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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Paul Kern who wrote (101825)	5/30/2008 8:46:13 AM
From: Broken_Clock	Read Replies (3) \| Respond to of 206323

Crude Oil Dances the Contango posted on: May 30, 2008 \| about stocks: DBO / OIL / USO Font Size: Print Email By Matthew Hougan All you commodity investors out there take note: crude oil is toying with contango again. The news was first reported by Brad Zigler at HardAssetsInvestor.com. It has important implications for any investor who owns either a broad-based commodity ETF or an oil-specific fund like the U.S. Oil Fund (USO). What is contango? Contango is when the price of oil tomorrow is more expensive than the price of oil today. Remember, oil isn't like gold. You don't buy physical oil the way you might buy physical bars of gold. Oil is too sticky, too hard to store, too toxic, etc. Instead, you buy oil futures. Like stock futures, oil futures give you the obligation to buy physical oil at a predetermined price at some date in the future. There are futures available for each month of the year: you can buy a future right now that gives you the right to buy oil in July 2008, August 2008, September 2008, and so on. Most commodity funds (including ETFs) buy what's called the "near-month" contract - currently, that is the July contract. These futures "expire" on the third Friday of every month. If a fund holds a contract through expiration, it has to take delivery of 1,000 barrels of physical oil at a depot in Cushing, Oklahoma. Most investors don't want to do that, so they sell the current contract before it expires and buy into the next-month contract. It's called "rolling" your futures position forward. This is where "contango" comes in. If the price of the next-month contract (i.e., August) is more expensive than the price of the near-month contract (i.e., July), you effectively lose money on the "roll." When that happens, the market is said to be in "contango." The opposite situation is called "backwardation." The oil market has been in strong backwardation since the summer of 2007, and it's given an extra boost to commodity and oil-specific funds. I wrote an article on August 3 about the fact that the oil market had entered backwardation. At the time, oil was trading for $75.96/barrel. Today, it costs $131.03/barrel, meaning oil is up 72.5% over the same time frame. But the US Oil ETF (USO) - which buys the near-month oil contract and rolls it over each month - is up 84% over the same time frame, outperforming crude by 11.5%. 2% of that boost is due to interest income, but the remaining 9.5% is due to backwardation. If you annualize that 9.5%, you see that backwardation has been boosting the return of USO at an annualized rate of almost 13% per year. That may not sound like much when oil seems to go up $5/day, but crude oil won't go up forever. Historically, the roll yield has been a huge component of total returns of a crude oil investment, and the fact that it has abated is important news. (Some people also believe that backwardation indicates a shortage of near-term supplies. The fact that it's disappeared suggests that those near-term supply shortages may be disappearing as well, which could have an impact on price trends.) Does this mean it's time to panic and sell your oil investments? No. Currently, the market is neither in backwardation nor contango. As of May 27, the July contract for oil cost $131.03/barrel, while the August contract cost $130.99/barrel - essentially the same. That means an investment in oil futures should approximate the returns of spot oil itself, which is all that most investors are trying to achieve. But the fact that backwardation has disappeared from the market means that the tailwind that's been giving crude oil futures positions an extra boost has disappeared as well. At the very least, it's something to be aware of.

To: Paul Kern who wrote (101825)	5/31/2008 8:31:49 AM
From: GREENLAW4-7	Read Replies (2) \| Respond to of 206323

Kern-ster, you have not a clue about my account. I never post how great I am,(but thanks) and unless you take offense to being Long, you should rethink those last few words. I am a contrarian and I have other trades that are not in the OSX sector. Last time I looked we were down 500+ points the last few weeks. On the contrary my friend, I have said the move up in the products, and let me spell it for you P R O D U C T ' s are being manipulated. Anyone who was only long from the OSX bottom in late Jan and held throughout this incredible run in Oil should be congratulated. But looking at the March - April charts a triple top was forming. I have said it since mid april, and I continue to say it and will do so for sometime. The move in Crude from 85 to 135 is pure hype and total manipulation. That portended that OSX has had a great, spectacular percentage move out of its channel. When we finally start to reverse which I feel we in currently trying to, it will take only a few weeks if that to take OSX back to the under 300 and under 260. High crude kills demand faster then you or I think. Add a slowing economy and you will find OSX long bets are on thin ice at best. If you were really making money you would not be so concerned with my posts. Next time don't play the fence!! GL