Oil Contango! (And Why It Matters to USO Investors)



USO’s performance

From February 16, 2017, to February 23, 2017, the United States Oil Fund (USO) (OIIL) rose 1.1%. In the trailing week, West Texas Intermediate crude oil April futures rose 1.3%. USO is meant to track active crude oil futures.

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Does USO track crude oil futures well?

On February 11, 2016, crude oil active futures hit a 12-year low. USO rose ~44.3% from February 11, 2016, to February 23, 2017. During that period, crude oil active futures rose 107.7%.

From June 20, 2014, to February 23, 2017, USO fell ~70.7%, while crude oil active futures fell 49.2%. The nearly two-year downturn in crude oil prices started from its peak on June 20, 2014.

The above numbers show USO’s lower returns, as compared to crude oil active futures. The lower returns are due to small losses that USO suffered when rolling its exposure to crude oil active futures. The futures were higher in price than the expiring futures contracts in the fund. Due to this “contango” structure in the futures market, USO has underperformed crude oil for the past few years.

Energy sector exposure

For exposure to the energy sector, you might want to look at energy ETFs that invest in oil and gas stocks and could be alternatives to ETFs that offer direct exposure to energy prices, such as USO. The energy ETFs include the following:

  • The Energy Select Sector SPDR ETF (XLE)
  • The PowerShares DWA Energy Momentum ETF (PXI)
  • The Vanguard Energy ETF (VDE)
  • The iShares US Energy ETF (IYE)
  • The Fidelity MSCI Energy ETF (FENY)
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

In the next part, we’ll look at UNG’s performance compared to natural gas futures.


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