USO , huge discount

Quote from Aaron:

For various reasons USO can't and doesn't represent any specific amount of oil. It is constructed so that the _percentage change_ in the price of USO will track that of crude futures. The actual price of USO will eventually drift further and further from the price of crude as the front month futures contract price jumps at rollover each month but USO does not.

This "roll yield" currently adds up to $1.10 x 12 = $13.20 per year.
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This is correct. Unlike GLD and SLV, which own gold and silver, USO does not own physical oil, but oil futures instead. Due to the structure of the market it is very expensive currently to own USO as a long-term investment. So, unfortunately for all the conspiracy theorists, there is no fraud nor conspiracy here.

I think the reason for this unusual market structure (i.e. contango) is that there are a lot of hedge funds investing in oil futures right now. As they can't own physical oil, they have to hold futures. And every month they are rolling their positions over, selling the front month and buying the next month contracts. This keeps the "oil curve" upward-sloping. And it also explains the plentiful inventories showing up in weekly data.

My bet is that this oil bull has run its course. There are just too many bulls in this market. At least it is very difficult to make any money going long oil, as you have to fight the $1/month roll cost. But if you short oil you get the benefit of this same $1 as a huge margin for error.
 
Here's the answer:

USO is NOT holding spot oil futures, but rather they are positioned in the (lower volatility) back months.
No free money arb here. Keep looking...
 
huh ?

-. At least it is very difficult to make any money going long oil, as you have to fight the $1/month roll cost. But if you short oil you get the benefit of this same $1 as a huge margin for error.-

I do not think this is correct ... can you give me an example
on how being short front month on expiry gets you bonus money
with crude oil
 
Quote from Rearden Metal:

Here's the answer:

USO is NOT holding spot oil futures, but rather they are positioned in the (lower volatility) back months.
No free money arb here. Keep looking...
More...


First off - spot futures? I'm not familiar with spot futures. I know spot markets and I know future markets. If there are spot futures, please keep me updated.

Second, look at this link

http://www.unitedstatesoilfund.com/uso_holdings.aspx


It's quite different from what you said. All they hold is sept crude.

Seems to me, a sixth grader can run this fund.

They are getting 5% percent on cash investments.

Seems to be POORLY tracking the price of crude.

Advantage: if crude goes to 60$ barrel, you break even.
 
Good point there. USO does not own physical oil but the futures. I agree with your post. The oil run is near its end with all the bulls in it, and I agree it will be difficult to make money on the long side. With the roll yield being at where it is, it seems oil only needs to go up less than 13 bucks for the year for you to make money on the short. You sold me on this idea, im shorting in my long term account :)
 
<i>First off - spot futures? I'm not familiar with spot futures. I know spot markets and I know future markets. If there are spot futures, please keep me updated.</i>


-->Spot month futures= Front (closest) month.


<i>Second, look at this link

http://www.unitedstatesoilfund.com/uso_holdings.aspx
It's quite different from what you said. All they hold is sept crude.</i>

----->No, that's not correct:

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1182960>
 

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Quote from SethArb:

huh ?

-. At least it is very difficult to make any money going long oil, as you have to fight the $1/month roll cost. But if you short oil you get the benefit of this same $1 as a huge margin for error.-

I do not think this is correct ... can you give me an example
on how being short front month on expiry gets you bonus money
with crude oil
More...

Assume that spot oil is at $70, and stays there for the rest of the year. Since futures are higher than that, but must equal spot at expiration, they must (slowly) decline towards $70 as expiration approaches.

In reality the prices fluctuate, but the spread between futures and spot still remains and keeps narrowing as expiration approaches.


UncleTom, can you explain your algebra?
 
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