Plummeting Oil Prices Increases Hedging for 2009 Contracts

Highlighted below are next year's oil contracts and the open interest for each. With prices plummeting the way they are, we are seeing increased hedging using the June and December contracts for 2009. One potential impactor that has not received enough attention is the huge increase in ETF activity. Across the board volumes for ETFs have risen, and oil is not excluded.

Looking at USO alone, shares outstanding have risen 215% since 11/28/08, and the 50-day average volume on the fund is up almost 50% in the same period. Increased activity in ETFs could well be the culprit for the increased volatility in front month oil contracts on the day of expiration.

click to enlarge

Comments

[L Boyd:]

I wonder at what point most ETFs/ETNs start to get out of front month contracts? If one could get a sense of the timing of this, there may be a way to profit off of these by going short a few days before and then obviously selling before the delivery date.

2008 Dec 24 07:03 PM

[irisatrx:]

"If one could get a sense of timing...."
If that were possible, none of us would ever have lost a cent in the Market

Follow the advice of my grandfather, a stockbroker in the 1920s:
"Buy Low; Sell High"

I'll guarantee it, you can't go wrong.


On Dec 24 07:03 PM L Boyd wrote:

> I wonder at what point most ETFs/ETNs start to get out of front month
> contracts? If one could get a sense of the timing of this, there
> may be a way to profit off of these by going short a few days before
> and then obviously selling before the delivery date.

2008 Dec 28 11:45 AM