Oil trading using Rollover of futures and its history database

Alongside with Natural gas contango monetization Oilgasfund also monetize contango in Oil. This monetization process more complex and it combined with gathering of futures premiums in two directions of trade either long or short (Natural gas trading only sell side or out of positions due to huge skew in negative rolling yield that makes any long position as speculative and it is not matched with trading algorithm).

To monitor the contango effect in Oil price I plotted below the chart of USO that is US Oil fund. This Fund trade by oil futures and his direct exposure are long positions in two nearest futures Front and Back of WTI Oil – underlined assets of fund structure. From the chart, we can see contango impact and as USO declining vs OIL. The second chart is dynamic of spread OIL vs USO that is a direct calculation of losing value during Contango and value accumulation for periods of backwardation.

To understand why it appears I recommend to read all links that introduced in the post and to take into consideration that Future cannot be traded unexpired and consistently. It has a life cycle and to maintain a long position in commodities always associated with the cost of carrying or storing expenses that very closely related to fair futures pricing. Fair pricing of futures in any time is a basis for futures premium and any fluctuation around it creates arbitrating opportunities that will be neutralized by market earlier or later. To maintain a long position in Oil means that it will face rollover cost that will finally lead to the same result or very close to it as USO price dynamic. That way to go long in commodities usually very risky especially long term due to the contango effect that will decay the value of investments.

There is some period of backwardation and an instance in Chart 2 that shows Spread Dynamic of OIL – USO introduced the period of Backwardation that created a squeeze in the spread and caused slow down in USO decay.

Measuring and forecast effect of Contango and Backwardation and its application as part of the trading process is a form of quantitative investments that oilgasfund carry out using the appropriate algorithm.

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