United States Oil Fund USO ETF , USL , UNG

Natural gas prices spike 12 percent even with storage facilities bulging
Prices jumped more than 12 percent in value for each per 1,000 cubic feet of natural gas on the New York Mercantile Exchange to start the week.

1/ Rapidly spiking prices led to some talk on Nymex that a very large player in the market believes that, at least in the short term, prices have fallen too far.

2/ Analysts at Goldman Sachs said prices for natural gas may even triple over the winter, though most energy experts believe there is a far greater chance that prices will plunge again.

There are two big factors that support the latter view, which would mean extremely cheap heating bills for a lot of people over the next few months.

a) The first is that natural gas in storage is 17 percent greater than it was last year and it is even nearing the maximum storage capacity in some places. And the U.S Energy Information Administration said in its short-term energy outlook that it expects another 12 percent buildup through October.

b) At the same time most meteorologists predict a very mild winter for large parts of the country. With demand already way down from industrial utility customers, the U.S. has an enormous amount of unused natural gas.

Oil and natural gas have historically tracked one another as far as prices go, but this year has been a different story.
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Natural Gas Fund /quotes/comstock/13*!ung/quotes/nls/ung (UNG 10.72, +0.13, +1.23%) were down about 6% in active premarket trade Monday after the exchange-traded fund in a regulatory filing late Friday said it plans to resume the creation of new shares on Sept. 28.

asr: by 13:00 EST , UNG recoverd 6% loss and stood at gain of 1% for the day. so new share issue cause morning panic selling.

The natural-gas ETF has been trading at a premium to net asset value since it halted new-share creation over the summer. The ETF's management "cannot predict what impact, if any, the resumption of creation activity will have on the price of the U.S. Natural Gas Fund units on NYSE Arca," according to Friday's filing. "It is possible that the resumption of creation activity, even on a limited basis, could reduce or remove any premium over net asset value," it said. "Investors are cautioned that paying a premium over the net asset value for U.S. Natural Gas Fund units can lead to additional losses for the investor in the event that the investor sells such units at a time when the premium is no longer present in the market price."
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Natural Gas Has Spiked 60% Since Labor Day. Why?

Dian Profile: at this URL.
ASR: we can ask advice of Dain ( as paid service ) on 'NG' future LONG/'UNG' short on friday after they UNG ETF announced they issue more new shares.
http://seekingalpha.com/author/dian-l-chu

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ETF Spotlight: United States Oil Fund (USO)

Assets: $2.8 billion

Objective

USO seeks to reflect the performance of West Texas Intermediate light, sweet crude oil. It invests in futures contracts.

How It Works

USO holds long positions on oil futures, rolling them forward each month. Three factors impact the ETF:

1. Changes in the spot price

2. Interest income on uninvested cash

3. The roll yield

USO’s prospectus warns of such a situation: a negative “roll yield” could cause the net asset value of USO to deviate significantly from crude’s spot price.

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asr note: as last post said USL is up 27% vs USO only 9% , oil DB 30% in this article . It seems for long term investor USL seems better .
Why Trading Oil With ETFs Is Better and Easier

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about a few ETFs that I was considering for the PeakStocks.com portfolio both long and short.

My advice is to play oil utilizing the USL vs. the USO unless you are a seasoned trader that has specific reasons for trading the USO such as the price movements associated with the rollover on or around the 4 day period of the 6th of each month.


One of those names was the United States Oil Fund (NYSE: USO), one of the largest ETFs in existence, and because it is so large, this ETF represents 1/5th of the total trading volume on the U.S. Nymex Exchange for oil futures contracts.

In the course of researching this ETF for possible purchase, or shorting, I came across some disturbing bits of information regarding how the ETF trades, and its overall affect on the oil markets.

In fact, on Friday February 27th, the Commodity Futures Trading Commission (CFTC), opened an investigation into the USO, as well as other market participants, regarding the Feb. 6 “roll”, or sale of the expiring front-month oil contract and purchase of the successive month’s contract.

New to the USO story?

The USO is an Exchange Traded Fund (ETF) that seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil.

The fund invests in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges.

It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.

In a nutshell, all things considered, the USO is a proxy for the price of oil, aside from its dependence on “rolling” the price of it’s contracts into future months, which can adversely affect its actual ability to “track” the price of oil.
Is the USO a Piece of Junk?

First a little background

As mentioned above, the USO was created as a proxy to track the price of oil.

When the fund was first created, its price was exactly 1-1 that of the current future’s month oil price.

That however has changed dramatically.

You see, the USO is a rolling ETF, which means in essence that every 30 days or so, the ETF has to “roll” into the forward contracts of oil BEFORE the ones it is holding expires.

There are other funds like the USL (NYSE: USL), which hold 12 month’s worth of contracts instead of just one so they merely roll one month but still hold the other 11, reducing price volatility and keep the fund more closely tied to the actual price of oil.

So, for the USO, if the ETF held say March contracts in the month of February, then at a specified period of time (for the USO it’s around the 6th of the month, but now over a 4 day period around that same time), the fund “rolls over” into the next month ahead of the one it carries.

In this example, say that it owned March futures contracts for oil at $40.

Then at or around the rollover date, the fund would have to sell all of it’s $40 contracts for March, and roll them over to April contracts that cost for example, $45. This part is pretty straightforward.

Here’s the problem with the USO: Rolling the current month’s contracts into the next month’s contracts, especially lately, creates what is called contango when the future price is higher than the current price.

Contango basically means that the price of the future contract is higher than the current contract, and thus, when the fund has to roll over into the next month’s contract, it has to pony up more money to do so, thus costing investors valuable gains, and actually LAGGING the performance of the underlying commodity it is trying to mimic.

Some of these losses are mitigated because the USO earns interest on the money it collects from investors, and because it only needs 10% of those funds to actually secure the futures contracts because of leverage.

By the way, the exact opposite can occur as well in what is known as backwardation.

In this case, the future contract costs LESS than the previous month’s contract, and thus the fund actually earns a higher rate of return than the fund it is tracking because of that.

Just to let you know however, since the inception of the USO, the fund has been in contango way more often than it has been in backwardation, thus costing investors more than they have gained as a result of the contract’s rolling over.

OK, so what?

Here’s the crux of the problem: because the USO has been in contango way more than it has been in backwardation, and by a much higher relative margin, what once started as a 1-1 ratio fund mimicking the price of oil, is now LAGGING the actual returns that you would have made with investing in oil and is now at about a .68 ratio.

This means that if you had invested $10,000 in the USO at its inception, that initial investment would now be worth about $7,000 NOT even accounting for any price movement in oil! This is just as a result of your loss of capital because of the way the fund is structured whereby it continuously rolls into future months of oil, losing a little on each trade.

Think of this as akin to currency erosion that is taking place right now around the world, whereby if you were invested in stocks in other markets, say in England, the loss of the British Pound to the U.S. dollar (about 30% in the last 6 months or so) would mean that even if your investments broke even, you would essentially still be DOWN 30% because of the erosion in the value of the underlying currency with which you purchased shares in those investments.

Before I started really looking into the USO, I never knew about this as an issue, and now that I have fully developed my thesis and investigated further I see that this is no way to play oil, aside from other problems that the fund is having, as I’ll go into more below.
More Bad News: CFTC Investigates USO and Other Funds

Large fund now able to move markets

To add to the contango scenario mentioned above, there is another worry with the USO that most people don’t even realize: the fund is so absolutely huge, accounting for 1/5th or more of the total Nymex contracts, that when the fund rolls over, that in and of itself moves the price of oil!

The price action lately is usually to move the expiring contract price downward as the fund sells those contracts, and upward for the new contracts that the fund is now purchasing, thus further eroding investors' gains and accelerating their losses!

As a result of the price movement and volatility, the USO has now changed its procedures to unload and buy these contracts over a 4 day period of time, rather than the usual 1 day.

In addition, on Friday February 27th, The Commodity Futures Trading Commission (CFTC) said its enforcement staff is investigating the United States Oil Fund LP and other market participants regarding the Feb. 6 “roll”, or sale of the expiring front-month oil contract and purchase of the successive month’s contract.

On Feb. 6, March oil futures, the front-month contract at the time, lost more than 2% in trading on the New York Mercantile Exchange as USO rolled its holdings into the April oil contract.

Prices in the March contract slid below $40 a barrel in the next trading session for the first time in three weeks.

Some investors believed the selling of USO, which held about 20% of all March contracts, contributed to the price downturn.

Now while I don’t foresee any real damage or changes coming out of this “probe”, it does illustrate just one more problem with the fund in that it is so large, that it now can move markets by itself, and not only that, but by the very nature of that knowledge, move markets as others hop on board and try and piggyback the gains/losses and rollovers that the fund is trying to accomplish thus adding to the overall volatility in the oil market.
So, IS the USO a Piece of Junk?

Yep, I think it is…here’s why:

* Contango too much to overcome: The very fact that the USO rolls over its contracts every single month creates a lot of extra price erosion in the underlying value of the fund.

Because we’ve been in, and will continue to be in, contango for a long period of time as oil prices are expected to rise, and future contracts are being held hostage for much higher prices, our investment in this fund would continue to be eroded over time, and buying and holding would in essence lose us money even if the price of oil stayed constant.

Sure, we could experience an extended period of backwardation, or the opposite of contango, and make money as the contracts are rolled over above and beyond the price of oil, but here’s the thing: if the future contracts are selling for LESS than the current contracts, doesn’t that mean that the price of oil is declining, and therefore, no matter what amount we are making on these contract swaps, we are still losing money on the underlying investment as oil prices decline?

Again, I don’t like having to overcome an extra handicap when trying to beat the overall market’s returns.

* No pricing advantage: As a result of the fund’s size and timed roll over dates, we are completely losing our advantage over Wall Street and other traders in “knowing” or taking advantage of something that not too many know about, and thus exercising our key differentiators as individual investors.

That has been completely removed as a result of the USO’s size, roll over timing, and associated hoopla and market coverage related to oil, the fund itself, and commodity futures trading.

We’re essentially small fish being carried away by the tide and there’s nothing we can do about it.

This would be fine with a small or micro-cap investment that we’ve thoroughly researched and investigated and can simply buy and hold to wait for our investment thesis to play out, but there isn’t such an advantage with the USO.

Can I still play the USO?

Sure, for short term, week-to-week movements, it’s still a decent proxy for oil, but anything longer than that, and you start to run into the above mentioned problems with the rollover and the size of the fund eating into your gains, and exacerbating your losses.

For traders, right around the 6th of each month when the USO exits its old contracts and enters the new ones, there is heightened volatility as well, and therefore, something that might interested those with a day trader mentality, or for short term price swings.

Are there other ways to play oil?

Yep, the other ETF that trades on the price of oil but uses 12 months worth of contracts, is the United States 12 Month Oil Fund (NYSE: USL).

This fund seeks to replicate the changes in percentage terms of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the average of the prices of 12 futures contracts on crude oil traded on the New York Mercantile Exchange.

The fund consists of the near month contract to expire and the contracts for the following eleven months, for a total of 12 consecutive month’s contracts.

When calculating the daily movement of the average price of the 12 contracts each contract month will be equally weighted.

This is a much better way to protect yourself against contango and backwardation as the risk is spread out over a 12 month period, and only the front month is rolled over thus avoiding not only large price fluctuations as a result of the total volume of contracts, but also because all 12 months are equally weighted, month to month changes in contango or backwardation won’t affect the fund as heavily.
Bottom Line

In doing further research into how I could play oil and trade this volatile but potentially lucrative commodity, I dug up some disturbing facts about the USO that lead me to believe that it is not worth our investment, and is a literal piece of junk.

I will be removing it from my watch list, and instead replacing it with the much more balanced USL ETF that trades on the next 12 months of oil prices, rather than just one month ahead.

It’s just another way of playing both sides: the changes in the price of oil both up and down, and the relative stability of all 12 future month’s contracts which smooth out the price swings and the contango and backwardation possibilities and make the investment more suitable for a buy and hold strategy since market timing for oil is nearly impossible.

My advice is to play oil utilizing the USL vs. the USO unless you are a seasoned trader that has specific reasons for trading the USO such as the price movements associated with the rollover on or around the 4 day period of the 6th of each month.
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Options: Call-Buyer in United States Oil Fund ETF

asr: story is on 7/30/09 when OIL future is at $63 ( after recovery from 58 to 67 , then back to 63 )

CHICAGO -- Crude oil took its biggest hit in three months yesterday, dropping nearly 6% to $63.26 a barrel the same day U.S. durable goods orders dropped by 2.5%. But at least one investor expressed bullishness with a tall order of calls in the United States Oil Fund ETF (USO Quote) during afternoon trading.

The investor bought 100,000 Jan. 2010 55 calls for 25 cents per contract, with the stock trading around $33.80. That means this investor needs USO shares to expire higher than $55.25 in half a year. These calls dropped three cents on the day and were home to open interest of 3,100 contracts. By the end of the day, more than 105,000 Jan. 55 calls changed hands, and USO shares closed down $2.29 to $33.47.

It's interesting that we saw heavy call-buying activity after USO stock has seen a prolonged downturn since the end of September last year -- these shares have dropped 71% since reaching a 52-week high of $117.24 last July.

While investors should not interpret bullish activity such as this as a reason to buy up USO stock, it is interesting that at least one investor bought calls in this fund on a down-market day.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
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Proshares ETF

all proshares
http://www.proshares.com/funds/performance/8879676.html

http://www.proshares.com/funds/performance/PerformancePricingFAQs.html


http://www.proshares.com/CommodityCurrencyProSharesTaxationFAQs.html

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Ultimate Guide to Natural Gas Futures, Part 1

UNG uses a monthly roll strategy whereby it buys the near month contract and then rolls to the next contract before expiration. Investors can go to the Web site of the United States Natural Gas fund and find the roll dates under the "Fund Facts."

GAZ is a note that tracks the Dow Jones-UBS Natural Gas Total Return Sub Index. It uses a similar strategy to UNG, but instead of rolling monthly, it rolls bi-monthly. Since GAZ is an ETN, it doesn't list what contracts it owns, if any. Barclays stands behind the notes and is responsible to make payments on the contracts, and a purchaser of GAZ is lending Barclays money the same as other bond holders. Barclays is not restricted in how it can use the capital and investors face the same risk as other holders of Barclays debt.

One important difference between UNG and GAZ, besides the credit risk in GAZ, is the tax implications. UNG is a partnership that pays no Federal taxes itself. Gains or losses are passed through to shareholders. Investors receive a Schedule K-1 and may have tax credits or liabilities even if they receive no income payments. GAZ is similar to other stocks in that income payments would be reported on a Form 1099 and capital gains and losses are incurred at the sale. Neither UNG nor GAZ has paid dividends.

A major issue that erupted in summer 2009 was the popularity of UNG and concerns over new CFTC regulations on position size. First, UNG was forced to purchase swaps because it became a huge portion of the market for near month gas futures contracts. Swaps carry counterparty risk, however, which causes it to have similar credit risk to GAZ, albeit less transparent. Concerned that the CTFC may limit how many contracts they can own, both UNG and GAZ stopped issuing new shares. This led to a premium in both funds.

The premium fluctuates daily. As of this writing they are similar, about 10%, but UNG has traded at a higher premium at times, briefly reaching a peak of 20% at one point. If the funds begin issuing shares again, the premium will disappear almost instantly.

You can check the premiums during trading on Yahoo! Finance by finding the intraday indicative value of the fund. Enter ^UNG-IV or ^GAZ-IV as the symbol and compare it to the last price; it is updated throughout the day. (You can substitute any ETF or ETN symbol to get its intraday indicative value.)
Contango
Another issue to consider is extreme contango. Futures contracts can be in contango or backwardation. Contango refers to the situation when near-month contracts are cheaper than contracts farther out in time. Backwardation is the opposite, when near-month contracts are more expensive.
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Since futures contracts have an expiration date, it is impossible to buy and hold. Commodity trading strategies take this into consideration and determine which contracts promise the best return. In the case of UNG and GAZ, the funds use a simple strategy that exposes them to gains or losses, depending on where there is backwardation or contango.

For instance, say natural gas for October delivery costs $2 and natural gas for November delivery costs $4. If a trader holds 1,000 contracts at $2 and rolls monthly, he will only hold 500 contracts after the roll, assuming no transaction costs. This became a major issue with UNG because it grew to such a large size.

When UNG rolls, its selling and buying cause the contango to widen, and since it publicly announces its roll dates, other traders can profit from UNG's "largesse." UNG shareholders suffered losses as they sold at lower prices and bought at higher prices. Currently, contango is especially large, due to several factors, which I have written about previously, and this makes this situation even worse.