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Tuesday, February 10, 2009

Oil investing USO vs USL

Trying to invest in Oil is extremely difficult. Unlike a stock, or commodity gold (GLD), you cannot buy something that represents oil price, like a stock, and hold it as long as you want to capitalize on oil price in the future.

The only thing that represents oil is commodity futures contracts. However, Futures are a completely different investment vehicle than stocks, that has different constraints including a time component for each months futures contract expiration. Maybe in a different post I can elaborate.

Purchasing the ETF "OIH" will allow you to buy a swath of oil companies, which can be influenced by oil prices. To buy "oil" as a stock, there are multiple ETF's, first there is USO, and I recently learned of USL.

USO's price is based upon the "next months" future contract of OIL. USL is based upon the next "12 months future contracts of OIL. Click here to read an indepth article on how this works.

The bottom line is, since fall of 2008, because of the difference of USO vs USL works with future contracts, USO has been a "loser" of an ETF compared to USL.

NOTE: UPDATE of Charts as of January 2010, click here

Below are two graphs, the first one shows USL vs USO since December 2007 to Feb 2009. Both ETF's represent oil, but notice USO started to deviate significantly from USL about when OIL collapsed. The variance is significant, USL is down -40%, where USO is down -60%!

The second graph shows since 1/1/09 to this month, USO (oil) is down -14.8%, where USL (oil) is UP 0.4%, and OIH (oil companies) is up 13.4%, and GDX (gold miners) is up 4.54%

Because of the significant difference in USL/USO prices, what I do have invested in USO I will immediately split 50/50 between USO and USL, and probably eventually sell 100% of my USO in favor of USL.

To be fair, USO could appreciate faster than USL in the near term, because of the differences in the way each ETF works off of future contracts. However, since Oil is a longer term play, USL currently looks like a better choice.

UPDATES :

BLOG ENTRY ON USO, USL, DXO, UCO
BLOG ENTRY ON USO VS USL VS DBO

UPDATE: Still, gold over all and GDX looks even better, see Garys blog post (click)

Special thanks to Steve for forwarding the article.

Click on each image below to get a clearer picture.


From WebSurfinMurf's Financial Blog


From WebSufinMurfs FinancialBlog2

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