Best energy ideas: Backwardation bet on US Oil Fund (USO)
To understand the United States Oil Fund (AMEX: USO), Ivan Martchev emphasizes the importance of the terms contango and backwardation.The editor of Vital Resource Investor explains, "A contango is when the price of a commodity for future delivery is higher than the spot price, while backwardation is when the price for future delivery is lower." Here, he explains how the change from one to the other now makes the oil ETF a buy.
The futures market now suggests that oil isn't as plentiful as it was at the same time last year when the sector began to weaken. For the first time in two-and-a-half years, the oil futures actually suggest that oil's in short supply.
"The market's gone from the notorious contango that made buying and holding the oil exchange traded funds (ETFs) much more painful than the oil stocks, to the current backwardation that looks like a smooth ski slope.
"The current backwardation status favors the buy-and-hold strategy for the oil ETF, the U.S. Oil Fund, which I first recommended as a special situation at the end of March.
"In the first six months of this year under the contango, we had resulting subtractions of the same difference every month as the next month futures contract was more expensive. This is no longer the case.
"Now, the reverse is going to happen. When contracts are rolled over each month, the difference between the expensive expiring current futures contract and the cheaper next month futures contract is added to the price of the oil ETF.
"The position recommended in March is profitable, but a lot more can be expected under the right circumstances. The best case scenario is for the backwardation in the oil futures to remain and for oil prices to rally at the same time.
"That way, the huge difference between the oil ETF and the front-month oil futures that's accumulated since the launch will begin to close and the oil ETF will begin to rise faster than the front-month oil futures -- the reverse of what's been going on recently.
"Meanwhile, oil was recently trading near its all-time high and more than 50% above the lows seen this past January at a hair under $50 a barrel. There was no disruptive weather last year during the hurricane season in the U.S., but it's unreasonable to expect another such benign outcome this season.
"Also, there's been little effect on emerging market economies from the slowdown in the U.S. so far, so it's entirely possible that we see the new all-time highs in oil soon. I'd also add that both the futures and the ETF show what a technical analyst would call massive 'head-and-shoulders' bottoms. USO is buy on pullbacks
The futures market now suggests that oil isn't as plentiful as it was at the same time last year when the sector began to weaken. For the first time in two-and-a-half years, the oil futures actually suggest that oil's in short supply.
"The market's gone from the notorious contango that made buying and holding the oil exchange traded funds (ETFs) much more painful than the oil stocks, to the current backwardation that looks like a smooth ski slope.
"The current backwardation status favors the buy-and-hold strategy for the oil ETF, the U.S. Oil Fund, which I first recommended as a special situation at the end of March.
"In the first six months of this year under the contango, we had resulting subtractions of the same difference every month as the next month futures contract was more expensive. This is no longer the case.
"Now, the reverse is going to happen. When contracts are rolled over each month, the difference between the expensive expiring current futures contract and the cheaper next month futures contract is added to the price of the oil ETF.
"The position recommended in March is profitable, but a lot more can be expected under the right circumstances. The best case scenario is for the backwardation in the oil futures to remain and for oil prices to rally at the same time.
"That way, the huge difference between the oil ETF and the front-month oil futures that's accumulated since the launch will begin to close and the oil ETF will begin to rise faster than the front-month oil futures -- the reverse of what's been going on recently.
"Meanwhile, oil was recently trading near its all-time high and more than 50% above the lows seen this past January at a hair under $50 a barrel. There was no disruptive weather last year during the hurricane season in the U.S., but it's unreasonable to expect another such benign outcome this season.
"Also, there's been little effect on emerging market economies from the slowdown in the U.S. so far, so it's entirely possible that we see the new all-time highs in oil soon. I'd also add that both the futures and the ETF show what a technical analyst would call massive 'head-and-shoulders' bottoms. USO is buy on pullbacks
entrada de Gekko a las
6:48 p. m.
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