“What’s more, the Brent futures curve has now flipped into backwardation for the first time in years, suggesting that the oil market is tightening and going toward re-balancing,” reports OilPrice.com. “The WTI futures curve is still in a state of contango–the opposite of backwardation.”
Widening contango could eat away at long-term returns. Specifically, USO tracks near month crude oil futures, swapping out contracts within two weeks of expiration for the next month contract. Consequently, in a contangoed market, USO would essentially be selling low and buying high, which may cut into performance.
Investors interested in gaining exposure to the crude oil market can take a look at the recently launched ETFS Bloomberg Energy Commodity Longer Dated Strategy K-1 Free ETF (NYSEArca: BEF). BEF tries to provide long-term capital appreciation designed to exceed the performance of the Bloomberg Energy Index 3 Month Forward Index, which tracks movements in the prices of rolling positions in a basket of energy commodity futures with a maturity between 4 and 6 months.
For more news on oil ETFs, visit our oil category.