The contango effect makes it very difficult to make money on the long side this way since you are facing a natural downward pressure for the contracts you are holding to converge downwards towards the spot price.

So essentially, you buy high and settle low, rinse & repeat & you keep losing. The difference between the contract you are moving from and the one you are rolling over to is of no material importance because the price you will settle at is what matters to conclude your P/L for that cycle.

 

[cruisecontrol]

When closing out the position later, it can be at any price, can be at $20 or it can be at $35.

What part of "the futures curve remains constant" did you not understand?

 

[Algo_Design_Kid]

What part of "the futures curve remains constant" did you not understand?

I think what he means is that once you purchase the contract, the gain or loss you experience will solely be from market fluctuations, which makes sense.

 

[narafa]

What part of "the futures curve remains constant" did you not understand?

I get your point about "The futures curve remains constant", but it's the spot price which the front month price converges to at expiration (Which does not usually appear in the futures curve mostly).

Even if the futures curve remains constant in spreads between expires, you buy Jun CL for $35 & Jul CL is at $40, your Jun CL will settle somewhere down near WTI spot at say $15 (By that time maybe Jul CL will be at $20 (Same $5 difference), which can settle later at any price ($10 maybe, $20, $25, you guess).

Besides, the futures curve is never static, the curve is always moving & the spreads are very dynamic

 

[narafa]

I think what he means is that once you purchase the contract, the gain or loss you experience will solely be from market fluctuations, which makes sense.

If that's what he means, then I must have miss-understood it, as it was referring to the difference in price between the contracts as the loss.

 

[cruisecontrol]

I get your point about "The futures curve remains constant", but it's the spot price which the front month price converges to at expiration (Which does not usually appear in the futures curve mostly).

Even if the futures curve remains constant in spreads between expires, you buy Jun CL for $35 & Jul CL is at $40, your Jun CL will settle somewhere down near WTI spot at say $15 (By that time maybe Jul CL will be at $20 (Same $5 difference), which can settle later at any price ($10 maybe, $20, $25, you guess).

Besides, the futures curve is never static, the curve is always moving & the spreads are very dynamic

I honestly have no idea what your point is. Do you dispute that contango creates unexpected losses for naive retail investors who try to buy the dip in USO? That's what this thread is about.

If that's what he means, then I must have miss-understood it, as it was referring to the difference in price between the contracts as the loss.

That was a reply to me. The "he" here is referring to you. Maybe slow down and read the posts a little more carefully before replying.

 

[narafa]

I honestly have no idea what your point is. Do you dispute that contango creates unexpected losses for naive retail investors who try to buy the dip in USO? That's what this thread is about.

No I am not disputing anything.

That was a reply to me. The "he" here is referring to you. Maybe slow down and read the posts a little more carefully before replying.

Ok, I will.

 

[bone]

Nope. Spot cash and CFD's were coming off days before the May contract finally shit the sheets.

You get spot performance by getting oil in a storage paying all the fee associate with it.

 

[FrankInLa]

This is simply not true. You buy the near month then you close out the near month. Next you purchase the far month and rinse and repeat. Pnl is realized WITHIN each contract month not across months.

Just imagine what happens if the futures curve remains constant for a few months. e.g. near month = 30, far month = 35. Every time you roll you are realizing a loss of $5.

 

[FrankInLa]

If anything you should compare futures performance vs forwards, not spot. But that is besides my point. I demonstrated why your assertion is wrong in my post right before.

This sounds like word games. I don't think most people would agree that "spot performance" includes storage costs. If this is some kind of industry standard definition, provide a citation. Regardless, the author's point about there being a drag on returns of the fund compared to a simple price-return of oil is absolutely correct.