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