Oil - holding cost and May-20 at -$37

[porkbelly]

I am new to spread betting (although I have traded futures before), and have been mulling over my first position.  But before putting on a 'buy and hold' long in spot oil, I wanted to calculate holding costs, given that Jun-20 is around $20.00 and Jul-20 is $26.00.  Would someone be kind enough to double check my maths and understanding?

For example, suppose I enter a long spot position at $20.00 in £1 per point.  By my calculations, the overnight roll cost would be £19.35 / day ((£2600-£2000) / 31 days), and there would be an additional daily IG funding cost of £0.16 (2.5% * £2300), giving a total daily holding cost of £19.51.  Does this look about right?  Over a year, this would cost £7,122, which is 3.1x the "investment" of £2,300.  And is this the same maths that is working against someone buying an oil ETF which rolls over futures to get the relevant exposure?

Assuming that I have understood the maths, a second question regards the big move in May-20 oil today to -$37.  If you were holding a position on Friday in spot or May-20 futures, would this automatically have been rolled over last week into Jun-20 futures?  Presumably, the weakness in May-20 futures was already pushing down the spot price, as from what I can tell the spot price is a "blend" of the two nearest futures.  But suppose this move to -$37 had occurred on Friday, then you would have been ****ed, right?  Rolling from May-20 (-$37) into Jun-20 (~£21) would have set you back £5,800 on just £1 per point exposure?

 

 

 

 

[Guest Anil]

I think that sounds right. I still find it very difficult to understand how oil may can go to -$37. Surely 0 is the lowest it can go.

This sets dangerous precedent. If it can go to -$37 then it can also go to -$100 so your potential exposure could be higher than anticipated.

[Caseynotes]

6 hours ago, porkbelly said:

I am new to spread betting (although I have traded futures before), and have been mulling over my first position.  But before putting on a 'buy and hold' long in spot oil, I wanted to calculate holding costs, given that Jun-20 is around $20.00 and Jul-20 is $26.00.  Would someone be kind enough to double check my maths and understanding?

For example, suppose I enter a long spot position at $20.00 in £1 per point.  By my calculations, the overnight roll cost would be £19.35 / day ((£2600-£2000) / 31 days), and there would be an additional daily IG funding cost of £0.16 (2.5% * £2300), giving a total daily holding cost of £19.51.  Does this look about right?  Over a year, this would cost £7,122, which is 3.1x the "investment" of £2,300.  And is this the same maths that is working against someone buying an oil ETF which rolls over futures to get the relevant exposure?

Assuming that I have understood the maths, a second question regards the big move in May-20 oil today to -$37.  If you were holding a position on Friday in spot or May-20 futures, would this automatically have been rolled over last week into Jun-20 futures?  Presumably, the weakness in May-20 futures was already pushing down the spot price, as from what I can tell the spot price is a "blend" of the two nearest futures.  But suppose this move to -$37 had occurred on Friday, then you would have been ****ed, right?  Rolling from May-20 (-$37) into Jun-20 (~£21) would have set you back £5,800 on just £1 per point exposure?

 

 

 

 

Hi, a couple of points I would make regarding the above.

For a buy and hold you should really only be considering a futures contract, generally a daily funded bet (spot) becomes less cost effective compared to a futures contract if held for more than 1-2 weeks.

The overnight fees become exaggerated with a large difference between the 2 futures contracts involved in the overnight fees calc, the large difference as has been the case recently makes the DFB even less attractive, at least for longs.

IG doesn't just choose the front 2 futures contracts for the overnight fees calc but instead chooses the most liquid of the futures contracts, there is little point in providing prices that can't actually be filled.

The overnight fees calc uses the daily closing price of the 2 futures contracts so can't be done in advance or extrapolated into the future with any degree of accuracy.

With regards the May futures contract it looks like IG shut it down earlier than their own expiry date so will be interesting to see how this affected others who were still in the market.

All of the above is based on my understanding and admit I may be wrong so apologies if that might be the case.