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WATCH THIS BEFORE INVESTING IN OIL STOCKS!! (USO, USL) | How Oil ETFs Work | Investing, Dividends

Jun 06, 2021
hey guys welcome back to mad money welcome back to another episode today we are going to talk about oil again and for those of you who know or don't know i am a petroleum engineer by training currently living in trinidad and tobago plz what my life is oil and gas currently, is more gas than oil, but i currently live and breathe oil and gas production right now. I don't really trade oil and gas as far as having to deal with these kinds of things that we're going to talk about today, but I do help produce and sometimes help provide the forecasts that go into our own company and then trade and find out. how do they supply and provide the other refineries or gas trains with the gas that they need to sell these types of contracts so i have a bit of information but of course i am not an expert in futures trading but i really do What I wanted to mention is the risks associated if they were what you should know when you buy into some of these funds now what we're going to take a quick look at is USCF or US Commodity Funds US Oil Fund which have created and so a lot of people like

this

a lot of people buy it and I'm not saying that or not to believe

this

but I think when a lot of people automatically rush into these types of funds maybe not necessarily e understand what exactly is going on, so I want to touch on that touch in this video today and explain it.
watch this before investing in oil stocks uso usl how oil etfs work investing dividends
So what I basically want to see is when you trade something like USO or the US oil fund the price of a barrel of oil goes up one percent, you don't necessarily see OSU go up one percent, which is kind of interesting. , so I want to mention why that is so now that we are at the end of April. we're actually starting to trade June futures and so for those of you who do or don't know basically the futures are the month before and actually start trading basically a month later a couple of days, so in this case we just finalized the May futures contract so basically everyone will start trying to get their May production in late April so the May books are now closed because basically in the next week or two we're going to start in May, which means now we're starting to trade for June, I mean for the whole of the rest of April and basically mid-May, we're actually going to try to provide oil production which will then go to refineries and things like that and that's basically what they're trying to do in trading so from now until May 19th which we'll get into that a little bit more a little bit later we're going to be trading futures June now what that really means is companies like us oil fund and other commodity traders are trading these futures basically you know some of them are acting normally buying them to help offset and really find a price for oil and gas , so they might actually have physical oil and gas that they're saying hey we need to find someone to buy this and they'll actually send the deliveries to whoever buys on who has that kind of future on the expiration date, which in this case was Monday Tuesday of this week and that's why you saw the negative oil prices but we'll get into that and a minute here but what you can see here is in this number my a or it may not mean anything to you what which will also dip into fifty-three thousand five hundred amounts of, say, June 2020 futures, so what does that mean for each contract or each amount of ad here is considered a thousand barrels of oil so if you wanted to multiply this it would basically say fifty three million barrels of oil and what they have here is they have it priced at about 13.7 t8 cents so in Right now June 2020 they have their futures is contracts at around thirteen dollars and seventy eight cents so the only way this US oil fund can make money now that they have this many June 2020 contracts 2020 which is what is currently trading the only way they can make money is basically if the futures price or the current price of the spot price goes up and up let's say 5% 10% in June that will help increase this value of this particular contract, but keep in mind the contracts for, say, July or August or July on the on, say, the London Stock Exchange, all these different ones, I guess, the futures are all trading at once and also they are They're still trading right so you also have July and August here so if we say the June price goes up 5% it doesn't necessarily mean that the July price or the August price will also go up 5% and you can see here they also have a lot of July contracts, it's actually almost twice as many as any of the others here, so specifically if you were going to look at their July contracts and totals, so they have the Chicago stock here, which is around 1.8 billion dollars, then they also have the London Stock Exchange, there's about a hundred million dollars, so they have almost two billion dollars worth of contracts for July specifically, so that means you know there's a financial institution that basically You have these books and you trade them, so if everything goes up, say a hundred percent in the June contract and doesn't necessarily move for the July contract, the actual spot price will move a hundred percent.
watch this before investing in oil stocks uso usl how oil etfs work investing dividends

More Interesting Facts About,

watch this before investing in oil stocks uso usl how oil etfs work investing dividends...

I'm sorry but US oil could move only 50 percent or 20 percent very much depending on how many contracts they have and what the book value is right now one of the key things I want to show here is this kind of highlighting the price of crude oil and giving you an idea and we can change and touch from time to time what exactly we want to see but particularly what I want to highlight here is this June 2014 is a period of time so June is 2014 we're spinning around a hundred dollars a barrel let's say it's $104 a barrel and then basically four years later four years three months later we're trading around $71 so yeah we saw this big dip here over the course of a long time we basically dipped around 70% of the oil price peak and then back up to within 25% of this high in the 20 2014 time period so if you go to USE and do the the same, or You look at the same time period, around June 2014, the time period, the fund was worth about $39 a share, you go down the same pivot point, you see 70 percent down because it happened pretty abruptly and then you would anticipate going back to this 70% of this $37 but you don't actually get even half of that point so keep in mind that from 2014 to 2018 the price of crude oil rallied from 25% of all time highs in 2014 but here we're seeing we're not even recovering close to close to 25% of what we saw in 2014 if you go from June to January to June 2018 to June 2014 respectively you're still 60% down so which doesn't necessarily make sense, why is it correct and the reason? it's because you're trading the futures you're not trading the physical crude oil you know what I mean you're trading the financial instruments that are going to go into what's going to happen and basically what I'm trying to say is when you they have these types of financial institutions trying to buy these contracts, they can't actually store any oil and so what would someone do if they say they are an oil storage company or an oil and gas company? they have storage capacity at some of their facilities, so they might say we can store up to 1.5 million barrels and we can sell $15,000 or 15 against or 1500 contracts associated with that or maybe it's 1.5 100,500 contracts , let's say and so what they could do is hold on to it for a week, two weeks, three weeks until the next trading month rolls around and hopefully the price of oil kept going up so what ends up happening here is that no matter what, at the end of the next month, basically the fund is going to have to sell because they can't necessarily hold and store it, so what ended up happening on Monday and Tuesday, which everyone was familiar with, what ended up What's happening is if I go back to, say, the last five days.
watch this before investing in oil stocks uso usl how oil etfs work investing dividends
What ended up happening is the negative price of oil, everyone is very familiar with that and a lot of it had to do with the fact that all these futures funds had all these contracts on the books but they couldn't take storage of this crude. actively and physically. and immediately what you would see is that the contracts were ending, these funds couldn't hold on to the May contracts because obviously they can't take any money and of course as oil continued to decline to escalate the escalation they didn't. I didn't want to sell it yet, but it got to the point where the end of the month happened and they had to sell it because they physically can't let it expire with it on the books because they physically can't receive it because I don't have storage space. and that's the kind of reason why you could be losing potential money on some of these things and not necessarily realizing it, that's why over time you'll see the price of oil, let's say, can go up and at the same time your USO or your usl background doesn't necessarily increase at the same rate now what I would like to say is specifically if we were to look at intraday within a day a week it pretty much matches up but where it really starts to hinder things is when it really starts to getting to the end of these kinds of trading months, so in the case of, say, April, we were looking at the trading month ending three days before the 25th of the month, so one two three were basically ending on Tuesday here so yesterday that's 24 in the case of next May we're looking at the year 25 three business days before then one two three so we basically started trading July contracts at the end at the beginning here at the end end of May so it basically means the June contracts are basically closing and the 19th of next month and so on I mean do the same for June so June one two three that means June 19th the books are they will close for July contracts and so once you get to the 22nd here we are going to be trading in August and so it will continue to move and these funds are here to try to make money on the futures now if you have a continued downward spiral . you'll have to pay a premium to buy these futures contracts and then two you'll lose money so it's almost like a double whammy and I think that's part of the reason why when you look at USO over the long term you don't necessarily g I got a lot of money keep in mind back in 2008 oil trading period was like 120 hundred and forty dollars a barrel it was trading at about a hundred and seventeen a share so if you think about it now we're at $14 about a tenth part. of that we should only have lost let's say we should only have lost ninety percent but here we are and we've lost ninety seven percent from that point and to hold another point up in 2008 we were trading around 140,000 a barrel in 2014 going back to $100 a barrel and you still lost sixty seven percent even though the price of oil is only down forty percent from that time period of 2008 to 2014 so it just goes to show that not only when you buy these funds you're paying the premium to buy the futures but that's how you can actually make money on these things let's say now so keep in mind that when we go back and look specifically at USO for example they have these contracts of June, July contracts and August contracts on the books now have these bought at let's say if there's 1878 $23 for August $20 for July and so if we were to say a big change in the oil price say 10 15 percent overnight yeah surely you can make a decent chunk of that so Well I say you're going to immediately earn 10 to 15 percent because the spot price jumps right away no I know, and that depends on whether it's just the first month price that's gone up or it's the June, July, and August spot prices that I've jumped and that's a great indicator of whether or not you're actually going to make money So I know this was a really interesting explanation and probably jumping around a little bit, but I really hope it finds you.
watch this before investing in oil stocks uso usl how oil etfs work investing dividends
Well, and I really hope that gives a little explanation as to when you're

investing

in these US oil funds. It's not necessarily this tracker that you're looking at and what you're really looking at here will be shifting to the right as immediately if we were to say, go from $14 a barrel and over the next year steadily over time back up to $60 a barrel so basically quadrupling this from where we are today and it took over the course of a year you're not going to see a 400% return right you're going to see a decent return for sure but it really all depends on if that happens from the overnight if we go from 14 to $60 a barrel overnight you will see a lot moremoney because you're not paying the premium futures contracts of having to trade these contracts and you're not seeing some of the Co Tango that you're having just by having some of these contracts on your books or in this case on us or your books but if you were going to have What happens between now and let's say 2021, you'll see a lot less, so you'll see one hundred percent, two hundred percent, I don't know, but just remember that again. even though we hit 25% of all-time highs between 2014 and 2018, we were still here. up to 64 in the USO basically saying you know we weren't making money you know you would have made money if you bought back here in this 2016 time frame and it went up it would have gone up 80 percent but keep in mind that the Oil price down here was $28 a barrel in 2016 and it basically went from $28 a barrel and to 3 times right I mean it went from 28 to 54 to 276 or something so basically tripled the price but you're only seeing an 80% return so I hope that helps and gives you an explanation of what happens when I'm

investing

in some of these funds what I would suggest is just limit your exposure limit your risk IMO , I'll probably stay away from investing in something like USO USL or any other type of oil fund and that's basically me.
I prefer to invest in the companies themselves. I prefer to look at companies with great balance sheets and great balance sheets, great cash flow, and that are preparing for the future, whether they're transitioning to greener energy or just making sure they keep going. inue to align your margins but that's a whole different story for a different day if you guys are interested in hearing my future outtake or presenting perspective on oil and gas more than happy to provide that but thanks you've been Digressing A bit, I hope this rant was good for you, and if you liked it, just give it a thumbs up and I'll talk to you in the next video.
Greetings.

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