1/With all of the news surrounding #Crude oil and #USO trading at all time lows, we find it urgent to explain why now is NOT the time to purchase this product, or any other crude tracking ETF. This will be very long but highly (We hope) informative. Many feel that at under $3,

2/there is nowhere else to go but up. Although this seems to make perfect sense on the surface, there is one major reason why this is not the http://case.Now  is NOT the time to invest in USO is due to the super contango that Crude oil is currently in. For those who may

3/not know, contango is a structure in the futures market where the price of a specific contract is increasing month by month. If month 1 is $2, month 2 is $3, month 3 is $4 then this market is contango. In general, some degree of contango is normal and not overly detrimental to

4/your investments. Super contango, or contango that is much wider than normal, is detrimental. Let’s say I am a futures trader and I really want to be long Crude oil. Being that it is the end of April, I would buy a June crude oil contract. Well, once we get most of the way

5/through May I notice that Crude didn’t really move up like I was hoping, but I am still bullish. Being that I am not a physical trader I would be forced to liquidate my long position by selling my June contract. If I still wanted to be long Crude, I would then buy a July

6/contract. This is called a roll. In a contango market, rolling long positions will lead to losses but typically those losses are marginal. The current scenario is anything but typical. What if I wanted to roll my position long yesterday? I would have sold my May Crude contract,

7/let’s say for $5. Around this same time, the June contract was trading around $18 and I would have purchased it. This roll cost me $13 per contract (not including the massive losses I took being long June). Today, that June contract was worth roughly $12, and the July contract

8/was worth around $20. Several things are happening here. 1, I lost a lot more money today by being long the front month, and 2, we now have $8 worth of contango between the front two contract months. For the record, we expect the contango to get even wider which will lead to

9/even more costly rolls. In the scope of this tweet, we will pretend that come mid May when it is time to roll again the contango is still $8. Once again, I must PAY (so I lose money) to close out my June contract and get long July. Even though the price of crude has technically

10/gone up (once June hypothetically expired at $13 the price of crude would be July, $20) I am still losing money. With the current supply glut situation the odds of extreme contango between the front two months are very high. It will potentially take months for storage to open

11/up a significant amount which means that every month forward we go, the present Crude oil contract will devalue relative to the next month’s contract. This, as we have explained, will lead to roll losses. How does this apply to USO? USO is managed through futures contracts,

12/with the vast majority being front month futures and a smaller portion being the second month’s contracts. This means that the managers of USO are forced to roll their long positions every month and in the current futures structure, this equates to big losses on every roll.

13/As an owner of USO, this cost will be passed on to you. So, even if Crude goes from $5 to $15 overnight upon expiration, this was strictly due to the months changing and anyone who rolled would lose $10/roll. As an owner of USO, you would be eating that cost.

14/ If you have any questions, please reply to this tweet or send us a DM! #OOTT #futuresbasics #futures #contago #oil #crude #futuresmarkets

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