Ed,
Thanks, and:
1. It shouldn't, but these are unsustainable production prices. All in, fully loaded, I recall most shale gas costs around $4.50/mcf, and all shales are NOT equal. Some are more and some are less, but none are sub $3 all in (including SG&A, royalties, dry well offsets, F&D, etc.).
2. GLD buys and stores physical gold whereas UNG and USO do not do so with their respective commodities; they keep rolling and someone keeps collecting premium. That is the vehicle that each created, not the one that may be desired by the investing public. I have been looking too for the best vehicle and have a few conclusions at the end of this post.
3. You have to refer to the filings for both funds. The roll for UNG used to occur in one day until reasonably recently, when they extended it for 4 days, dampening volatility. As for the relationship of USO to oil, or NG to UNG, suffice it to look at this crude chart of USO. Replace it with UNG for your amusement.
stockcharts.com
The 10-Q will warn you plenty of what you see in the chart, but most people go head long into it thinking they are buying black gold.
For example, here is a link and an excerpt from USO's filing. It is boring extensive reading, but one must read the filings.
Excerpts from the most recent USO 10-Q (pgs. 19-24.):
sec.gov
Tracking USOF’s Benchmark
USOF seeks to manage its portfolio such that changes in its average daily NAV, on a percentage basis, closely track changes in the average daily price of the Benchmark Oil Futures Contract, also on a percentage basis. Specifically, USOF seeks to manage the portfolio such that over any rolling period of 30 valuation days, the average daily change in the NAV is within a range of 90% to 110% (0.9 to 1.1) of the average daily change in the price of the Benchmark Oil Futures Contract.
There are currently three factors that have impacted or are most likely to impact, USOF’s ability to accurately track its Benchmark Oil Futures Contract.
First, USOF may buy or sell its holdings in the then current Benchmark Oil Futures Contract at a price other than the closing settlement price of that contract on the day during which USOF executes the trade. In that case, USOF may pay a price that is higher, or lower, than that of the Benchmark Oil Futures Contract, which could cause the changes in the daily NAV of USOF to either be too high or too low relative to the changes in the Benchmark Oil Futures Contract. During the six month period ended June 30, 2009, management attempted to minimize the effect of these transactions by seeking to execute its purchase or sale of the Benchmark Oil Futures Contract at, or as close as possible to, the end of the day settlement price. However, it may not always be possible for USOF to obtain the closing settlement price and there is no assurance that failure to obtain the closing settlement price in the future will not adversely impact USOF’s attempt to track the Benchmark Oil Futures Contract over time.
Second, USOF earns interest on its cash, cash equivalents and Treasury holdings. USOF is not required to distribute any portion of its income to its unitholders and did not make any distributions to unitholders during the six month period ended June 30, 2009. Interest payments, and any other income, were retained within the portfolio and added to USOF’s NAV. When this income exceeds the level of USOF’s expenses for its management fee, brokerage commissions and other expenses (including ongoing registration fees, licensing fees and the fees and expenses of the independent directors of the General Partner), USOF will realize a net yield that will tend to cause daily changes in the NAV of USOF to track slightly higher than daily changes in the Benchmark Oil Futures Contract. During the six month period ended June 30, 2009, USOF earned, on an annualized basis, approximately 0.22% on its cash holdings. It also incurred cash expenses on an annualized basis of 0.45% for management fees and approximately 0.18% in brokerage commission costs related to the purchase and sale of futures contracts, and 0.19% for other expenses. The foregoing fees and expenses resulted in a net yield on an annualized basis of approximately -0.60% and affected USOF’s ability to track its benchmark. If short-term interest rates rise above the current levels, the level of deviation created by the yield would increase. Conversely, if short-term interest rates were to decline, the amount of error created by the yield would decrease. When short-term yields drop to a level lower than the combined expenses of the management fee and the brokerage commissions, then the tracking error becomes a negative number and would tend to cause the daily returns of the NAV to underperform the daily returns of the Benchmark Oil Futures Contract.
Third, USOF may hold Other Oil Interests in its portfolio that may fail to closely track the Benchmark Oil Futures Contract’s total return movements. In that case, the error in tracking the Benchmark Oil Futures Contract could result in daily changes in the NAV of USOF that are either too high, or too low, relative to the daily changes in the Benchmark Oil Futures Contract. During the six month period ended June 30, 2009, USOF did not hold any Other Oil Interests. Due, in part, to the increased size of USOF over the last several quarters and its obligations to comply with regulatory limits, USOF is likely to invest in Other Oil Interests which may have the effect of increasing transaction related expenses and result in increased tracking error.
Term Structure of Crude Oil Futures Prices and the Impact on Total Returns. Several factors determine the total return from investing in a futures contract position. One factor that impacts the total return that will result from investing in near month crude oil futures contracts and “rolling” those contracts forward each month is the price relationship between the current near month contract and the next month contract. For example, if the price of the near month contract is higher than the next month contract (a situation referred to as “backwardation” in the futures market), then absent any other change there is a tendency for the price of a next month contract to rise in value as it becomes the near month contract and approaches expiration. Conversely, if the price of a near month contract is lower than the next month contract (a situation referred to as “contango” in the futures market), then absent any other change there is a tendency for the price of a next month contract to decline in value as it becomes the near month contract and approaches expiration.
As an example, assume that the price of crude oil for immediate delivery (the “spot” price), was $50 per barrel, and the value of a position in the near month futures contract was also $50. Over time, the price of the barrel of crude oil will fluctuate based on a number of market factors, including demand for oil relative to its supply. The value of the near month contract will likewise fluctuate in reaction to a number of market factors. If investors seek to maintain their position in a near month contract and not take delivery of the oil, every month they must sell their current near month contract as it approaches expiration and invest in the next month contract.
If the futures market is in backwardation, e.g., when the expected price of crude oil in the future would be less, the investor would be buying a next month contract for a lower price than the current near month contract. Hypothetically, and assuming no other changes to either prevailing crude oil prices or the price relationship between the spot price, the near month contract and the next month contract (and ignoring the impact of commission costs and the interest earned on Treasuries, cash and/or cash equivalents), the value of the next month contract would rise as it approaches expiration and becomes the new near month contract. In this example, the value of the $50 investment would tend to rise faster than the spot price of crude oil, or fall slower. As a result, it would be possible in this hypothetical example for the price of spot crude oil to have risen to $60 after some period of time, while the value of the investment in the futures contract would have risen to $65, assuming backwardation is large enough or enough time has elapsed. Similarly, the spot price of crude oil could have fallen to $40 while the value of an investment in the futures contract could have fallen to only $45. Over time, if backwardation remained constant, the difference would continue to increase.
If the futures market is in contango, the investor would be buying a next month contract for a higher price than the current near month contract. Hypothetically, and assuming no other changes to either prevailing crude oil prices or the price relationship between the spot price, the near month contract and the next month contract (and ignoring the impact of commission costs and the interest earned on cash), the value of the next month contract would fall as it approaches expiration and becomes the new near month contract. In this example, it would mean that the value of the $50 investment would tend to rise slower than the spot price of crude oil, or fall faster. As a result, it would be possible in this hypothetical example for the spot price of crude oil to have risen to $60 after some period of time, while the value of the investment in the futures contract will have risen to only $55, assuming contango is large enough or enough time has elapsed. Similarly, the spot price of crude oil could have fallen to $45 while the value of an investment in the futures contract could have fallen to $40. Over time, if contango remained constant, the difference would continue to increase.
An investment in a portfolio that involved owning only the near month contract would likely produce a different result than an investment in a portfolio that owned an equal number of each of the near 12 months’ worth of contracts. Generally speaking, when the crude oil futures market is in backwardation, the near month only portfolio would tend to have a higher total return than the 12 month portfolio. Conversely, if the crude oil futures market was in contango, the portfolio containing 12 months’ worth of contracts would tend to outperform the near month only portfolio. The chart below shows the annual results of owning a portfolio consisting of the near month contract and a portfolio containing the near 12 months’ worth of contracts. In addition, the chart shows the annual change in the spot price of light, sweet crude oil. In this example, each month, the near month only portfolio would sell the near month contract at expiration and buy the next month out contract. The portfolio holding an equal number of the near 12 months’ worth of contracts would sell the near month contract at expiration and replace it with the contract that becomes the new twelfth month contract.
As for more efficient vehicles for investing in the commodiites, I am always looking at companies with large reserves and what those reserves are priced at today. They are all expensive, very expensive IMO. CLR which does not have the large reserves, for example, trades at nearly 19x 2009 CFO, 10x sales, and 15x EV/ttm EBITDA. DVN is trading at 8x CFO. They are buys at 4x CFO IMO. The markets are ignoring the commodity price in lieu of hedges that are expiring in Q4, for example. But on the same token, the market is discounting NG and its ample supplies but placing a premium on the glut of distillates. It does not compute, per se. The only cheap thing right now is refining, trading at 35% or so of replacement value, but even so, VLO posted a quarterly loss for the first time in likely 7 years or so. It is not pretty out there. PTEN trades at TBV, but BJS which has lots of pressure pumping like PTEN garnered a 16% premium. Investors would not like to be taken out at $15-$17/sh. when they saw $36 less than a year ago. Maybe one trades out of oil equities into gas equities, but they have to dig for cheap ones since the well know names are hard to find. Gas is a local fuel, and without export capacity IMO it will not be a solid hedge against a devaluing US$. It is and will continue to be volatile IMO without additional storage to dampen the disruption swings. Volatility hurts planning which hurts promotion of it as a fuel in my opinion. Yet, at under $3 it is attractive for the long term, I think. I am also looking at pipeline MLPs (collecting rent for traffic) like NS with a 8% yield, and royalty trusts. RT missed the boat last year. They dropped, cut their divvies, and diluted the heck out of everyone at the bottom. PIGS!!!
Sorry for the rambling post, but heck, it is late. Time to decompress...
Best regards, |
