Wt Wti Crude 2x Discussion Threads

[bobby.ifa] 05/1/2009 14:26

Andrew, if the Bank of England drop interest rates sharply this coming Thursday, this will devalue sterling further and assist the LOIL price further, combined with the middle east deadlock, this would make this an attactive one to two week play?

[andrewbaker] 05/1/2009 14:11

FPET does a similar job by buying forward: USL averages the effect. In both cases if oil goes into backwardation, the benefit from it reduces for the same reason. If you're bullish oil going forward, then buying oil company shares or an oil sector ETF could be an idea. A leveraged (*2) play is ProShares DIG, which being in dollars is also long US$ and short sterling.

[danieljwalker] 05/1/2009 13:29

USL seems to mitigate the contango and averages over 12 months of contracts. Any thoughts? Not leveraged but I'm looking for drip feed buy and hold and LOIL is just not suitable for that.

[andrewbaker] 05/1/2009 13:21

-danieljwalker I do not know of any product that tracks the oil price without being open to contango and backwardation due to the use of oil futures.

To minimise the effect of contango on a long oil position you can buy forward petroleum (FPET) as this buys 3 months forward futures where contango is far less.

-BJED Buying ETFS priced in US dollars is surely short sterling, long dollar: if the £ drops against the $, the return increases in sterling terms and vice versa. (Buying the pound quoted security makes no difference as the price adjusts to the $/£ exchange rate anyway.)

..............

There is so much oil being stored in tankers at the moment: now, is this because the oil companies think they can make an extra profit by selling it at a higher price in the future, even after storage costs, or is it because you can't just turn off the production tap overnight, and therefore more storage is needed as they can't sell the stuff they've already got? If you think the former, then go long, but if the latter; go short. I'm short, and the short term surge due to middle east war worries (which I missed trading, drat) is, IMHO, just that. A short term surge.

[hodginsjkp] 04/1/2009 20:44

SOIL gains in past magnified by pound dropping against dollar. LOIL or US listed equivalent possibly best traded via small spreadbet to at least negate currency factors

[jonwig] 04/1/2009 10:47

BJED - thanks for your clarification.

bobby - I think the market is factoring in some cheating!!

[bobby.ifa] 04/1/2009 10:41

BJED- if production is cut by OPEC then surely this will drive the price up?

[bjed] 04/1/2009 09:30

Andrew, you're right about the interest added. It's virtually nothing as the 3-month Treasury Bill yields it invests in are virtually zero at the moment thanks to US rate cuts!

djw, CRUD has the same rollover pattern as LOIL, the only difference is it is leveraged 1x rather than 2x. My preference is LOIL as due to the leverage, for a foreign (non-US) investor, it's a short on the dollar as well as a long on crude. But otherwise it's twice as risky so only put half as much in !

jonwig, contango for may/mar LOIL rollover is currently 6.8%, so IMO SOIL still has the edge here. mar/feb contango is a massive 8.3% which suggests there could be a big drop in the mar contract to come after feb expires, unless demand recovers sufficiently by then which of course it could.

[jonwig] 04/1/2009 08:07

djw - can't help with your query, sorry, as I'm a beginner here.

But the current contango has been exercising my brain, as it would be a great pity if profits from holding LOIL were to be eroded on rollover next month.

From the limited evidence, I don't think that's a big danger, though it would become one if the spot price were to fall or stay static for some time.

As I see it, the contango has arisen because the market feels the current oil price is "wrong" for very temporary reasons. But both China and the US are about to increase stockpiles, whilst there is less opportunity to store up oil cheaply enough for a month or more. Mid-East troubles and OPEC cuts (more expected) add to the mix.

At present the contango for one month seems to have dropped to around 4% (from 10% at one point) and could, of course, vanish altogether.
Once it's replaced by backwardation, rollover of LOIL should save money, whilst holders of SOIL take the pain.

All that boils down to saying that LOIL gains are magnified on the way up, but SOIL gains disproportionately on the way down.

Any comments welcome!!

[danieljwalker] 03/1/2009 20:01

any takers for my query? thanks chaps

[andrewbaker] 02/1/2009 14:28

LOIL and OILB both rely on futures. Personally, I would not at this time want an ETF that tracked the oil price by holding the physical commodity, as in my view, the price is still in a downtrend; so holding such an ETF would lose money. More so, holding a long futures based ETF would be bad at present as crude oil is in extreme contango, and you could lose 30% in a year even if the price of crude stayed the same the whole time!

I correct an earlier statement about the interest added possibly negating contango in a long contract: it doesn't as there's not enough.

16:14 now and LOIL up even more (though a short term spike in my view). There's a big difference between short term/daytrading and even medium term trading of oil when fear/economics/politics all combine! However, I'm staying in SOIL: the contango works in my favour in a short contract plus with so much oil stored such that even oil tankers are being utilised to hold the stuff, the only way for prices in the next few months is down.

[bjed] 02/1/2009 12:40

bobby.ifa

Brics etfs are presumably equity based so i'd be wary given the global recession and peak oil look like being major factors over the next few years. Also see the long term dow chart, doesnt look good.

[boffster] 02/1/2009 10:21

LOIL doesn't appear to 'lose out' versus OILB. Try plotting a 1 year chart. You'll see that the relationship with OILB is pretty much the same either side of the Jun/Jul spike.

[danieljwalker] 01/1/2009 19:29

oh i kind of got the impression that crud just tracked the dollar price of oil literally as per an index tracker? i must have misunderstood - is there any product that offers this? tia

[andrewbaker] 31/12/2008 15:53

The figures above are correct but do ignore the interest element added daily which with the normal much smaller price changes would help offset the losses due to the math. Like nearly all index-linked investments, costs of one sort or another mean that 100% replication is very rarely achieved. I agree that over time these losses can wipe out any gains and thus the benefits of staying invested, which is why I trade in and out, taking profits (yes, and losses too sometimes) when I feel the price trend is or has changed.

-danieljwalker

Contango/backwardation results from the rolling over of futures contracts at expiry and is a function of the ETF not that of any index, sub or otherwise. So if CRUD is constructed using futures (which I think it is), then c/b will still affect the prices.

[danieljwalker] 31/12/2008 10:38

Looking at CRUD now - I know its not leveraged but does it avoid the cantango problem because it is based on a sub-index

[machoolahan] 30/12/2008 18:40

Think its

1/2 x 1/2 x 3/2 x 3/2 = 9 /16 ~ %56 no?

But answer seems right....

Note this would be true of anything that made two 50% falls followed by two 50% rises (not just LOIL).


BUT! Take a "true break even" test case of oil starting at $50 then falling by $10, then rising by $10...

That's a fall of 20% followed by a rise of %25 - so LOIL (say at 100 to start with) would do

-> 60 on first day (-40%)
-> 90 on second day (+50%)

Other way round, though.....

Take a test case of oil starting at $50 then rising by $10, then falling by $10

-> 140 on first day (+40%)
-> 94 on second day (-33%)

Interesting if true, suggests they are printing money as time goes on (regardless of contango).....

[bjed] 30/12/2008 18:13

mac

A 50% drop over 2 days would mean a loss of 83% of the value of a loil investment i believe. A subsequent recovery over the next 2 days would mean you had still lost 44%!

Crud 3/4x2/3x3/2x4/3 = 100%
Loil 1/2x1/3x4/2x5/3 = 56%

It's not much better over 3/6 days where you'd lose 80% or 30% after recovery

[bobby.ifa] 30/12/2008 12:26

BRICS ETF's seem to be tipped for '09.Anyone thoughts on this?

[danieljwalker] 30/12/2008 11:22

Thanks so much for explaining all that chaps - much appreciated.

[machoolahan] 30/12/2008 09:49

So BJED - what happens to the price (mathematically) if the POO drops 50% over two days? Still trying to figure LOIL out! Any help appreciated....

[bjed] 30/12/2008 00:00

daniel

There is a fact sheet for LOIL (on the website at the top link) that actually says LOIL could lose all it's value if there was a 50% drop in a single day, so I have to believe we would lose everything if that happened ! Though if there is a move of more than 10 dollars I think trading is automatically suspended so don't think it will ever happen !

Here is another good explanation of contango/backwardation and a longer term futures fund to smooth out the effects (also see link on right to 3 month forward though no specific fund is mentioned).



Has anyone tried the US 12 month oil fund AMEX:USL? It seems like a useful hedge if you're into SOIL at the moment? I never thought we'd see LOIL below 5 bucks but now the contango is so wide I can see how it could stay around there for a while yet. There seems little demand for oil in the near months so until OPECs output cuts work their way through the system we could stay here for a while.

[andrewbaker] 29/12/2008 21:07

The ETFS crude ETF do not buy or hold the physical commodity buying futures instead, and rolls-over from an expiring contract into the next on expiry: in respect of oil sometimes the price of the new futures contract is higher (Contango) and sometimes lower (Backwardation). With contango, the ETF has to bear this higher price which adds to the cost, so over time the ETF price change will not match the oil price change. With backwardation, this runs in favour of the ETF price. Therefore, when using a crude oil ETF as a proxy for the price of crude, the loss (or sometimes gain) from this rolling over should be taken into account.

[danieljwalker] 29/12/2008 14:08

BJED - can you explain the rollover on this for me again please? This is something I hadnt factored in since I was looking to buy this drip feed for a long term investment and its sounding like this really isnt a long term tool?

Also what is the situation if there is a 50% drop in crude in one day (anything is possible) and the ETF loses 100% of its value. Does it then stay at 0 and we have lost all our investment?

tia

[bjed] 24/12/2008 15:40

There is now a table at the top to illustrate the rollover method of this ETF.
This takes place every 2 months over a 4 day period.

The rollover from Jan-09 to Mar-09 was very bad for LOIL, and good for SOIL, due to Mar-09 price 10% higher than Jan-09. The ETF lost 10% compared to someone who could actually take delivery and store the black stuff.

The 2 month contango seems to be narrowing slightly recently, but May-09 is 8% higher than Mar-09 which will be bad for LOIL if it stays light that when rollover takes place in 6 weeks time.

If the contango stays so high it won't matter if we reach $100 in 5 years time because LOIL could lose all the gains in the rollover cost/spread.