Oil futures ETF

tomas999

I made a mistake of purchasing Oil ETF (Wisdom Tree Oil Monthly - OILB). When bad luck meets naivety you are going to lose money - as I found out this morning after selling with significant loss only after investing on Monday. I could not have picked a better time!!!!

I sold it because I was worried about contango. Namely, I feared that I could lose my investment completely. Is complete loss of ETF investment possible due to a long term contango even if the ETF is not liquidated?

OR assuming that the ETF I invested in continued to trade and I waited for the price of shares to increase I could have recouped my losses eventually?

I am trying to learn my lesson - I should not have invested before fully grasping it. Your perspective would be much appreciated!

Thanks

Barry_Bear

This couldn't get worse. If the Saudi's won't or can't reach an agreement to drastically cut supply, demand does not pick up, and the US runs out of storage capacity and has to stop production and close down its fracking industry, even the Fed wouldn't be able to save the US economy. 

TemporaryUsernameMay2020

tomas999 said:

I made a mistake of purchasing Oil ETF (Wisdom Tree Oil Monthly - OILB). When bad luck meets naivety you are going to lose money - as I found out this morning after selling with significant loss only after investing on Monday. I could not have picked a better time!!!!

I sold it because I was worried about contango. Namely, I feared that I could lose my investment completely. Is complete loss of ETF investment possible due to a long term contango even if the ETF is not liquidated?

OR assuming that the ETF I invested in continued to trade and I waited for the price of shares to increase I could have recouped my losses eventually?

I am trying to learn my lesson - I should not have invested before fully grasping it. Your perspective would be much appreciated!

An ETF investing in oil futures is likely to be managed with the aim of never losing 100% of its value. Though there may be a small chance that the management could be caught out in extreme market conditions. You'd have to delve into the prospectus, or other scary long documents, to get more accurate info about its strategy.

However, it could easily lose such a large part of its value that there's no realistic prospect of recouping your losses by just waiting long enough. As covered earlier in the thread, this kind of ETF does not track the oil price, so the oil price could get back to (for instance) $100 a barrel, and yet the ETF could be nowhere near recovering to the value it had when oil was last at that price.

This is very different from (say) holding an ETF which tracks a global equities index and which uses physical replication. In the latter case, if global equities recover to their value on some earlier date, so would the ETF (minus a small deduction for charges and other costs).

Barry_Bear

I said earlier that if the oil prices were not increased soon enough to reduce the over supply before the US runs out of storage, if US fracking has to stop even the Fed may not have the means to sort the US economy.

BUT I forgot what the US does best. START A WAR - (to bring democracy and freedom).

I hope Trump's comment today aimed at Iran is not preparing the ground for this.

EdGasketTheSecond

“Governments with access to the printing press may be more easily tempted to engage in expensive and unnecessary foreign wars because they do not have to raise taxes to do so,”:

From:

https://glintpay.com/money-en_us/governments-debase-currency-anyway/

cloud_dog

Barry_Bear said:

This couldn't get worse. If the Saudi's won't or can't reach an agreement to drastically cut supply, demand does not pick up, and the US runs out of storage capacity and has to stop production and close down its fracking industry, even the Fed wouldn't be able to save the US economy. 

This was the end goal for the Saudi's, when Russia refused to play ball originally.  I think they had a plan to execute their pump 'till you drop (you being other producers) for 3 years (or that was the rumour).

bargainhunter888

still not clear lol, you buy into an ETF that holds contracts for May/June for example? the ETF holder would then have to roll over any contracts and buy new ones, why would this constitute to a loss? are you not just buying shares in the ETF holder, rather than the specific contracts?
in addition, if everyone is rolling over contracts on a monthly basis, surely it has the same result as no one buying a contract and thus oil production has to stop anyway because everyone is rolling over? or does rolling over mean someone else has to take that contract of oil? and thus contracts have to be honoured at some point by someone?

Username999

bargainhunter888 said:

.... have to roll over any contracts and buy new ones, why would this constitute to a loss? ....

Roll Over May to June example:

1) Sell May for $1 (and you probably paid over $30 to buy that so a loss of $29,000 per contract).

2) Buy June for $23 (you need margin to cover $23,000 per contract).

That's not a good Roll Over and you might not have enough funds to cover the transaction so that the ETF might have to be liquidated.

And that's if you could get $1 for the May.

Multiple the above by a few 1000 contracts and you're into big numbers.

Username999

bargainhunter888 said:

are you not just buying shares in the ETF holder, rather than the specific contracts?

Yes if you buy the ETF you don't get involved with the Futures, the ETF does all that. 

bargainhunter888 said:

in addition, if everyone is rolling over contracts on a monthly basis, surely it has the same result as no one buying a contract and thus oil production has to stop anyway because everyone is rolling over? or does rolling over mean someone else has to take that contract of oil? and thus contracts have to be honoured at some point by someone?

Not every one is rolling.
Refiners will buy the Futures and take physical delivery of the Oil and be happy. 
Day traders will be buying/selling and never take delivery.

Malthusian

EdGasketTheSecond said:

“Governments with access to the printing press may be more easily tempted to engage in expensive and unnecessary foreign wars because they do not have to raise taxes to do so,”:

From:

https://glintpay.com/money-en_us/governments-debase-currency-anyway/

Printing money is taxation - it effectively confiscates the assets of everyone who owns the government's currency in proportion to how much they hold.

When I was about 7 I thought that a cash machine gave you free money, apparently Glint's rentaquote (the CIO of an obscure dog fund) hasn't progressed past that level of economics.

Whether a government can start a war or not depends on whether the populace will tolerate the cost, both human and economic. There are any number of ways to meet that cost (printing money, taxation, conscription / commandeering) and a government that doesn't have its own currency merely has to use one of the others. As it doesn't pay either way, it isn't a disincentive.