How to "invest" in oil?

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gch
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Re: How to "invest" in oil?

Post by gch »

AZAttorney11 wrote: Mon Apr 20, 2020 12:46 pm How much has the spot price of WTI declined since OP wanted to invest in oil three days ago?
Just today the spot prices should down 90%. But the forwards are little changed.
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David Jay
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Re: How to "invest" in oil?

Post by David Jay »

Wow, aren’t you glad you didn’t buy any May contracts?
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firebirdparts
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Re: How to "invest" in oil?

Post by firebirdparts »

I was thinking this was really uninteresting, but now that the spot price is $3 a barrel, I'm starting to get mildly interested.
A fool and your money are soon partners
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fredflinstone
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Re: How to "invest" in oil?

Post by fredflinstone »

AZAttorney11 wrote: Mon Apr 20, 2020 12:46 pm How much has the spot price of WTI declined since OP wanted to invest in oil three days ago?
Worst market timing ever?
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
fanmail
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Re: How to "invest" in oil?

Post by fanmail »

how about now do you want to store it at -$22?
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Re: How to "invest" in oil?

Post by fanmail »

fanmail wrote: Mon Apr 20, 2020 1:27 pm how about now do you want to store it at -$22?
now you can buy it at -$37 if you want to store 1000 bbls or more.
inbox788
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Re: How to "invest" in oil?

Post by inbox788 »

fanmail wrote: Mon Apr 20, 2020 1:30 pm
fanmail wrote: Mon Apr 20, 2020 1:27 pm how about now do you want to store it at -$22?
now you can buy it at -$37 if you want to store 1000 bbls or more.
Wow! You'd think at those (negative) prices, some of the oil producers would "buy" the futures contracts themselves and turn off the faucet.
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Re: How to "invest" in oil?

Post by fanmail »

inbox788 wrote: Mon Apr 20, 2020 1:47 pm
fanmail wrote: Mon Apr 20, 2020 1:30 pm
fanmail wrote: Mon Apr 20, 2020 1:27 pm how about now do you want to store it at -$22?
now you can buy it at -$37 if you want to store 1000 bbls or more.
Wow! You'd think at those (negative) prices, some of the oil producers would "buy" the futures contracts themselves and turn off the faucet.
must not have anywhere to store it right now
brcarls
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Re: How to "invest" in oil?

Post by brcarls »

inbox788 wrote: Mon Apr 20, 2020 1:47 pm Wow! You'd think at those (negative) prices, some of the oil producers would "buy" the futures contracts themselves and turn off the faucet.
I bet a lot of oil leases stipulate that they lose the lease if they don't produce oil. So they can't just turn off the faucet without losing their most valuable asset... But if they keep producing, they have to pay someone to take the oil.
Sockpuppet
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Re: How to "invest" in oil?

Post by Sockpuppet »

inbox788 wrote: Mon Apr 20, 2020 1:47 pm
fanmail wrote: Mon Apr 20, 2020 1:30 pm
fanmail wrote: Mon Apr 20, 2020 1:27 pm how about now do you want to store it at -$22?
now you can buy it at -$37 if you want to store 1000 bbls or more.
Wow! You'd think at those (negative) prices, some of the oil producers would "buy" the futures contracts themselves and turn off the faucet.
The problem is they can't easily turn off the faucet. They typically need to have some limited amount oil coming out of the ground unless they plan to close up the well, which is expensive and can make it impossible to reopen.
PVW
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Re: How to "invest" in oil?

Post by PVW »

Valuethinker wrote: Sat Apr 18, 2020 3:54 pm
glorat wrote: Sat Apr 18, 2020 9:29 am
inbox788 wrote: Fri Apr 17, 2020 6:38 pm Negative oil prices! Who would have thunk that? I hope USO can't go negative. I wouldn't want to lose $5 on my $4 "investment".

Texas Oil at $2 a Barrel Raises Specter of Negative Prices [behind paywall]
https://www.bloomberg.com/news/articles ... ive-prices
For sale of education and comparison... Electricity markets have a famous known normal case of negative prices that can but traders.

If you trade electric power, it is not something you can intrinsically buy and hold. If you are long, you must deliver in the half hour slot you've bought it for. If you've bought some and have nowhere to send it by that time, you'll have to pay a fee to "dump" the electricity into the ground.

I suppose this doesn't happen much in practice since this event typically only happens when a trader really screws up and there are classical market participants like hydro dams that can pump water back up stream or modern participants like the Tesla battery in Australia that can "hold" power
Actually it happens all the time.

Except for Alpine countries like Norway pimped storage Hydro is a tiny fraction of annual demand.
Batteries are too little to be noticeable.


Coal fired power stations take hours to get on and off the grid. Nuclear stations similarly cannot be switched "on" and off.

As the levels of intermittent renewables like solar and wind, chiefly, rise inexorably towards 50% or more of energy demanded you have a situation where the marginal cost of electricity production approaches zero.

Thus supply can easily exceed demand and you wind up paying the grid to take away your generation.

A good example is Ontario. About 60% nuclear and 30% hydro electric. In spring, especially post 10 pm, when demand is low and the dams are full from spring runoff, Ontario winds up paying the Midwest US ISO to take away its surplus power.

UK is starting to have more of these scenarios because of its growth in offshore wind. When wind speeds are high there may just be too much power.
This is the most interesting thing I've learned today.

I wonder, even if you have to pay someone to take your excess, does the power get put to some useful purpose or is it just somehow dissipated (e.g., as heat)? (Just wondering aloud, I'm not expecting you to do research or be my resident expert on power generation.)
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Uncorrelated
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Re: How to "invest" in oil?

Post by Uncorrelated »

The "dump excess energy" problem is a part of the reason why bitcoin mining is so big in China. China constructed a lot of hydro power dams in remote areas in anticipation of population growth and increased energy usage. But in the mean time that power has to go somewhere. Bitcoin miners can be very flexible with their power supply requirements, and thus present an ideal target to offload excess energy. Rumor has it that the energy is sometimes sold for negative rates.

In other countries this is usually done by selling the electricity to neighboring countries and/or working with industries to turn on/off their systems. One example of that is the water level control in the Netherlands, which needs regular pumping. A perfect system to turn on when the sun is shining a bit too much on those solar panels.

Energy storage is a pretty difficult problem. It's interesting that we have problems with oil now, because it's generally not considered a perishable good. Similar problems have been occurring in all kinds of different industries since covid19, from tulips to potato's and steak.
Arabesque
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Re: How to "invest" in oil?

Post by Arabesque »

Canadian dollar is tied to commodities, a petrocurrancy. It is low and going lower, i bet. It will go up when/if oil rises. I’m not playing that game this time, but I have in the past.
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whodidntante
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Re: How to "invest" in oil?

Post by whodidntante »

brcarls wrote: Mon Apr 20, 2020 2:50 pm
inbox788 wrote: Mon Apr 20, 2020 1:47 pm Wow! You'd think at those (negative) prices, some of the oil producers would "buy" the futures contracts themselves and turn off the faucet.
I bet a lot of oil leases stipulate that they lose the lease if they don't produce oil. So they can't just turn off the faucet without losing their most valuable asset... But if they keep producing, they have to pay someone to take the oil.
I think it's extremely expensive to shut down and later restart an oil extraction site. Some are deciding it's better to ride through than to shut down production.
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Rainier
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Re: How to "invest" in oil?

Post by Rainier »

USO and other oil ETFs/ETNs are on the fast track to blowing up. If you don't understand what you are buying when you "invest" in these then stay far away.

They are only being held up because so much dumb money is flowing into them propping up next months contracts. USO now owns 33% of the June oil contracts.

The oil ETF party is about to end very badly burning retail investors who thought investing in oil seems like it made sense.
KSActuary
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Re: How to "invest" in oil?

Post by KSActuary »

Rainier wrote: Mon Apr 20, 2020 5:23 pm USO and other oil ETFs/ETNs are on the fast track to blowing up. If you don't understand what you are buying when you "invest" in these then stay far away.

They are only being held up because so much dumb money is flowing into them propping up next months contracts. USO now owns 33% of the June oil contracts.

The oil ETF party is about to end very badly burning retail investors who thought investing in oil seems like it made sense.
Great post. Something good will come but not to retail investors (except momentarily cheap gas).
inbox788
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Re: How to "invest" in oil?

Post by inbox788 »

Rainier wrote: Mon Apr 20, 2020 5:23 pm USO and other oil ETFs/ETNs are on the fast track to blowing up. If you don't understand what you are buying when you "invest" in these then stay far away.

They are only being held up because so much dumb money is flowing into them propping up next months contracts. USO now owns 33% of the June oil contracts.

The oil ETF party is about to end very badly burning retail investors who thought investing in oil seems like it made sense.
Where is that 33% number being reported and updated? Do you know how many of the July contracts are held?

June WTI is currently up 4%. (21.24 +0.81 (+3.96%) 18:59 CT, 538,038 Open Interest)

https://www.barchart.com/futures/quotes ... res-prices

http://www.uscfinvestments.com/uso

I'm seeing NAV of $3.46 and 7.8% premium.
fittan wrote: Fri Apr 17, 2020 11:06 amIf I want to bet on oil price what is the best way to do it? Is there a particular mutual fund that correlates fully to oil price?
I haven't seen OP replies, but despite problems with USO and other ETFs, they're some of the better ways for retail investors to get correlation to oil prices, at least short term. One could directly trade the futures, but I haven't seen much else. And with the ETF, you can't go below zero!
rascott
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Re: How to "invest" in oil?

Post by rascott »

inbox788 wrote: Mon Apr 20, 2020 7:21 pm
Rainier wrote: Mon Apr 20, 2020 5:23 pm USO and other oil ETFs/ETNs are on the fast track to blowing up. If you don't understand what you are buying when you "invest" in these then stay far away.

They are only being held up because so much dumb money is flowing into them propping up next months contracts. USO now owns 33% of the June oil contracts.

The oil ETF party is about to end very badly burning retail investors who thought investing in oil seems like it made sense.
Where is that 33% number being reported and updated? Do you know how many of the July contracts are held?

June WTI is currently up 4%. (21.24 +0.81 (+3.96%) 18:59 CT, 538,038 Open Interest)

https://www.barchart.com/futures/quotes ... res-prices

http://www.uscfinvestments.com/uso

I'm seeing NAV of $3.46 and 7.8% premium.
fittan wrote: Fri Apr 17, 2020 11:06 amIf I want to bet on oil price what is the best way to do it? Is there a particular mutual fund that correlates fully to oil price?
I haven't seen OP replies, but despite problems with USO and other ETFs, they're some of the better ways for retail investors to get correlation to oil prices, at least short term. One could directly trade the futures, but I haven't seen much else. And with the ETF, you can't go below zero!

USO is fine for a very short trading window.... anything else it's terrible.

If one wants exposure to oil prices they should just buy a basket of major producers.
bck63
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Re: How to "invest" in oil?

Post by bck63 »

fittan wrote: Fri Apr 17, 2020 11:06 am Ok I'll admit it is not investing but gambling. If I want to bet on oil price what is the best way to do it? Is there a particular mutual fund that correlates fully to oil price? I know I can invest in Exxon etc but like to know if there are more direct alternatives.
Try the S&P 500 instead.
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Re: How to "invest" in oil?

Post by DonIce »

Arabesque wrote: Mon Apr 20, 2020 5:04 pm Canadian dollar is tied to commodities, a petrocurrancy. It is low and going lower, i bet. It will go up when/if oil rises. I’m not playing that game this time, but I have in the past.
Oil and gas production make up 3.8% of Canada's GDP.
Micronite
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Re: How to "invest" in oil?

Post by Micronite »

brcarls wrote: Sun Apr 19, 2020 11:31 am
emoore wrote: Sat Apr 18, 2020 8:43 pm dying energy source.
Not in my lifetime... fossil fuels will be the dominant energy source on the planet for generations to come. Maybe you can say it is dying when competing energy sources are economically viable without government subsidies, but right now, the only alternative on any meaningful scale is nuclear.
I don't know about oil being dominant for generations. Like you said, nuclear is a good alternative. Gen 4 nuclear fission plants also produce hydrogen, which can also be used as fuel source. If Toyota's investment into hydrogen FCEVs is correct, it could prove to be a viable alternative to ICE vehicles.
glorat
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Re: How to "invest" in oil?

Post by glorat »

fittan wrote: Fri Apr 17, 2020 11:06 am Is there a particular mutual fund that correlates fully to oil price?
I don't know if this question has been clearly answered... Assuming you mean correlation with oil prices over a medium to long term, I'll just state the answer is simply no

Unlike equities and fixed income, there is an underlying carry cost to holding commodities like oil and electricity. You can't fully magic this away with futures, ETFs or derivatives.

Case in point is the current negative oil price. If it were equities, you'd arbitrage by buying and holding now and selling later when the price recovers. The problem is that the world is running out of storage space to hold any more oil coming out of the ground.
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Rainier
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Re: How to "invest" in oil?

Post by Rainier »

If you liked USO for $4 yesterday you are going to love it under $3 today.

While the May contracts waited until the last day to crash I suspect the June contracts will collapse much sooner. Nobody wants to be holding the bag if they go below zero as well. Imagine holding a long position that has infinite risk.

I'll say it again for those that missed it. USO owns 33% of all the June oil contracts. Traders who have no need or capability to ever take delivery of a drop of oil are controlling 33% of oil in the United States to be delivered in June (probably over simplified, but reasonable). What happens if the June contracts go negative this week and USO can't get out of them?
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Re: How to "invest" in oil?

Post by fatFIRE »

Rainier wrote: Tue Apr 21, 2020 5:41 am If you liked USO for $4 yesterday you are going to love it under $3 today.

While the May contracts waited until the last day to crash I suspect the June contracts will collapse much sooner. Nobody wants to be holding the bag if they go below zero as well. Imagine holding a long position that has infinite risk.

I'll say it again for those that missed it. USO owns 33% of all the June oil contracts. Traders who have no need or capability to ever take delivery of a drop of oil are controlling 33% of oil in the United States to be delivered in June (probably over simplified, but reasonable). What happens if the June contracts go negative this week and USO can't get out of them?
USO files for bankruptcy?
inbox788
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Re: How to "invest" in oil?

Post by inbox788 »

fatFIRE wrote: Tue Apr 21, 2020 12:21 pm
Rainier wrote: Tue Apr 21, 2020 5:41 am If you liked USO for $4 yesterday you are going to love it under $3 today.

While the May contracts waited until the last day to crash I suspect the June contracts will collapse much sooner. Nobody wants to be holding the bag if they go below zero as well. Imagine holding a long position that has infinite risk.

I'll say it again for those that missed it. USO owns 33% of all the June oil contracts. Traders who have no need or capability to ever take delivery of a drop of oil are controlling 33% of oil in the United States to be delivered in June (probably over simplified, but reasonable). What happens if the June contracts go negative this week and USO can't get out of them?
USO files for bankruptcy?
USO goes negative!
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David Jay
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Re: How to "invest" in oil?

Post by David Jay »

inbox788 wrote: Tue Apr 21, 2020 12:27 pm
fatFIRE wrote: Tue Apr 21, 2020 12:21 pm
Rainier wrote: Tue Apr 21, 2020 5:41 am If you liked USO for $4 yesterday you are going to love it under $3 today.

While the May contracts waited until the last day to crash I suspect the June contracts will collapse much sooner. Nobody wants to be holding the bag if they go below zero as well. Imagine holding a long position that has infinite risk.

I'll say it again for those that missed it. USO owns 33% of all the June oil contracts. Traders who have no need or capability to ever take delivery of a drop of oil are controlling 33% of oil in the United States to be delivered in June (probably over simplified, but reasonable). What happens if the June contracts go negative this week and USO can't get out of them?
USO files for bankruptcy?
USO goes negative!
I presume this was intended as humor? I do not believe that there is any mechanism for collecting money from an ETF holder.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Rainier
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Re: How to "invest" in oil?

Post by Rainier »

David Jay wrote: Tue Apr 21, 2020 2:02 pm
inbox788 wrote: Tue Apr 21, 2020 12:27 pm
fatFIRE wrote: Tue Apr 21, 2020 12:21 pm
Rainier wrote: Tue Apr 21, 2020 5:41 am If you liked USO for $4 yesterday you are going to love it under $3 today.

While the May contracts waited until the last day to crash I suspect the June contracts will collapse much sooner. Nobody wants to be holding the bag if they go below zero as well. Imagine holding a long position that has infinite risk.

I'll say it again for those that missed it. USO owns 33% of all the June oil contracts. Traders who have no need or capability to ever take delivery of a drop of oil are controlling 33% of oil in the United States to be delivered in June (probably over simplified, but reasonable). What happens if the June contracts go negative this week and USO can't get out of them?
USO files for bankruptcy?
USO goes negative!
I presume this was intended as humor? I do not believe that there is any mechanism for collecting money from an ETF holder.
No, there is no mechanism to collect from an ETF holder. That is the problem, the exchanges are legally obligated to settle a trade so who gets left holding the bag in this case?

For example, if I sell 100 shares of XYZ on the NYSE there is no risk that I will not be paid for my shares. What about contracts on the CME?

FYI, USO just changed their product. They now own 3 months of forward contacts, versus 2.
JackoC
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Re: How to "invest" in oil?

Post by JackoC »

DonIce wrote: Mon Apr 20, 2020 10:54 am I'm surprised no company has started a physical oil ETF. Most unleveraged gold ETFs hold physical gold. You could do the same with oil and charge the storage cost as the ER. It would track the long term price of oil much more closely than oil futures ETFs which are hugely affected by contango/backwardation.

In the current situation, if a company started such a fund they would probably get investment in the billions very quickly... businesses opportunity anyone?
True there are physical gold ETF's but not many other physical commodity ETF's AFAIK. A lot of commentary on physical oil v futures seems to make the assumption that (being long at least) futures could be a complete mugs game. But how does that square with any concept of a reasonably efficient market? I know there are media articles about the 'financialization' of futures markets implying the outside 'financial' investors are being preyed upon but this is somewhat doubtful IMO. So the assumption that holding physical would be a breakthrough to a new higher plane of usefulness of commodity investing is also doubtful IMO.

The gyrations of the May WTI contract immediately before it expired (today was last trading day) have been remarkable, but really not an accurate representation of the overall state of the crude oil market, bad as it has been for longs. The May price is the result of a 'long squeeze' about tank and pipeline capacity *in and around the Cushing, OK delivery point specified in the WTI contract* If you didn't get out of the long position today, you must take delivery of 1,000 bbls per contract at Cushing next month, and have a way to store it there or pipe it out to somewhere you could. The Jun contract is a more realistic picture of the market, including storage capacity worldwide not just in one location. And also the 'lead' contract, which has been Jun for awhile is more reflective of the fate of USO/OIL etc. Jun has dropped around 50% in the last 5 days (~$13 now, I guess references to high 20's are from older posts), the ETF OIL is down a little less than that, though USO considerably less (around 33%). Those funds were obviously not in the May contract 2 days prior to the end of trading, and you would not expect them to be.

Besides last minute physical/futures squeezes at delivery point, you'd expect the futures curve to basically reflect costs you'd have to pay (financing, storage) to be long physical rather than futures. Many ETF buyers *think* physical is somehow categorically superior, so why not satisfy them with a physical ETF where that's easy to do? But that's a lot less easy and cheap to do with oil than gold. There's relatively little to 'managing' physical gold v being long the futures. There's a lot more to managing physical storage including trading to buy and sell the oil going in and out than a couple of traders to maintain a long position in CL contracts and roll them along. Either a substantially bigger ER to pay for that physical oil management team or less profitable ETF for the sponsor. Without actually a guarantee it would outperform rolling the futures by as much as that management cost. But maybe somebody will offer such a fund at some point.
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Re: How to "invest" in oil?

Post by acegolfer »

Rainier wrote: Tue Apr 21, 2020 2:52 pm For example, if I sell 100 shares of XYZ on the NYSE there is no risk that I will not be paid for my shares. What about contracts on the CME?
To trade futures contracts on CME, an investor must establish a margin balance. Over time, this margin balance will increase/decrease, as futures price change. This is called daily settlement aka marked to market.

Later, when he closes his position, he will receive the margin balance. No risk of not getting this money. The risk is the end balance could be much smaller than the amount he added.
RomeoMustDie
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Re: How to "invest" in oil?

Post by RomeoMustDie »

Sector funds associated with oil prices could be interesting. Travel and automobile stocks are two in mind that benefit from lower fuel prices.
inbox788
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Re: How to "invest" in oil?

Post by inbox788 »

Rainier wrote: Tue Apr 21, 2020 2:52 pmFYI, USO just changed their product. They now own 3 months of forward contacts, versus 2.
Looks like only 5% of the 3rd month, which doesn't seem like much, but they're increasing the portion of the 2nd month, so it's not 80% front month. This may reduce the correlation with spot price, but should reduce volatility.
Beginning Tuesday, USO will invest approximately 40% of its portfolio in crude oil futures contracts for June, approximately 55% of its portfolio in contracts for July, and approximately 5% of its portfolio in crude oil contracts for August.
https://www.marketwatch.com/story/large ... 2020-04-21

I'm good with buying July WTI for $20, so I'll be holding at current USO price about $2.80 and seeing what happens in July. Hopefully these low and negative prices encourage producers cut deeply ASAP instead of having to pay folks to take it off their hands.
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Phineas J. Whoopee
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Re: How to "invest" in oil?

Post by Phineas J. Whoopee »

Sell, or in this case rent out, the shovels.

Build more oil storage capacity in Cushing, OK.

PJW
Valuethinker
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Re: How to "invest" in oil?

Post by Valuethinker »

inbox788 wrote: Mon Apr 20, 2020 1:47 pm
fanmail wrote: Mon Apr 20, 2020 1:30 pm
fanmail wrote: Mon Apr 20, 2020 1:27 pm how about now do you want to store it at -$22?
now you can buy it at -$37 if you want to store 1000 bbls or more.
Wow! You'd think at those (negative) prices, some of the oil producers would "buy" the futures contracts themselves and turn off the faucet.
You can damage the long term output of the well doing that.

Apparently that is the problem w Russia cutting field production
Valuethinker
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Re: How to "invest" in oil?

Post by Valuethinker »

Micronite wrote: Tue Apr 21, 2020 5:26 am
brcarls wrote: Sun Apr 19, 2020 11:31 am
emoore wrote: Sat Apr 18, 2020 8:43 pm dying energy source.
Not in my lifetime... fossil fuels will be the dominant energy source on the planet for generations to come. Maybe you can say it is dying when competing energy sources are economically viable without government subsidies, but right now, the only alternative on any meaningful scale is nuclear.
I don't know about oil being dominant for generations. Like you said, nuclear is a good alternative. Gen 4 nuclear fission plants also produce hydrogen, which can also be used as fuel source. If Toyota's investment into hydrogen FCEVs is correct, it could prove to be a viable alternative to ICE vehicles.
Easy to look at long term possibilities but not notice the ones going on around you.

Wind is now the cheapest new form of generation. Cheaper than gas. And utility scale solar is not far behind.

Electric Vehicles continue to make headway. After 2035 many European countries will ban sale of Internal Combustion Engine vehicles.

It's here. The revolution is upon us.
Valuethinker
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Re: How to "invest" in oil?

Post by Valuethinker »

RomeoMustDie wrote: Tue Apr 21, 2020 5:08 pm Sector funds associated with oil prices could be interesting. Travel and automobile stocks are two in mind that benefit from lower fuel prices.
When the lockdowns ease both sectors will rally.

The airline sector is a warrant on the ending of cv19 restrictions.

What you have to find is airlines with the balance sheet to survive this.
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Rainier
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Re: How to "invest" in oil?

Post by Rainier »

Update: USO can now invest in anything oil related if need be. Will do a 1 for 8 reverse split by the end of the month.
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