Watch Out For Contango: Looking For The Best Long Term Oil Fund: USO, OIL, USL or DBO

By Perry H. Rod, Published: March 6th, 2009 8:48 PM PST

It's really very simple.

Go to any stock comparison chart today and compare the popular United States Oil Fund (USO), Barclay's iPath S&P GSCI Crude Oil Fund (OIL), or PowerShares Crude Oil Double Long and compare these to The United States 12 Month Oil Fund (USL) or PowerShares DB Oil Fund. You will find that USL and DBO outperform the rest in all long term charts - 3 months, 6 months, 1 year.

That's because of contango, the term used for the strategy of buying the front-month futures contract and rolling it forward, which is what all the major funds have to do in order to try and keep in line with current crude oil future contract trading.

Remember, oil contracts priced in the future are currently more expensive than current prices. As long as that is the case, when the current month's futures contract expires, these funds are forced to 'roll over' and pay a higher price for the next month's contract. Who pays for the difference? The long term investor of these funds who don't know any better. What makes it more extreme (and unusual) is that a major chunk of the futures contract volume is actually driven by the fund that's trying to follow the contract prices.

Did you get that? It's pretty ridiculous when you think about it: the index supposed to follow current crude oil prices actually drives the current price.

Assuming that all this is true, it is actually the longer term contracts that provide a more meaningful look into the value of oil. The current contracts go all the way to the year 2017, where traders currently predict that the price of oil will be $74 (that's, of course, laughable to those who believe we are hitting a period of peak oil around the world, even with the economy causing a drop in short term demand).

In any case, there are two oil funds that are superior in that they have already proven not to lose as much unnecessary dollars when rolling from one futures contract to the next, and yet they still follow the current price of crude: USL and DBO.

USL buys 12 months worth of contracts and rolls over all of them, which spreads out the contango and minimizes the effect of the price differential roll over between the current month and the next. DBO, on the other hand, uses management discretion, meaning they can basically buy and do whatever they want depending on what the current futures contract situation looks like. It has worked so far, as they are performing in line with USL, suggesting that they are also likely spreading their bets and buying 12 months worth of contracts.

I'm still waiting on a fund that focuses more on late date futures contracts only, but right now USL and DBO are the best available. In 3 months, 6 months and 1 year, USL and DBO have outperformed OIL and USO by around 10-20%. That's the price you pay when you buy USO or OIL.

The Inevitable Future: Peak Oil and Socialism

By Reggie Abaca, Published: April 21st, 2009 1:13 AM PDT

The current economic malaise was triggered by falling home prices and aggressive lending practices, they say.

The other part of the story – where oil (OIL, USO, USL) prices shot up to $150 a barrel - has been largely ignored, for now.

But it happened.

Worldwide peak oil is not a theory. It has already occurred and the 2008 oil price shock represented the first real test of what can happen. The after effect of the sudden oil price rise was so devastating that it temporarily crippled the entire world and was the primary trigger to what would become a financial meltdown.

When oil shot up to $150 a barrel, producers had an amazing incentive to significantly increase production. But before they had the opportunity, the world economies fell, and oil consumption dropped. Crude oil prices fell to as low as one fifth of their peak price.

It may take some time for oil consumption to completely recover, but when it does, look out. This time around, financial companies were battered to a point where over three quarters of the industry’s value vanished. So what will be the next victim?

Today’s observer might say that the process of a changing world as a result of expensive energy is already well under way. When the middle class gets squeezed, they naturally turn to government officials who make the most promises. The United States is now led by a popular liberal president along with liberal representatives in the nation’s House and Senate. It is no accident and conservative critics may not be exaggerating when complaining about a move toward socialism.

Somebody needs to tell conservatives, however, that the move toward socialism is now inevitable. Just imagine today’s oil prices doubling or tripling on top of our current economic problems. The result would be rapid inflation and a people who are only more desperate, naturally turning to government officials who make the most promises. Those who make the most promises are those who will naturally ignore long term economic ramifications.

The result is not just a move toward socialism. It is a loss of opportunity for those who are not already wealthy. It is a different kind of America.

Texas energy specialist Matthew Simmons, has predicted that Saudi Arabia, which is by far the number one oil supplier to the world, is already experiencing peak oil production while Saudi officials mask the truth. Recent 2008 production numbers have suggested that Russia, the number two oil producer in the world, has just hit its peak. The question remains, how long will it take for the world’s oil consumption appetite to rise back up, putting pressure on oil suppliers to keep their promises that they can meet demand? Unlike the early 1980’s, when consumption did not pick up for several years, China, India and emerging markets have been experiencing a robust and renewed industrial revolution of their own, fueled by population growth and improved technology. You can see the result in the air quality of those respective nations.

If a dramatic rising price of oil is indeed inevitable, as evidence suggests, the greatest victim may be the United States middle class, who for so long have enjoyed a special status in the world. The cruel reality is that the precious American dream will likely really just be a dream sometime in the future. If oil were at $150 barrel today in this environment, it would already be a dream.

But let’s hope those Saudi monarchs are honest thoughtful individuals who are telling us the truth about their oil production capabilities.

But don’t get your hopes up.