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USO ETF Analysis - is US Oil Fund a Good Investment - $USO - YouTube
Channel: Learn to Invest - Investors Grow
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hi I'm Jimmy in this video we're gonna
look at the ETF called the United States
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oil fund ticker symbol USO I've gotten a
lot of questions about if USO is a good
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investment so we're first gonna look at
how the fund works then we'll touch on
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their fees and then dive into if it
could be a good investment now that the
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oil market is at a crazy low price so
let's start the basics of how the USO
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ETF is managed the key question is is
investing in USO the same as investing in
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oil and historically it has been but
with the way it's set up it means that
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when things go bit nuts the fund could
run into some serious problems and as we
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might have guessed that's what's
happening in the oil markets right now
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things got a little bit crazy and it's
not quite correlating to the price of
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oil as much now just so we're on the
same page this is a chart of WTI oil
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going back up up to a few days ago WTI
has been the benchmark for American oil
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for a long time so this is the spot
price of oil all spot price means is
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that it's the value today for a barrel
of oil so if we bought oil two days ago
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this is a price it would've paid that's
when the negative price happened that
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everybody was talking about but it's
super important for us to recognize that
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this spot price is determined by looking
at whatever the most current futures
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contract is right now so the futures
contract in the case of oil is a monthly
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contract and it has a set expiration
date this chart here is technically the
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May 2020 the price went negative there
and we might ask why May not April since
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we're actually in April right now and
that's because the oil in that contract
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must be delivered in May so they called
the May contract either way the contract
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expired on Tuesday the day after this
drop happened so what happens next with
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the price of oil after the contract
expires well they simply reflect the
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next contract in this case the June of
2020 contract so the spot price is
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simply representation of the current
futures or future the current futures
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contract price
to illustrate if we went over to the
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Yahoo Finance to check on the price of
oil and we click on their price of oil
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when we pull down their chart well I
took a screenshot from that when I was
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doing the research and we can see that
oil at this time was about $15 a barrel
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but if we take a closer look at the
chart we can see that there is no sign
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that oil ever went negative why because
this is the June contract the may
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contract expired and it no longer exists
so on CNBC or Yahoo or Bloomberg or
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whatever whenever we look at a chart
there's not going to be any sign that
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the price of oil ever went negative
since June since in June it never went
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negative at least not yet although I
suppose that could happen at some point
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so I just wanted to bring that out that
we should be aware of how the spot price
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for oil come with where the spot price
comes from ok now this brings us back to
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us oh so here's what's interesting about
USM so many investors look at us Oh as
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buying these spot price of oil but
technically it's not the fund managers
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themselves describe it as using the near
term contract to track the price of oil
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which means that if we're if the June
contract is currently the active
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contract which it is that's what they
buy
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ok that's logical but crucially they say
that if the near month contract the near
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month futures contract is within two
weeks of expiration basically they start
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buying the next month's contract so to
illustrate i roughly broke up this chart
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by a monthly contract now we may know
that we just left the may 20 2008 at now
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we're in the June 20 20 contract range
and that's also the current spot price
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for oil that's what the current spot
price represents and that's the reason
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we don't see the negative price for the
may contract anymore but according to us
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oh they start buying the June contract
about at this point during the chart so
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technically when the price of oil went
negative
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well us Oh didn't own anymore of the may
contract in fact they have come out and
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said that as of April 13th they no
longer owned anymore May contracts and
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here's what we get to the problem as of
April 22nd about
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midday the June contract is about $15 a
battle and that's the frontmost contract
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so that's the one quoted right now when
we look up the price of oil this is also
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known as the spot price but the July
contract is currently trading for about
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21 dollars a barrel the August contract
is trading at $24 a barrel by the way
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they call this being in contango when
the price of the futures deploying
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future prices are higher than the
current spot price the they call it
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contango that's fairly common and it's
logical if we think about if the oil
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doesn't need to be delivered for two
months or so well whomever is storing
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that oh don't have to pay for the
storage costs over the next two months
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so I partially expect that we're gonna
pay more for oil that has to be
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delivered in two months than it has to
be delivered today but these numbers are
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so far apart from contract to contract
that price is so far apart that they
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actually call this super contango super
contango is somewhat rare but it has
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happened before but certainly it's not
the norm
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and if we're curious if future prices
were lower they actually call that
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backwardation either way so why is this
a problem for us oh well let's imagine
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that the USO ETF had just fifteen
million dollars in so at $15 a barrel
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let's pretend they own 1 million barrels
right simple enough right now they owned
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1 million barrels now it's time for them
to roll into the next contract so they
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sell their $15
they sell each of their 1 million
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barrels for $15 and now they have to buy
them for $21 a barrel now they don't
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have a million barrels anymore in fact
they only have about 715,000
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barrels
now what happens if the oil price in
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July starts to tumble and let's pretend
that drifts to $15 a barrel and let's
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imagine that August drifts down to $20 a
barrel well now they do it again they
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sell it for 15 and they buy the same oil
but significantly less because now they
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have to pay $20 well this is going to be
a huge problem as long as the oil
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markets stay in super contango and this
is an unfortunate thing for many
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investors who have gotten into USO
thinking that it's a good way to buy oil
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new
what could be a low-price hoping it will
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bounce back you know and investors can
make a few dollars but now we know it
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doesn't really work this way during
these very unusual times on the oil
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markets or in super contango if the
spread between these months was only 50
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cents or even a dollar fine it doesn't
go as noticed okay now this brings us to
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their 72 basis point expense ratio that
the etf has which that's almost that
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that's going to impact us performance as
well now this brings us to the
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investment side of USO is us a good
long-term investment clearly short term
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it seems to be bad in fact just
yesterday I believe I saw an example
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where the USO ETF was down why oil was
up which is the exact opposite of what
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many USO investors want to see happen
and that's at least partially due to the
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fact that in April USO has been forced
to change their rules to avoid
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liquidation of a fund despite the fact
they have a few billion dollars in the
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fund first where they tried to own only
the current bond they used to try to own
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a hundred percent of the current month
month of oil futures then they switch
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that to now they're able to own mostly
the current month but they can also own
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some of the next month I've even seen
that they got a little bit of the
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following month as well to try to avoid
some of the rollover risk and they're
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allowed to play with the weights of
which which months at they own based on
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the situation then they just announced
yesterday a 1 for 8 stock split and
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frankly this is being done simply to
jack up the price of the ETF from less
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than three dollars a share when I saw it
yesterday I believe it was about two
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dollars and 50 cents but it doesn't
change anything fundamentally so if we
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were to own let's say we owned eight
shares well they basically take those
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eight shares worth two dollars and 50
cents they give us back one share worth
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$20
so fundamentally it's the same thing but
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I suppose a $20 each EF looks more
reputable that have $3 ETF that being
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said I'm not sure that USO is a sound
investment at this point I'll admit that
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when I first saw the USO ETF it seemed
like a clean way to invest in the price
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of oil
no it was the only when I started
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peeling back the layers can we see how
we could really get hurt in certain
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situations in the oil market so this is
sort of the perfect storm for oil and
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USO is on the bad end of this now let's
imagine that oil turns higher and heads
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to 30 or 40 dollars a barrel
well I'm assuming that USO will have a
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will recover a decent amount but if
that's what we're after I think it makes
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more sense it only makes more it only
makes sense to invest in you in so if
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we're long term admit investors and we
can handle the possibility of a very
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crazy ride along the way now this is
actually the first ETF that I've
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analyzed on the channel did you find
this interesting if you did I'm curious
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if you think I should do other analyze
other ETFs I've analyzed a lot of stocks
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but not many ETFs
so if you want me to analyze more please
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let me know in the comments block now if
you were interested in investing in oil
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I actually am working on identifying
some top companies from the energy
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sector that could do well over the next
few years so that's going to be coming
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out soon I'm sorry to rain on your
parade about us oh so sorry about that
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perhaps you might be more interested in
something like gold or silver that might
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be a bit more interesting since they
seem to be doing a little bit better now
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and if you curious actually did a video
where I analyzed gold versus silver as
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investments so if you're curious perhaps
that could be a good next video for you
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to watch and I want to thank you so much
for sticking with me all the way to the
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end of the video I really appreciate it
thanks and I'll see in the next video
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