Thanks. There seems to be an element of luck here. But, hey, in every investment this is the case! Congrats.
Appreciate your reply. I had not been paying huge attention during those times. Even so, can such a scenario be possible for extended periods of times?
Yes, it all depends on the thinking of real producers and real consumers rather than speculators. My current guess is that USO is doing a UNG. Unless next month is priced higher than next month +1 consistently, USO is destined to loose money.
Hi serious minded guys / girls,
I am thinking of going short on USO and cover myself with 2018 oil futures contracts. Can you validate my thinking here?
(1) The 2018 Jan futures for oil is quoting at 46.60. The front month contract is quoting at 39.35. So the maximum loss I would encounter would be $7000 assuming that my investment is $46000.
(2) Now I would want to go short (for the same amount of money) on USO. As I understand, USO is representing the next months contract (currently May 2016s). When they rollover to next month, I am guessing this is happening this week, they have to loose 80 cents of rollover cost because they will be selling May contracts at 41.13 and buying June contracts at 42.06. This rollover cost is about 2%. This has to happen every month. So, USO will be getting discounted by 2% per month for the next 21 months of our investment horizon. This means that the USO will come down at the rate of (.98 exp 21) = .65. That is 1 dollar invested in USO will only be worth 65 cents. Hence my short of USO worth of 46000 to start with would give a profit of about $16000. (Intrinsically).
(3) The net profit would be $9000 (16K profit from the sort of USO and 7K losses from the oil contracts) at the end of the period (next 21 months). The APR would be 10.75%. I read that there is a fees / transaction costs reduce the value of USO by about .50%. Adding this to our returns, it would be 11.25%. This seems to be a good investment.
So, my question to you is, is there any fallacy in my hypothesis? I understand that the entire thing collapses if my assumption that there is a severe 2% rollover cost every month. Will this come down? Or will it even become negative in which case I may incur losses on both sides?
I will greatly appreciate replies.
But then, if you want to buy and hold or go short on a 6 month to 2 year time frame, I thought I have to have some idea. Or, on a historical basis, what is the correlation? Any idea?
Hi All, How much is USO representative of oil? Would I lose money if I hold USO and oil remains flat for an year (theoretically speaking).
May be the market made a mistake when it pushed TLT to 138! Listen, Saudis are not buying and they will not have money for a long time to come. Chinese have to sort out their mess. A lot of people are bankrupt and are scrambling to get their balance sheet repaired. Of course, the ECB is printing and that is the only reason why the treasuries are quoting this high. Wait for some more time and you will see that Uncle Sam is coming to the market with boat loads of paper to sell!
Wealth was destroyed? What do you mean by this? Did anybody drop a bomb and killed some factories or buildings or lives? Man, the money just changed hands and that is all there is to it!
On the contrary, the (foolish) Saudis are sending their oil to all the nook and corner of the world at comparatively low prices! Rest of the world, including US is gaining. American oil is neatly tucked in underneath the soil.
If anything, I think the wealth has increased during the last year! One has to be very patient to reap the benefits!
No they are not wrong. I am not predicting 5% on the 30 year. I am predicting that it is going to go higher. Why do you think TLT came all the way from 140 to 115? Was there any QE during this period? The only QE during this period was by ECB.
The other observation you are making that every QE actually increased the interest rate is fallacious. The market did not believe that Ben would be doing such a tremendous amount of QE!
In any case, my theory is just one theory. Yours is another. You say that it depends on inflation. I say no, it depends on the available money to purchase treasury. I cannot see where people are going to get the money to buy these treasuries. Saudis have dug a grave for themselves and Chinese need hard cash sooner than latter. Let us see. I see TLT at 110 or below in 1 to 2 years time frame.
You just will not get that. The current FED hates QE. Europeans are going to stop that madness. Chinese are not going to be buying bonds. Saudi's are self destructing each and every minute.
It is all demand and supply. Uncle Sam has to pay much higher to borrow in the future and interest rates are going to be higher and higher and higher.
If I am wrong, please tell me why and where?
GDP lower should translate to higher rates IMHO! Lower GDP means people are not producing much. This means that to maintain the same level of living standards, people and companies have to borrow money. Uncle Sam especially has to borrow even more. Those who have money will not lend money as freely as one thinks. There is going to be no QE whatsoever and interest rates are going ti rise. It is all demand and supply!
On the other hand, higher GDP should translate to deflation invariably.
The Saudis are the suicide bombers of this world. They will self destruct in about 12 month's time. It is a process. They are going to be borrowing and selling whatever they have.
Iran is destroying Saudi Arabia without firing a single shot! Saudis are the greatest fools on mother earth. Fools and money will not stay together. Iran will not pump oil "at any price"! So the Saudis can pump all they want getting nothing for their oil! 2 years from now, Saudis are cooked.
That also means that oil is going to 100. Other than supply and demand, there is the problems of cost as well! Demand will keep growing!
But then the Saudis have to feed their population and also have to fly all over the world (you know for what). They just cannot run their country with half of their usual revenue. Saudis are doomed. They will cut.
Ya, I am wondering too. Saudi Arabia would have only half or quarter of their revenues. So, this madness cannot go on for ever. Probably they want the frackers to go bankrupt. They also dislike Iran. But I think that they cannot be hurting themselves for long. I think they started the game thinking that the frackers would cooperate but free world economics is forcing the frackers to get as much revenue to survive. So, it all appears that it could be a while more like this.
That is happening anyway even if interest rates are low!
QE4? Dreaming too much! Draghi blinked. Yellen is not going to do it. One and done is the best one may be hoping for but that is not going to happen. Sooner than latter oil will bounce 10 to 20% higher and the headline number on inflation will be a higher number.
Money is plenty all over the world! But those are in the hands of the rich people. They will squeeze the governments sooner or latter.