First up, FT Alphaville:
Oil-invested index funds like the Dow Jones AIG commodity index, the S&P GSCI and the United States Oil Fund begin to rollover their positions from the April front-month WTI contract to the May one this Friday.
Accordingly, energy markets are prepared for some significant distortions in the days ahead.
The United States Oil Fund ETF will be most closely watched after changing its roll period from one day to four. A reminder, the USO’s February roll saw the March front-month contract at the time lose more than 2 per cent in trading on the Nymex as it moved its holdings into the April oil contract. The CFTC has since said it is investigating the fund, whose positions have by far surpassed Nymex accountability limits in the last few months.
Furthermore, despite moving to a four-day roll, some analysts feel the ETF won’t actually fare that much better as, adding to its troubles, it will have to compete with both the DJ AIG and the S&P GSCI for contracts.
That said, while the fund still holds a substantial 81,707 or so April-WTI contracts collectively between the ICE and Nymex exchanges, analyst Olivier Jakob of Petromatrix notes the fund’s size has been decreasing of late. Although at its current size it is still comparable to when it rolled in February....MORE
And from Hard Assets Investor:
Looks like somebody took Stephen Schork's advice Wednesday. Somebody bought oil options.
Maybe a little background's in order.
Schork,editor of The Schork Report energy newsletter, in an Hard Assets Investor interview ("Schork: Seeds Being Sown For Oil Rally") made a case for $60-$65 oil. That level, says Schork, is OPEC's "marginal breakeven."
Schork's not looking for oil to rally today, next week or even next month. Rather, his sights are set some 12-18 months out. Mindful of the withering effect of a year's worth of negative roll yields, Schork pooh-poohed the use of oil ETFs. No, said Schork, investors looking for a ride on the price train to the sixties should instead, consider long-term call options on oil futures.
A call entitles its holder to purchase the underlying futures contract at a pre-determined strike price anytime before the option's expiration. It's a right, not an obligation to buy futures, mind you. A holder can also sell the call to close out the contract. On Wednesday, for example, with March 2010 oil at $53.15, a $55 call could be purchased at $8.52 a barrel. Since oil futures, and their associated options, represent 1,000 barrels, that makes for an $8,520 tab. Pricy, though still cheaper than futures margin.
A gain in the underlying futures should cause, all else held constant, an increase in the call's value. It won't be a dollar-for-dollar gain, though. The option's delta expresses its sensitivity to futures. The $55 call's delta is 0.56, meaning a $1 increase in March 2010 futures translates, today at least, into a 56-cent gain in the option's premium....MORE
For many USO links, see: "U.S. Oil Trust Investigated by CFTC (USO)"
