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About oil trading

  • #61
  • Mar 6, 2016 5:38pm Mar 6, 2016 5:38pm
Quoting dice action
Thanks for your reply charron. I don't know. I have very little experience with ETFs. I don't really understand them (perhaps you could explain). All I want to do is go long on the oil price. I checked out USO, but it doesn't seem to mimic the oil price itself as the price is 9,65USD... Does an ETF exist that exactly follows the price of oil? "9,65" means little to me, I sort of wouldn't know at what price to sell it.
you can buy USO same way as you buy any stocks.
USO mimicks the movement of oil price. Check out the charts. If oil price rise by 20 dollars, USO price will also rise by 20 Dollars
I purchased it at 8.80, I plan to keep it for 3 years
Many brokers let you purchase ETF commission free, all you need to pay is 0.45% MER/year
  • #62
  • Mar 6, 2016 5:50pm Mar 6, 2016 5:50pm
If USO mimics the oil price and rises 20 dollars if oil rises 20 dollars, then why is the price of USO 9.65 and oil is at approximately 40USD? I don't get it.
Is USO leveraged or un-leveraged?
  • #63
  • Mar 6, 2016 6:10pm Mar 6, 2016 6:10pm
I suppose you could trade futures then. Some brokers ( CMC for example ) offers Oil Futures with no financing and auto-roll feature.
  • #64
  • Edited 7:09pm Mar 6, 2016 6:57pm | Edited 7:09pm
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If USO mimics the oil price and rises 20 dollars if oil rises 20 dollars, then why is the price of USO 9.65 and oil is at approximately 40USD? I don't get it. Is USO leveraged or un-leveraged?
1-Don't pay attention to the price of the ETF. It doesn't rise price-for-price with oil. Just pay attention to the % and watch the price of oil to determine when you want to buy/sell. If oil rises 3% then the ETF will rise approx. 3%.

2-USO is not a leveraged ETF. Do not buy a leveraged ETF to hold for the long-term.

3-USO is 52% oil futures and 48% other oil-related products (gasoline, natural gas, heating oil, etc....). There are several other oil ETFs but none that I know of are 100% oil futures related.

4-Example: Buy $1,000 worth of USO (1,000/9.65=104 shares). Oil rises 20% ($36 to $43.20) Your $1,000 USO position will profit $200.

***Notice the chart below that USO is doing worse than crude oil because natural gas is doing even worse than oil so dragging USO down.

Quoting sbc
I suppose you could trade futures then. Some brokers ( CMC for example ) offers Oil Futures with no financing and auto-roll feature.
Most brokers require $3,500-$5,000 per contract to hold oil futures overnight.
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  • #65
  • Mar 6, 2016 8:09pm Mar 6, 2016 8:09pm
Quoting dice action
If USO mimics the oil price and rises 20 dollars if oil rises 20 dollars, then why is the price of USO 9.65 and oil is at approximately 40USD? I don't get it. Is USO leveraged or un-leveraged?
Sorry, I meant to say "if Oil rises 20 %, USO will also rise by about 20 %"

you should not care about the price quote of USO. it has its own unique price in the market (so, do many other oil ETFs like OIL, UCO etc.)
All I care is, when Oil price rises, my USO investment will also rise by equal percentage
  • #66
  • Mar 7, 2016 5:23am Mar 7, 2016 5:23am
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If USO mimics the oil price and rises 20 dollars if oil rises 20 dollars, then why is the price of USO 9.65 and oil is at approximately 40USD? I don't get it. Is USO leveraged or un-leveraged?

Simple fact is this. There is no financial instrument to hold oil that does not currently have huge financing costs one way or another: CFDs charge this cost upfront as overnight roll over, and etfs has the cost inbuilt. None, so stop looking for one.

Your options are to either hold oil in barrels at your house, or buy a stock, or etf of stocks that make their money from oil and respond in kind. The other option is to trade the near term contract and I believe you can roll it over.

The reason for the decay in USO is because of a phenomenon known as contango.
https://www.khanacademy.org/economic...cts/v/contango

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When you hold a futures contract, it is a contract for delivery of an item at some point in the future. When a market is in contango the future contract trade at a higher price than the spot price for many reasons. Overtime these contracts will decay towards the spot price, so on the day where the contract expires its price will be nearly exactly the same as the spot price.

Example. You can have a Decemeber futures contract priced at $60, your fund invests in it. The spot price is $40. The spot price stays the same over the course of the year, over that time the futures contract will decay towards the spot price.

That is why all these oil ETF under perform the actual oil market, because they buy futures contracts a higher price than the spot price, and these contracts decay over time to the spot price which causes value to be lost.
  • #67
  • Mar 7, 2016 10:14am Mar 7, 2016 10:14am
I am glad to see all the good replies. In the beginning it took a while before anyone responded and I was starting to wonder "what happened to FF? I thought there were smart people on that forum"). Seeing the detailed replies has reaffirmed my assumption that FF is a decent place to be
  • #68
  • Mar 9, 2016 12:24pm Mar 9, 2016 12:24pm
I agree with verv and some of the other comments, transaction costs are unavoidable and best not to invest in any highly leveraged products if it's a long term strategy.

If you go for stocks which are oil-driven and highly correlated with crude, the I would also check the fundamental financial ratios of each company, the quality of earnings, capital structure, dividend yield etc..
ETFs are better for short term in general due to contango and tracking issues..

Don't forget to consider what's most tax efficient also
  • #69
  • Mar 10, 2016 3:43pm Mar 10, 2016 3:43pm
Hmm... So, the two main options presumably would be:
Oil ETF such as USO. ETFs have small financing costs, but also "contango", which could be substantial. It may also not be directly linked to just the oil price.
Oil price CFDs. Which have financing costs, BUT reflect the actual oil price pretty well, am I right? I have no clue what the actual yearly financing cost for holding an oil price CFD is...
Which of those two alternatives will correlate the best with the actual oil price taking into consideration the different financing costs and contango (for the ETF alternative)?
I see someone recommended an oil STOCK ETF. How would one know that this would correlate better with the actual oil price in terms of % gain or loss, than an oil price CFD?

I find it a bit strange that such a famous commodity as oil, is in itself not directly "investable".
  • #70
  • Edited 4:30pm Mar 10, 2016 4:10pm | Edited 4:30pm
Quoting dice action
Hmm... So, the two main options presumably would be: Oil ETF such as USO. ETFs have small financing costs, but also "contango", which could be substantial. It may also not be directly linked to just the oil price. Oil price CFDs. Which have financing costs, BUT reflect the actual oil price pretty well, am I right? I have no clue what the actual yearly financing cost for holding an oil price CFD is... Which of those two alternatives will correlate the best with the actual oil price taking into consideration the different financing costs and contango...
1-No easy way around contango. You'll have it if you use futures or ETFs. Futures will need to be rolled or the ETF will have it done automatically. If the market gets a bit less bearish the contango will get reduced. If the market gets bullish the contango will change to backwardation but not very likely any time soon.

2-CFDs will reflect the exact price of oil but to be long there's the swap charge. (See the drawing below) Try it on DEMO for a while to see how much the swap costs are. Just be aware that most brokers charge 3X swap on wednesday to cover the weekend swaps.

3-The financing charges for ETFs are pretty small so not much to worry about considering the % move in oil. More important in performance (in regards to following oil price) is the contango drag which is deducted from the price of the ETF.

4-XLE is the largest ETF that tracks the largest oil companies. If you want to go this route, the ETF is a safer way than buying individual companies and doesn't require reading all the financial statements to figure out which companies are safest.

5-If you're familiar with trading options, that's the way I'd go. Buy calls or call spreads on ETFs. Sell OTM calls only on a portion of your position to cover the premium costs and leave the upside unlimited. Roll up & out as price rises.

6-Even though oil was down a bit today, the futures weren't too bearish today as you can see in the futures that some of the contango was reduced today. The front month was down less than the back month. (See graph below.)

***Chart below shows comparison.
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  • #71
  • Mar 10, 2016 6:25pm Mar 10, 2016 6:25pm
Thanks for your detailed reply, srt. I think I have learned something about oil trading. Trading options is probably a good idea, but I don't yet have understanding of them.
I still don't have a good idea of which option is the cheapest taking both financing costs and contango into consideration. Whether the cheapest option is oil price CFD or oil price ETF.
Does "contango" apply as much to oil sector STOCK ETFs as to USO?
I see that the XLE ETF as of now tracks the actual oil price very closely..
Unless I get a better clue of wich is better, oil price cfd or oil price etf or oil stock etf, I think I might decide to spread my investment across different oil related instrements and see which instrument fares best over time..
  • #72
  • Mar 10, 2016 7:26pm Mar 10, 2016 7:26pm
Quoting dice action
Thanks for your detailed reply, srt. I think I have learned something about oil trading. Trading options is probably a good idea, but I don't yet have understanding of them. I still don't have a good idea of which option is the cheapest taking both financing costs and contango into consideration. Whether the cheapest option is oil price CFD or oil price ETF. Does "contango" apply as much to oil sector STOCK ETFs as to USO? I see that the XLE ETF as of now tracks the actual oil price very closely.. Unless I get a better clue of wich is better, oil...
1-XLE will have no drag from contango as it's an ETF of a group of energy companies. (See graph below showing the companies)

2-Place some trades on a DEMO account to see how much the cost is for holding a CFD. I think the swap costs will be way too much to hold for the long-term. Your account will show the swap charges every day.

3-If you don't want to use options then I think the best long-term investment is to buy XLE & USO. XLE probably will have less chance of a double but also less chance of dropping 50% from current levels. It pays a 3.6% dividend yield also so with interest rates so low investors will tend to seek good yield payouts if they feel the investment is safe. USO pays no dividend.
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  • #73
  • Mar 11, 2016 8:05pm Mar 11, 2016 8:05pm
^what SRT said.

The only thing I would add is that I personally prefer the etf XOP, it has advantages and disadvantages over etf XLE.

Generally though it is closer to what I am after, which is something which more closely tracks oil, and it has a higher exposure to shale and smaller US oil producers.

XLE is safer though.
  • #74
  • Edited 8:37am Mar 12, 2016 8:14am | Edited 8:37am
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Okay, What I want to do is open a long position for oil to hold for a multi-year period of time. I know there are various providers who have oil CFDs, like IG Markets and CMC Markets. The thing is I understand there are "financing costs" for holding an oil CFD for a longer period of time, and I have no knowledge relating to how to determine which broker and which instrument offers the best "deal". I assume this may be a good place to ask for advice on this as there are many traders on here with presumably better understanding of how CFDs work. What...
One of my brokers offers WTI & Brent CFDs with no financing cost other than the 4-5 point spread. The CFD position is adjusted at the time of the futures contract expiration into the new front month's opening price.

The other option is an oil ETF. I purchase these and sell covered calls against my under lying position. There is a annual fee and can be found when you look up the ticker symbol for each product.
  • #75
  • Mar 12, 2016 11:31am Mar 12, 2016 11:31am
Which broker is that?
  • #76
  • Mar 12, 2016 3:05pm Mar 12, 2016 3:05pm
Quoting dice action
Which broker is that?
FXChoice

Here's what is on their site:

SPOT OIL
We offer a non-expiring CFDs market based on the front month (“spot”) futures price of WTI and Brent crude oil.
One trading day prior to the expiry date of the futures market, we will:
1. Adjust the quote of the market by the difference between the last traded prices of the spot (front) month and the next month’s price (the spread).
2. Make a credit/debit adjustment to your accounts with open positions based on the spread.
3. Adjust any working stop or limit orders based on the spread.
Example:
On 1 January, we quote 98.10 – 98.25 for the spot WTI market. This price is based on the current front month for WTI, which in this example is the February 2014 contract.
You decide to SELL 0.1 CFDs and hold your position open through the next month.
On 15 January, we switch from using the February 2014 quote to the March 2014 quote as the basis for the spot price, because the underlying February 2014 futures market expires on 16 January.
The last traded prices of the underlying NYMEX futures contract for the spot month are 98.00 (Feb) and for the next month 96.62 (March.) so our price is adjusted down by 138 pips.
Your open position is adjusted by 138 pips (+138 for long positions, -138 for short positions.) In this example, the account will be debited (1.38*1000*0.1) = $138.
In other words, because the spot quote dropped by 138 , your account would be debited the equivalent of 138 pips to adjust for the change in quote. If the quote had risen by 138 pips, you would be credited the equivalent of 138 pips. This happens each month when the new quote is issued.
  • #77
  • Mar 13, 2016 6:39pm Mar 13, 2016 6:39pm
Okay, I googled it. Is this the broker you are referring to? https://en.myfxchoice.com/
  • #78
  • Mar 14, 2016 6:49am Mar 14, 2016 6:49am
CFDs and Commodities don't sound like a good vehicle for long term investing in Oil, why? Expiration Dates, Rollover Fees and such would probably make quite the dent in your profits, if any left.
Since Oil seems to be hitting a support level (or at least as your strategy suggests), investing in Oil ETFs and other equities sounds like a better choice, plus you also may be entitled to dividends which you can reinvest (DRIP. Since you are thinking long term).

I wouldn't be so sure as to an actual Buy & Hold on oil, specially considering all the new renewable energy alternatives that have been growing and taking over the markets (Solar City and Tesla just to cite some popular ones).

Good Luck and Good Trades!
Good Luck and Good Trades!
  • #79
  • Mar 14, 2016 2:52pm Mar 14, 2016 2:52pm
Quote
Oil as a buy and hold investment
  • #80
  • May 31, 2016 2:18pm May 31, 2016 2:18pm
Hello internet warriors,

I came across an interesting presentation by U.S. Energy Information Administration 'What drives crude oil prices? An analysis of 7 factors that influence oil markets, with chart data updated monthly and quarterly" May 10, 2016| Washington, DC; hopefully some of you oil or correlation traders can find trading opportunities from the information given down below. Last but not the least, I hope this presentation helps educate internet warriors how crude oil plays a major role in commodity market.

Also the OPEC meeting is happening on June 2nd, 2016, I see huge volatility in the commodity market and several Forex pairs; the question is are we ready for the high risk appetite?

See you market warriors around.
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