Opinions
Richard Croft
U.S. Oil Fund E.T.F.
USO-N
COMMENT
Aug 18, 2015
$14.050
Stock price when the opinion was issued
E.T.F.'s
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His view on oil is a little different than what you are used to hearing. He would view it as a “lower for longer” phase. Looking back at timelines of commodity markets, they tend to move in long waves of boom and bust. From 2002 to 2011, the big China era, oil was doing well. After a bubble, which he thinks oil is in, you have the guillotine phase, and then it is sandpaper for 3 years. Thinks $50 is going to be about the ceiling, and will be range bound from $25 to $50. The story is not one of demand, it is one of supply. There is a lot of supply out there, so any time oil prices spike, we get regions increasing supply. He wouldn’t be Long on this.
E.T.F.'s
DON'T BUY
The first oil futures contract today (the front month) is trading below the back month contract, which is 'contango'. The opposite case is 'backwardation'. Inside the ETF they own the front month and then on the transition day, about a week before, they sell the front month and buy the back month. If the front month is lower than the back month and the price of oil does not rise in the second month then you will lose that forward carry. If you don't understand these mechanics then you are at a serious disadvantage with this product.
E.T.F.'s
COMMENT
Risky? If oil goes negative, contracts will not be honored and this creates problems as they have to roll futures contracts forward. They have tried to reconfigure the fund to become more long dated on their positions. You have to be careful of the exposures in ETFs like this one. He would avoid leveraged plays, because your timing has to be exactly right due to the underlying decay they have.
E.T.F.'s
DON'T BUY
His team's belief is that commodities have completed their secular downturn. "The best cure for low prices is low prices." Though he's bullish on oil, leaders of this commodity bull market will be the base metals like copper and iron ore. Oil is interesting, but not as interesting as the metals. Instead, he'd investigate some of the ETFs that track base metals.
E.T.F.'s
DON'T BUY
Playing with the forward markets so it is challenging. In April 2020, the futures contracts traded at negatives and there were changes made. Now it does not track oil contracts. Have to look at oil futures curve and what it owns. It is not as simple as oil prices going up. However, it could be a tool to play rising oil prices.
E.T.F.'s
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An energy play, so the decline in this is the stumble in the price of oil. For it to rebound, you are going to have to see oil back to around $75-$80 a barrel. Doubts if you will see this until the latter half of 2016, if even then. You could be holding this for a long time. You could write covered calls, which is simply selling a call option in which you agree to sell this to somebody else at a certain price. If you are in for a protracted period of time where you don’t think the ETF is going to rebound sharply, then this is not a bad strategy because you are collecting cash flow while waiting.