Wt Wti Crude 2x Discussion Threads

[relishing] 26/1/2009 11:31

You're forgiven bobby. Oil rose about 10% from 4:30pm on Friday when LOIL closed, until oil trading closed later on Friday night, hence why LOIL opened up about 20% this morning. The other few % is the rise since this morning.

[bobby.ifa] 26/1/2009 11:28

Forgive my ignorance Relish, but Oil? Has it risen 12% in the past three days (assuming it trades on the weekend)?

[relishing] 26/1/2009 11:22

Since Friday close - LOIL stops trading at 4:30pm whereas oil doesn't.

[bobby.ifa] 26/1/2009 11:16

What rise?
Brent Crode is up 0.33 dollars to $46.80- where as LOIL up 23%- I thought the LOIL being leveraged 2 times any rise or fall, can't see why the massive non-correlation.

[relishing] 26/1/2009 10:50

Rise in the oil price.

[bobby.ifa] 26/1/2009 10:47

Anyone know why the rise?

[relishing] 26/1/2009 10:40

Well this one is certainly up - by 25%!

[wotabore] 26/1/2009 09:56

Folllowing article argues that OIL ETFs could go down even if oil price goes up, any opinions?

"How contango affects oil ETFs
Posted by Izabella Kaminska on Jan 22 09:07.

Hat tip to Abnormal Returns which draws attention to this oil post on Market Folly.com.

The Market Folly piece highlights why retail investors should most definitely be interested in the forward oil curve, and specifically whether it is in contango or not. As the post explains, the performance of a fund like the US oil fund (USO) is largely dependent on three variables: 1) changes in the spot price of crude oil, 2) interest income on un-invested cash, and 3) the 'roll yield'.

While the first two are easily understood by the retail investor, the roll yield is more troubling. Of course, when the market is in contango an index investor can lose irrespective of whether price moves at "face value" appear favourable. As you have to pay a premium to move into the ensuing monthly contract, a profit can only be achieved if the positive price moves are greater than the losses generated by the roll itself (the premium paid to remain in the position).

So while to many retail investors the low price of oil may look like an attractive buying opportunity, the current state of the market means, more than likely, they will generate a loss just because of the roll.

Consequently, a fund like the USO is not a good proxy for an oil-price position. As the Market Folly post explains (our emphasis):

The conclusion, at this stage of analysis, is that USO is not a direct play on the spot price of crude oil - it is, instead, a play on the spot price, forward prices, and the relationship between spot and forward (the slop of the futures curve). For a trader who is long USO, my instinct is that maintenance or aggravation of the contango in crude oil will cause impairment of the value of USO in relation to spot crude - whereas, any mitigation of the contango situation (including a shift to a flatter curve or backwardation) will enhance the performance of USO. I plan to study this issue more extensively. But, in the mean time, I will not consider USO to be a good proxy for the spot price of crude oil - and I will be particularly leery of participating in USO for anything other than a short term trade."

And yet, investment in USO continues to grow. As Olivier Jakob at Petromatrix explained just a few weeks ago:

The size of investment in the ETF has recently grown to such a high level that it will need to roll in one day more than the GSCI in two days; and we do not think that the managers of the USO have the practical experience of rolling such a large position. Given the high Cushing stocks, the USO roll tomorrow to be followed by the GSCI roll and 2009 rebalancing, we would favor having any WTI length on March rather than Feb.

Interpretation? Retail investors are clearly not understanding the contango.

What's more investors in the USO fund are potentially being doubly hurt; not only is the fund already faced with an uphill struggle of rolling a sizable position into a contango curve, it has chosen to do so all in one day with everyone knowing exactly the day it is doing so. That is not a good position for investors. To compare, both the S&P GSCI and recently UBS-taken-over AIG index roll over a number of days.

While Tuesday's Nymex WTI roll from the February to the March contract may have seen the contango flatten a touch, it is still significant. Anyone interested can track it here on the Nymex website."

[anisha] 23/1/2009 07:23

andrew

thanks

[andrewbaker] 22/1/2009 14:04

anisha-

The 2x leverage is on a daily basis: arithmetical. Over more than one day, the difference is geometric. So: 100 -> 75 day one gives LOIL down from 100 to 50. If day two is 75 -> 50, LOIL goes from 50 to 16.67. So while oil has lost 50% over two days, LOIL is down 83.33%. It helps to know the math!

[goldenshare888] 22/1/2009 08:51

Plenty of forecasts for $70-$100 oil later this year.Would be very nice...!!!

I am long on oil....

[surfer2] 21/1/2009 16:59

how does this work ? like a share or a CFD?

if i buy 1000 quids worth of Loil at 5 and it drops from say 5 to 4 how much of my 1000 do i lose ? 20% x 2 ? = 400 quid plus spreads ? and how are the spreads ? . if Loil drops from 5 to 2 do i lose 3 of 5 x 2 or 6 ie. 120% ie forfeit all my money or have to stump up more ? thnx

[mountpleasant] 21/1/2009 16:54

That'll be the intermediary fees, ETF securities and counterparties.

[anisha] 21/1/2009 15:14

hi can anyone explain how the price of loil is down from 97 to about 5 when the leverage is only x2 .thanks

[blackm0nday] 21/1/2009 12:47

Lol, or should I say Loil

[relishing] 21/1/2009 12:30

Let us know when your period's finished.

[pbracken] 21/1/2009 12:29

It was obvious from the context of the post, for anyone with even a morsel of a brain cell.

[pbracken] 21/1/2009 12:20

Not over the past two days you imbecile.

[relishing] 21/1/2009 12:17

LOIL is down!

[pbracken] 21/1/2009 12:09

I don't get it either; Light crude has risen by 25% and LOIL has edged up only 12% or so. Thought this was a leveraged play.

[relishing] 21/1/2009 08:36

Any idea why SOIL opened up and LOIL opened down, even though the oil price rose after close yesterday?

[bobby.ifa] 21/1/2009 07:38

Saint- I feel that the current price is an excellent entry level given the cost of producing the stuff is around 30 dollars per barell- so I would expect little downside- just my thoughts!

[saint27] 20/1/2009 18:51

AndrewBaker - thanks for your thoughts. Interesting to hear other's views especially people who follow this closely. I tend to agree with you that oil price may stay where it is for a while but do think we will be far higher in say 1-2 year's time. If I do go in early I will take the advice and keep it simple and go for something like CRUD rather than leveraging up.

It will be interesting to see what effect other issues might have e.g. any further Israeli action in the middle east. Also at some stage I can see the West and Iran causing some tension over the nuclear issue. Any full blown action would surely have a big effect.

Oil is pretty cheap now - difficult trying to pick the bottom but I cant see too much more downside from him but there again I'm no expert.