Oil contango means QM is a bad buy?

F

FanOfFridays

Here's a post from a few weeks ago. The author suggests that since crude oil was in 'super' contango at the time of the post, there was a problem going long crude oil futures. He said

"the problem with futures contract now for long term position is the super contango we have with crude right now.

The price of the 2010 contract is more like $60 now rather than $4x the spot is. So you have to pay $60 if you want to go long term.

http://www.elitetrader.com/vb/showthread.php?s=&postid=2275848#post2275848

I'm going to swallow my pride and admit that I don't understand this at all (my futures trading has always been very short term). The QM closed at $40.17. If I wanted to go long crude oil for the longer term on Friday, could I not just buy 1 contract at that price? If the spot price goes up, will the contract not increase in relatively the same manner because of something to do with the excessive contango? How am I paying $60 when I go long 1 contract of the QM trading at $40 today?

Is the problem here the effect that a reversal of contango will have on the price? That is, does contango create a situation where although the QM is trading at $40.17, it 'really isn't' because the retreat from super contango will cause a drop in the front-month price?

I was expecting a flurry of questions when this post went up (in a thread which discussed the best way to go long crude) but none came. I was assuming that going long a futures contract and simply rolling it over was the best way to go long oil (given sufficient margin). What am I missing?

By the way, I would like to go long somewhere below today's levels.
 
Quote from niceneasy:
you pay the spread every time the futures roll month to month.
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Really?? Hmmm. Pretty basic. I've never rolled one over. Thanks.

So assuming that a small amount of contango is the norm on a futures contract that involves non-perishables, if the contango comes back to normal it can be a good trade.

Nevertheless this is a surprise to me. A lot of people here seem to be unaware of the problems involved in going long the QM while the contract is in contango.
 
Quote from niceneasy:

check out symbol uso. this is most direct way to invest in oil with none of the associated headaches of futures.
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Yeah, I've actually been watching USO trade intraday for the past week or so. It's pretty entertaining, all right. Like Friday, for example.

I just assumed that the futs would be the cleanest way to go long oil, but evidently I'm wrong.
 
Quote from niceneasy:

check out symbol uso. this is most direct way to invest in oil with none of the associated headaches of futures.
More...

When USO began trading it was basically the same price as oil futures. I believe this was in the $69 area, but you can check for yourself. If you compare the price of the front month of oil futures now versus USO you see the expense of futures eroding the value of USO. You also are relying on the clowns managing the USO ETF to minimize expenses. Based on how I have seen USO trade, it is only good for short term trading. It can trade down when oil futures are up, and I don't recommend it around the time of roll over of contracts. You may also want to check out a few of the ultra (leveraged) oil ETFs, such as UCO and DXO.
 
NONE of us on ET would likely hold crude oil contracts & roll them over each month.

More likely those here are TRADERS and get out of positions within the day, week or certainly the month!

If you want oil in your portfolio forever, sure buy an ETF. Only one price to follow.

For trading CL & QM are supreme, in my book.

If you're new to trading learn what support & resistance are. AND TRADE THEM. :)
 
Quote from CET:

When USO began trading it was basically the same price as oil futures. I believe this was in the $69 area, but you can check for yourself. If you compare the price of the front month of oil futures now versus USO you see the expense of futures eroding the value of USO. You also are relying on the clowns managing the USO ETF to minimize expenses. Based on how I have seen USO trade, it is only good for short term trading. It can trade down when oil futures are up, and I don't recommend it around the time of roll over of contracts. You may also want to check out a few of the ultra (leveraged) oil ETFs, such as UCO and DXO.
More...
I never would have thought there would be this much disagreement about how to do something so simple as go long oil longer term. I read through the thread entitled 'How best to go long oil' and I saw the comments which echoed your own. I'll have to go back there to confirm but some guys in there were also complaining about some aspect of the ETFs and how they didn't like them either. I am absolutely not saying that you aren't right, just that there seem to be so many complications in these newly conceived instruments. In reading the description of the USO components, I can see how the door is open to mismanagement.

Maybe it was the fact that there's an MER involved in ETFs...?
 
USO only trade the front month, so with this contango, they will lose money on every rollover..

USL is a better OIL ETF cause they trade the 12 full month, but is very iliquid instrument.
 
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