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How to play a long term bullish view on oil?


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How to play a long term bullish view on oil?

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  #1 (permalink)
jawadde001
Vlaanderen Belgium
 
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If i'm bullish on the oil market on the long-term, what is the best way to translate this view in the future market?

1) Buy a near-term contract and roll it monthly.

2) Buy once a 6 month contract.

The near-term future has a smaller bid-ask spread, but monthly transaction cost. So what you lose in fees, you win in slippage and vice versa.

Are there other things i should consider?
I know the market is in contango. But should i prefer the short term or long term contract or it doesn't matter that much at the end?

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  #3 (permalink)
 myrrdin 
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jawadde001 View Post
If i'm bullish on the oil market on the long-term, what is the best way to translate this view in the future market?

1) Buy a near-term contract and roll it monthly.

2) Buy once a 6 month contract.

The near-term future has a smaller bid-ask spread, but monthly transaction cost. So what you lose in fees, you win in slippage and vice versa.

Are there other things i should consider?
I know the market is in contango. But should i prefer the short term or long term contract or it doesn't matter that much at the end?

The bid / ask spread does not impact your results a lot, as limit orders in the middle between bid and ask usually get filled.

Another argument is that margin for a 6 month contract is lower than for the near-term contract. But the difference is not large. In addition, the 6 month contract moves slower - helps to sleep well.

A different approach would be to sell puts far under the market, eg. CLZ P30.

Best regards, Myrrdin

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  #4 (permalink)
jawadde001
Vlaanderen Belgium
 
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I already have short CL puts.

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 SMCJB 
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With prompt crude trading sub $50 but long dated crude trading above $60 the market is already pricing in a 20% expected move in spot crude prices in the next few years.

If you think that rally will happen quicker than the curve implies then you should be buying something more short dated.
If you think that rally will be larger than the curve implies which month you buy will depend upon when you think the move will happen.

As @myrrdin says, bid/ask shouldn't be that much of a factor assuming your not going way back. It's only 1 tick wide in CLU5 but it's only 3-5 ticks wide in CLZ7 and only a couple ticks wider still in CLZ8. Anything further back and you are going to give up some edge though. NOTE CME only implies out through CLZ7. What this means is that the best executable price further back is consistently much better than the best displayed price, but if you put a price in, HFT/MMs will take it as soon as they think its 1-2 ticks of value which will be way inside of the bid/ask.

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  #6 (permalink)
jawadde001
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I used the e-mini crude oil future, but i will not trade QM's anymore. The execution was terrible.
I payed 52.575$ for the may 2016, while the bid-ask spread in CL was 52.38 - 52.39.

Next time i'm going to trade CL or QM front month instead.

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 SMCJB 
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QM has liquidity in the first 3 months, a little a less in Z5 even less in Z6 and even less in M6. There is virtually no liquidity in F6-K6, N6-X6 and F7 on back. I suspect your K6 fill was based upon an M6 quote plus the K6-M6 spread. I would advice against QM for anything other than the 1st 3 months.

If you take a look at this page on CME's sight you can see the previous days QM volume by month and the total open interest. If you have a 1 lot QMK6 position on you are 50% of the open interest in QMK6.

https://www.cmegroup.com/trading/energy/crude-oil/emini-crude-oil_quotes_settlements_futures.html

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 Seahn 
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SMCJB View Post
With prompt crude trading sub $50 but long dated crude trading above $60 the market is already pricing in a 20% expected move in spot crude prices in the next few years.

Actually I believe out dated futures are trading higher because the market is factoring in the storage costs associated with storage of the current glut of oil.

It is a common incorrect notion that higher prices for out months implies prices are going up. I wish it was that easy.

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 SMCJB 
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Seahn View Post
Actually I believe out dated futures are trading higher because the market is factoring in the storage costs associated with storage of the current glut of oil.

I'd respectably disagree.

Regarding the forward curve representing storage costs, there's always a cost to store oil and there's always oil in storage but the market isn't always in contango.

Fundamentally there is a current expectation that US supply/demand situation will shift over the next few years if only due to a reduction in production.


Seahn View Post
It is a common incorrect notion that higher prices for out months implies prices are going up.

I would agree that forward price curves are notoriously bad at predicting forward prices. (Personally I believe the forward CL curve represents the hedging/speculation imbalance far more than perceived forward value.)

Seahn View Post
I wish it was that easy.

Me 2.
The reason it's not easy is because a contango forward curve implies spot prices will be higher and not that futures prices are going up. The only way to capture that is to buy spot oil and hold/store it. Which isn't easy for everybody except a few dozen physical traders set up to do that. (ie Buy Spot, Sell Forward, Own Storage.)
You can't buy spot futures and expect the market to go up - roll cost/yield will wipe out any profits you hope/expect to make. (ie Buy Prompt, Sell Forward, Roll Futures every month.)

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 tigertrader 
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SMCJB View Post
I'd respectably disagree.

Regarding the forward curve representing storage costs, there's always a cost to store oil and there's always oil in storage but the market isn't always in contango.

Fundamentally there is a current expectation that US supply/demand situation will shift over the next few years if only due to a reduction in production.

I would agree that forward price curves are notoriously bad at predicting forward prices. (Personally I believe the forward CL curve represents the hedging/speculation imbalance far more than perceived forward value.)

Me 2.
The reason it's not easy is because a contango forward curve implies spot prices will be higher and not that futures prices are going up. The only way to capture that is to buy spot oil and hold/store it. Which isn't easy for everybody except a few dozen physical traders set up to do that. (ie Buy Spot, Sell Forward, Own Storage.)
You can't buy spot futures and expect the market to go up - roll cost/yield will wipe out any profits you hope/expect to make. (ie Buy Prompt, Sell Forward, Roll Futures every month.)

indeed. the larger the inventory build-up, the steeper the contango will become

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