ETFS Leveraged Crude down 10% ?

[Eek!]

Hello everyone, first post.

Oh. My. God.

I'm interested in ETFS Leveraged Crude - LOIL. I've watched WTI crude fall 1-2% this morning. The DJAIGCL that LOIL is supposed to follow is currently closed. LOIL is down 10%. That's rather a large tracking error!

Can you help me understand what's happenend here this morning?

Many thanks for any comments.

 

[Martinghoul]

Must be the roll... There's a lot of shenanigans arnd the contract roll time when the USO does the deed. You can google various articles on the subject.

 

[Eek!]

Thanks for replying. Looks like I've been conTango'd. It's clearly my own fault for not understanding what I was buying. It seems I'm not the first though.

I've been reading but I stilll have questions. Different articles refer to different dates for the roll. Is it monthly or bi-monthly. Is it finished now for this month or am I going to get hammered again for the next 3 or 5 days?

If I understand what the near and far prices are, is there a way to play this? I've spotted the short crude ETF did rather well today.

Cheers.

 

[Mike2000uk]

There are a couple of reasons for this. As martinghoul says the contango ( price difference between different months futures contracts) causes the ETC to lose value during the contract roll over. I think the difference was roughly 50c this time. Which is much better than previous months.
Also LOIL is traded on the LSE which closes at 4:30pm. WTI crude is 24 hours and dropped about $2 after London closed. So this is priced in today as well as the 4 or so percent drop during todays trading hours. Don't forget it has 2x leveraging.

I bought this etc some time ago and use spread bets to hedge at moments like this.

The main problem with this etc is that it is valued in dollars so u have to factor in the exchange rate. As crude and the dollar are so closely linked it means that usually, inparticular lately, that crude rises as a consequence of the weakening dollar and so although you gain a big percentage before u change to sterling this is much reduced after. (I'm assuming your uk?)

This will make money long term but it's nowhere as good as it seems at face value.

Mickey

 

[Mike2000uk]

Contracts roll monthly. The contango won't always be there it's a sign of over supply in the market. It's come a lot over the past few months. It can also go into backwardation where the far prices are less than the current month. Although I'm not sure if this would mean you would gain from the rolls or not.

 

[Martinghoul]

Firstly, I am not exactly the expert...

The contracts are monthly, so the rolls normally take place every month. As to when the USO is done rolling, that's the big question, to which I don't know the exact answer. If I were them, I'd try to do something smart and play some games, but, then again, they don't get paid to be smart. Maybe someone who is a crude expert knows more.

Yes, there's a way to play this and a whole bunch of banks have been doing just that. They rent tankers and store the oil to take advantage of the contango. So, basically, as a USO investor, you're subsidizing their arbitrage. Specifically, look for articles about Phibro (a Citi unit) and JPMorgan.

 

[Eek!]

I'm very aware of the leveraging!

So, I'll put the noose back in the cupboard then. Thanks for your comments.

 

[Eek!]

I'm not complaining. The ETFS bumpf does point out the pit falls - the daily tracking error, the affect of the roll. But I do wonder who this ETF is for.

It doesn't seem to make sense for a private/small investor to hold onto these things long term and if you're a pro, don't you just buy the contracts themselves?

 

[Martinghoul]

I don't know who would use ETFs to speculate in crude, gold and other commodities.

My theory is that the USO target audience is either a) retail investors herded towards the ETF by some very clever marketing; b) institutional investors that are constrained by some weird regulaton that allows ETFs and nothing else.