Playing the Oil Market

In a recent TheStreet.com article, "Looking Ahead With Hope and Trepidation," Eric Bolling wrote about some of his recent stock picks and gave his take on current financial crisis that the U.S. is facing.

Overall, Bolling is putting an emphasis on being nimble and being able to get liquid. Many of his picks are shorter-term and are being used as trading vehicles to benefit from the price action. Keep in mind that he is a trader and he acts swiftly. I do agree with his selection of U.S. OIL FUND ETF (USO) (which is essentially an ETF that buys front month crude oil contracts and is a direct proxy for playing the price of oil). However, I picked up PowerShares DB Oil Fund (DBO) instead last week, which plays contracts of oil almost a year out, rather than front month. I did this because the oil curve is currently in contango where the front-month is trading very cheap and the entire curve going further into the future is priced much higher. Therefore, whenever USO "rolls over" to the new contract each month, you're essentially getting crushed.

While it is definitely nice to have ETFs, essentially to trade crude oil in the stock market without having to go to a commodities exchange, you have to be aware of the differences/limitations of USO or DBO. Keep an eye out over the next week or so, as I have a piece coming out that will talk about oil more in-depth.

Disclosure: Author owns DBO.

Comments

[BelaOthello:]

When you say you are getting crushed what assumptions are you making about the current or long term price of oil? If the long term price of oil is going down wouldn't DBO be getting crushed?

2008 Nov 05 02:11 PM

[Market Folly:]

BelaOthello, I'm talking about USO in regards to rolling the front-month contracts. If this month's contract is $60 and then next month's contract is $65, the etf has to roll over to that next month contract at some point and purchase the more expensive contracts.


On Nov 05 02:11 PM BelaOthello wrote:

> When you say you are getting crushed what assumptions are you making
> about the current or long term price of oil? If the long term price
> of oil is going down wouldn't DBO be getting crushed?

2008 Nov 06 09:40 AM