Michelle Caruso-Cabrera discusses the recent appearance of backwardation in the oil market and what its effects will be in the United States Oil Fund (NYSE:USO). Backwardation says that as the contract approaches expiration, the futures contract will trade at a higher price compared to when the contract was further away from expiration. This is said to occur due to the convenience yield being higher than the prevailing risk free rate.
Michelle shows a chart of the ’12 contracts and states that if we see a similar pattern in the ’11 contracts that would be very bullish and profitable for the USO ETF.
To dive deeper into the oil plays, they brought in Daniel Dicker, an independent oil trader, and Ray Carbone, president of Paramount Options, to share their best energy plays now. Both Daniel and Ray do not like the ETF plays, calling them a lousy proxy for oil prices.
See the full video below: