WEBVTT - The Complexity of the Oil Trade 0:00:05.840 --> 0:00:06.520 Welcome to Trains. 0:00:06.519 --> 0:00:08.320 I'm Joel Webber and I'm Eric bel Chernas. 0:00:12.840 --> 0:00:16.760 Eric, we had plans for this episode, and then the 0:00:16.800 --> 0:00:20.880 situation in the Middle East, specifically around Iran, has continued 0:00:20.920 --> 0:00:22.760 to escalate, so we need to talk about energy. 0:00:23.160 --> 0:00:24.120 Yeah. Oil. 0:00:24.880 --> 0:00:27.520 What really got me thinking we should call an audible 0:00:27.600 --> 0:00:30.360 this week is USO. This is the oil ETF that 0:00:30.400 --> 0:00:32.120 has come back from the dead. Like three times, I 0:00:32.159 --> 0:00:35.720 swear I've written this thing off. Remember during COVID, it 0:00:35.800 --> 0:00:38.600 actually had futures that were about to go negative because 0:00:38.720 --> 0:00:40.600 nobody wanted oil reverse. 0:00:40.720 --> 0:00:42.239 Now you've got this things up. 0:00:42.840 --> 0:00:46.160 At least it was up twelve percent on this particular day, 0:00:46.400 --> 0:00:48.520 and before that I had gone forty percent in a month, 0:00:49.120 --> 0:00:52.479 and the volume was massive, twenty two billion dollars in 0:00:52.520 --> 0:00:55.639 a week, and it's been in the top five most 0:00:55.760 --> 0:00:59.000 traded ETF. So it's come out of its sort of 0:00:59.160 --> 0:01:01.600 grave to come back and take over. This is the 0:01:01.680 --> 0:01:04.880 kind of ETF that my friends from college will text 0:01:04.959 --> 0:01:07.720 me about, like, oh, I want to buy oil. USO 0:01:07.840 --> 0:01:10.240 looks like the one, and it's the ETF we really 0:01:10.600 --> 0:01:15.200 made the whole traffic light system on because it's holding 0:01:15.240 --> 0:01:17.800 futures and they roll and it can be hidden costs 0:01:17.800 --> 0:01:19.880 in there and people it's like a wolf in sheep's clothing. 0:01:20.200 --> 0:01:22.560 But when it goes up, man, it really works. I 0:01:22.560 --> 0:01:26.000 think we should go over that, and then also alternative 0:01:26.000 --> 0:01:28.200 ways to play energy, because if you don't want to 0:01:28.200 --> 0:01:30.119 mess with derivatives, you got to go to the equity market. 0:01:30.200 --> 0:01:31.679 So there's like XL XOP. 0:01:32.360 --> 0:01:35.119 So when you want to play oil or invest in oil, 0:01:35.240 --> 0:01:38.080 or feel like you want more exposure to it, this 0:01:38.160 --> 0:01:41.760 is a perfect thing to cover on this podcast because 0:01:42.080 --> 0:01:45.160 there's multiple options and each have their trade offs. 0:01:45.280 --> 0:01:48.280 You mentioned your traffic light system at Bloomberg Intelligence. What 0:01:48.440 --> 0:01:51.640 traffic light color are you giving this episode as we 0:01:51.680 --> 0:01:52.280 go into. 0:01:52.040 --> 0:01:57.320 It, it's kind of the whole spectrum because USO is 0:01:57.400 --> 0:02:02.520 read XL and XOP would be green, although XOP gets 0:02:02.760 --> 0:02:06.920 one mark for being not market cap weighted. But yeah, 0:02:07.000 --> 0:02:11.440 I'll flashing everything. Yeah, that's why this is complex investing 0:02:11.480 --> 0:02:15.000 in oil. The bottom line is if you think about 0:02:15.000 --> 0:02:17.240 the thing you want to invest in, say a barrel 0:02:17.240 --> 0:02:20.040 of oil, think to yourself how annoying would this be 0:02:20.160 --> 0:02:22.919 to actually invest in directly? You have the bio barrel 0:02:22.919 --> 0:02:24.520 of oil somewhere, put it in your backyard. 0:02:24.560 --> 0:02:25.200 It's toxic. 0:02:25.720 --> 0:02:28.320 The more annoying and exotic it sounds, the more you're 0:02:28.360 --> 0:02:30.840 gonna have to deal with some frictions or things you 0:02:30.840 --> 0:02:33.200 don't like, like costs, and that's the case here. 0:02:33.840 --> 0:02:37.600 So joining us to walk through these options. Vincent Piazza, 0:02:37.720 --> 0:02:42.000 who's the Bloomberg Intelligence Senior Industry analyst for energy, as 0:02:42.000 --> 0:02:48.959 well as James Seffert ETF analyst at Bloomberg Intelligence, this 0:02:49.120 --> 0:02:52.360 time on Train's the complexity of the oil trade. 0:02:54.520 --> 0:03:00.239 James Vince Welcome Atrians, Thank you, thanks for having me. James, 0:03:00.280 --> 0:03:01.000 I want to start with you. 0:03:01.040 --> 0:03:07.160 Can you break down why USO is, Like Eric said, 0:03:07.240 --> 0:03:09.919 it goes up and it comes down. What about how 0:03:09.919 --> 0:03:12.880 does this thing of structure that makes it so volatile 0:03:12.919 --> 0:03:13.200 like that? 0:03:14.120 --> 0:03:16.920 Yeah, I don't this wording is going to sound mean, 0:03:17.040 --> 0:03:20.520 but it's called the United States Oil Fund and Eric said, 0:03:20.520 --> 0:03:22.639 it's the It's one of the primary reasons we went 0:03:22.680 --> 0:03:24.280 with the traffically because it's kind of like a wolf 0:03:24.320 --> 0:03:27.080 in sheep's clothing, like United States Oil Fund. Like it 0:03:27.120 --> 0:03:29.120 just sounds like, oh, it just holds oil. It's simple, 0:03:29.639 --> 0:03:31.720 and it's so much more complex than that, because, as 0:03:31.800 --> 0:03:34.040 Eric said, you've got to roll futures. It tries to 0:03:34.040 --> 0:03:35.600 stay as much in the front month as it can. 0:03:35.640 --> 0:03:38.280 Typically we can get into what happened when oil went negative, 0:03:38.320 --> 0:03:40.400 which is going to be interesting to what's going on today, 0:03:41.000 --> 0:03:45.320 but it it it can change exactly what it's holding 0:03:45.360 --> 0:03:48.000 and when when when oil went negative, things drastically change 0:03:48.040 --> 0:03:50.880 exactly how the ETF was working. But what ends up 0:03:50.920 --> 0:03:52.600 happening is even if you think oil is going to 0:03:52.640 --> 0:03:54.120 go up over a certain time period, that's not what 0:03:54.200 --> 0:03:57.240 you're investing in. Everyone when oil went negative would would 0:03:57.280 --> 0:03:58.720 have taken the bet that oil was going to go 0:03:58.760 --> 0:04:00.920 up from here. But you can't just make that bet 0:04:00.920 --> 0:04:02.840 in the markets, because the markets are smarter than that. 0:04:02.880 --> 0:04:04.440 They know that oil is likely to go up. In 0:04:04.480 --> 0:04:07.280 these contracts end every month. You need to trade each contract, 0:04:08.320 --> 0:04:10.000 so and if you're on the front month, you either 0:04:10.040 --> 0:04:12.080 got to get out of that contract or you have 0:04:12.120 --> 0:04:14.000 to take the delivery of the oil. And all of 0:04:14.000 --> 0:04:16.880 this just gets very complicated. So exactly why we're going 0:04:16.920 --> 0:04:18.440 to call this complexity of the oil trade. 0:04:18.480 --> 0:04:21.200 And let me just paint a visual. If you're picturing 0:04:21.279 --> 0:04:25.080 futures right April, May, June, July, it goes out like. 0:04:25.040 --> 0:04:26.240 A year picture. 0:04:26.279 --> 0:04:29.599 The curve typically slopes up, so like as you roll 0:04:29.640 --> 0:04:32.440 from like April to May, you pay a little more 0:04:32.480 --> 0:04:35.520 for the next month. That is called roll costs. And 0:04:35.600 --> 0:04:39.520 this curve isn't in the state of contango. Now if 0:04:39.600 --> 0:04:42.440 everyone wants oil in an instant, the curve goes the 0:04:42.480 --> 0:04:45.720 opposite direction, so you actually pay less when you roll. 0:04:46.240 --> 0:04:49.880 That's where it's're at right now and USO obviously this 0:04:49.920 --> 0:04:52.640 is a good time to use it. But normally that 0:04:52.880 --> 0:04:55.080 roll costs when it's in a state of contango could 0:04:55.120 --> 0:04:58.520 be anywhere from ten to thirty percent a year. So 0:04:58.600 --> 0:05:00.360 you could make a call that oil is going to 0:05:00.440 --> 0:05:03.479 go up in January and it goes up forty percent 0:05:03.560 --> 0:05:06.640 or thirty percent, and you basically are flat because of 0:05:06.640 --> 0:05:08.880 all the roll costs. That's why this is a wolf 0:05:08.880 --> 0:05:11.840 in sheep's clothing. But because it does hold the near 0:05:11.920 --> 0:05:14.840 months right the month's closest to the actual barrel of oil, 0:05:15.520 --> 0:05:19.640 it does have a lot of sensitivity to the price today, 0:05:19.800 --> 0:05:23.560 so it does move very sensitively, and that's why the 0:05:23.600 --> 0:05:26.760 trading crowd likes it so decent trading tool, bad long 0:05:26.839 --> 0:05:30.279 term holding. Vince as an energy expert at BI, I 0:05:30.279 --> 0:05:32.839 know you cover the equities. Is that a fair assessment 0:05:32.920 --> 0:05:34.599 of the future's market in your opinion? 0:05:35.400 --> 0:05:38.440 That is the I couldn't have said it any better. 0:05:38.480 --> 0:05:42.720 That is the perfect way of describing the difference between 0:05:43.200 --> 0:05:48.200 a tnentango setup versus a backwardation, which is what we 0:05:48.400 --> 0:05:51.880 have today. And because of the volatility, and also keep 0:05:51.920 --> 0:05:56.880 in mind at the back end is fairly illiquid, so 0:05:57.040 --> 0:06:00.000 the front end is more liquid. There's much more volume 0:06:00.200 --> 0:06:02.920 on the front end of the curve the back end. 0:06:03.120 --> 0:06:07.479 Because of that ill liquidity or the less liquidity relative liquidity, 0:06:09.680 --> 0:06:14.040 you could see very very sharp changes in the underlying 0:06:14.200 --> 0:06:15.520 price of those contracts. 0:06:16.040 --> 0:06:18.159 Okay, So, Vince, one of the things that I wanted 0:06:18.200 --> 0:06:21.119 to talk to you about was not that long ago, 0:06:21.960 --> 0:06:25.720 like weeks, it seemed like the world was in an 0:06:25.760 --> 0:06:29.520 oil glut, like there was more oil on ships than 0:06:29.680 --> 0:06:32.800 ever before. The price had been dropping. We were talking 0:06:33.360 --> 0:06:37.720 fifty dollars a barrel. Now it's like the reverse. How 0:06:38.040 --> 0:06:41.000 sensitive is the oil market to just disruptions and why 0:06:41.040 --> 0:06:41.240 is that? 0:06:41.279 --> 0:06:42.400 So? 0:06:42.839 --> 0:06:48.240 We have several significant choke points in the world, and 0:06:48.360 --> 0:06:53.280 the Shadehorn moves is probably one of the more significant 0:06:53.360 --> 0:07:00.919 choke points. Roughly twenty percent of LNG roughly eighteen nineteen 0:07:01.040 --> 0:07:05.320 called twenty million barrels of crude run through that particular 0:07:05.520 --> 0:07:11.360 very narrow passage, So a delay in transporting those molecules 0:07:11.880 --> 0:07:18.080 has a significant ripple effect across several other of the 0:07:18.160 --> 0:07:21.960 choke points. That choke point, that very narrow choke point 0:07:23.120 --> 0:07:34.080 marries European supply, European capacity with Asian demand, so Middle 0:07:34.160 --> 0:07:38.800 Eastern supply running through that up to Europe down to Asia. 0:07:39.160 --> 0:07:44.000 That's a very significant choke point that could have considerable 0:07:44.400 --> 0:07:49.080 impact on balances, both in the short term and also 0:07:49.200 --> 0:07:50.200 in the long term. 0:07:51.120 --> 0:07:54.720 One more follow Vince, because you're following this very closely 0:07:54.800 --> 0:07:57.400 and from a like you're looking at the investment side 0:07:57.400 --> 0:07:57.640 of it. 0:07:58.520 --> 0:08:00.400 How long can this last? 0:08:00.520 --> 0:08:05.040 Like is this something that it just seems like they're 0:08:05.040 --> 0:08:07.440 going to try to get the choke point opened as 0:08:07.480 --> 0:08:10.640 fast as possible. I mean, I'm sure, I'm sure that 0:08:10.680 --> 0:08:14.000 the pressure, especially if it hits you know, a price 0:08:14.000 --> 0:08:17.280 of gallon of gas, is going to be intense. So 0:08:17.440 --> 0:08:19.520 is this something that could last for a long time, 0:08:19.720 --> 0:08:23.640 or like I guess in this trade, is it kind 0:08:23.640 --> 0:08:26.000 of like one of those things that could reverse pretty quickly. 0:08:27.240 --> 0:08:30.320 So the analog here that we have. The closest analog 0:08:30.880 --> 0:08:37.079 is twenty twenty two Russia Ukraine where Brent. Let's use 0:08:37.120 --> 0:08:42.280 Brent right. Brent is considered the global seaborn benchmark. Yeah, 0:08:42.800 --> 0:08:47.480 So we had Brent in February of twenty twenty two, 0:08:48.440 --> 0:08:54.600 spike to a peak in March and retrace by early 0:08:54.679 --> 0:08:59.720 two Q So it retraced that gain, that peak of 0:09:00.120 --> 0:09:04.200 flee from ninety to eighty to one twenty and then 0:09:04.320 --> 0:09:07.360 back down again to a ninety handle some time in April. 0:09:07.640 --> 0:09:11.600 So it retraced very quickly. Now, in the case of 0:09:12.800 --> 0:09:17.079 the Strait of Hormuz and Iran in general, we want 0:09:17.120 --> 0:09:21.000 to look at three things. Right, I call it a delay, 0:09:21.840 --> 0:09:28.360 I call it disruption and destruction. Delay is the hydrocarbons 0:09:29.760 --> 0:09:34.000 get to their destination a few days later, we're not here. 0:09:34.960 --> 0:09:39.240 Disruption is I shut down a well, I shut down 0:09:39.320 --> 0:09:44.720 capacity because I fear that these barrels, these molecules can't 0:09:44.760 --> 0:09:47.880 get to their final destination. That's where we are now. 0:09:48.720 --> 0:09:53.240 The destruction phase, where all bets are off global economies 0:09:53.360 --> 0:09:58.720 are severely impacted, is if assets are taken off the 0:09:58.800 --> 0:10:04.440 chessboard because of destruction, so that there is significant capital 0:10:04.840 --> 0:10:09.640 that needs to be invested to bring these facilities and 0:10:09.720 --> 0:10:14.400 bring this back up to snuff. So supply chain delays, 0:10:15.120 --> 0:10:20.160 maritime logistical delays, those are days. We're now in the 0:10:20.280 --> 0:10:25.480 case where we could see significant barrels off the market 0:10:25.920 --> 0:10:30.640 for significant periods of time, causing a collapse of the 0:10:30.679 --> 0:10:35.200 global economy. Because we're staring at you know, not long 0:10:35.240 --> 0:10:38.720 ago it was one hundred and twenty being bid before 0:10:38.760 --> 0:10:42.760 the US market opened. We're staring at over one hundred dollars. 0:10:43.840 --> 0:10:45.920 That volatility is significant. 0:10:53.120 --> 0:10:57.000 Let's say you know, we were college roommates. This is 0:10:57.000 --> 0:10:59.760 a cruise story, and I text you and I say, 0:10:59.880 --> 0:11:02.840 n listen, I'm not selling my Vanguard funds, but I 0:11:02.880 --> 0:11:05.120 want a little piece of this oil action. I want 0:11:05.160 --> 0:11:08.160 to make sure that I'm participating in all this craziness. 0:11:09.480 --> 0:11:11.640 I was looking at USO, but I don't know. I 0:11:11.679 --> 0:11:14.040 know you cover the stocks. What should I do? How 0:11:14.040 --> 0:11:15.880 would you answer that question to them? 0:11:16.000 --> 0:11:18.200 You can start with this is not investment advice. 0:11:18.760 --> 0:11:23.280 Yeah, yeah, yeah, yeah, yeah, yeah, yeah, No, definitely that's true. 0:11:23.480 --> 0:11:25.960 I'm not trying to because we can't give investment advice. 0:11:25.960 --> 0:11:29.320 But I guess maybe as somebody who knows as much 0:11:29.320 --> 0:11:32.280 as you, just be interested to hear what you would 0:11:32.280 --> 0:11:34.480 say in terms of just somebody who wants to get 0:11:34.559 --> 0:11:35.960 more exposure to this market. 0:11:36.640 --> 0:11:40.800 Yeah. So if you think about from a broader perspective, 0:11:42.080 --> 0:11:46.400 you have the ETF complex. The xl E is probably 0:11:46.440 --> 0:11:51.760 the broadest, the most liquid, the cheapest form of exposure 0:11:52.040 --> 0:11:57.120 across the equity energy space. But that exposure encompasses not 0:11:57.200 --> 0:12:00.960 only the upstream but also the downstream the extream components, 0:12:01.000 --> 0:12:04.439 so it gives you what I call the energy value chain. 0:12:04.800 --> 0:12:07.960 So you you like that vehicle as just like a 0:12:08.000 --> 0:12:08.600 proxy for. 0:12:08.600 --> 0:12:15.280 The energy exactly exactly because within within that ETF as 0:12:15.679 --> 0:12:19.600 both James and Eric No. Three names make up the 0:12:19.640 --> 0:12:22.680 bulk of that exposure. And those are the integrateds. You 0:12:22.720 --> 0:12:26.920 have Exxon, Chevron, and you have what I call a 0:12:27.880 --> 0:12:31.880 mega independent like Conicgo. They make up the bulk of 0:12:31.920 --> 0:12:35.920 that exposure. So they have exposure across not only the 0:12:36.040 --> 0:12:40.320 upstream side of the business so the extractives right the EMPs, 0:12:40.679 --> 0:12:45.040 but also have downstream downstream refining and also petrech chemicals. 0:12:45.400 --> 0:12:49.080 So that provides you with the value chain exposure. As 0:12:49.120 --> 0:12:54.400 you get more granular and you think about the EMP space, 0:12:55.480 --> 0:13:01.520 the XOP is an area that that we've discussed in 0:13:01.600 --> 0:13:07.160 the past. But the XOP or the US Oil and 0:13:07.240 --> 0:13:11.640 Gas e M P ETF, which I think is I EO, 0:13:12.880 --> 0:13:18.240 they're not pure proxies for the upstream exposure because they 0:13:18.320 --> 0:13:24.440 too have much more broader exposure to the downstream and 0:13:24.520 --> 0:13:30.200 also some LNG components. Really, when you think about the 0:13:30.320 --> 0:13:35.880 exposure and what tends to do well in instances like this, 0:13:36.520 --> 0:13:39.800 it tends to be that downstream side, right, because as 0:13:39.880 --> 0:13:45.199 prices go up, the refiner's reprice to the consumer at 0:13:45.240 --> 0:13:49.560 the retail level the gas and diesel that go into 0:13:50.200 --> 0:13:55.240 on road vehicles, and so that price tends to come 0:13:55.280 --> 0:14:03.400 across pretty instantly. But when price is revert at the 0:14:03.440 --> 0:14:08.760 wholesale level at the crude level, prices at the pump 0:14:09.200 --> 0:14:14.240 don't correlate as quickly. So in the refining space, in 0:14:14.240 --> 0:14:18.160 the downstream space, you have probably one of my favorite 0:14:19.680 --> 0:14:23.560 ticker symbols of all time. C R a K. You 0:14:23.560 --> 0:14:25.000 guys can pronounce it for me. 0:14:26.280 --> 0:14:29.960 Vince wrote a which is basically an introduction to stocks. 0:14:30.040 --> 0:14:32.640 Usually he wrote one for xl E and in it 0:14:32.680 --> 0:14:35.400 I'm reading it and I could tell he he loves 0:14:35.480 --> 0:14:38.360 crack Joel, because I'm like I'm like, Vince, why don't 0:14:38.360 --> 0:14:40.560 you just why don't you just say you love crack 0:14:40.640 --> 0:14:41.240 in the headline. 0:14:41.280 --> 0:14:42.880 I mean, that's really what's going on here. 0:14:43.520 --> 0:14:47.800 Okay, So talk to us about about the ETF crack. Vince. 0:14:48.600 --> 0:14:54.080 Yeah, So it provides you with pure play downstream exposure. 0:14:54.120 --> 0:14:57.280 When I mean downstream exposure, the upstream side are the 0:14:57.360 --> 0:15:02.640 companies that extract the hydrocarbon. The downstream the refiners are 0:15:03.280 --> 0:15:09.920 the companies that refine the product, the raw material, the 0:15:09.960 --> 0:15:14.080 feedstock into the things that we use. So the gasoline 0:15:14.080 --> 0:15:18.600 and diesel that cars and trucks and vans used in 0:15:18.680 --> 0:15:26.720 there every day. Now, as spreads widen, there is an 0:15:26.720 --> 0:15:30.080 outside its profitability that ends up in the hands of 0:15:30.120 --> 0:15:34.920 the refining companies and most likely for longer, even after 0:15:35.040 --> 0:15:40.000 the price reverts. So it is a pure play exposure 0:15:40.360 --> 0:15:44.600 to the downstream. The reasoning being that you have margin 0:15:44.680 --> 0:15:49.480 expansion and higher profitability for longer as this crisis persists 0:15:49.480 --> 0:15:53.200 for longer, you also most likely have what I would 0:15:53.240 --> 0:15:59.080 call a geopolitical risk premium that remains in the commodity 0:15:59.120 --> 0:16:00.240 for longer as well. 0:16:01.960 --> 0:16:04.160 Eric, to bring in just a little bit of flows 0:16:04.280 --> 0:16:07.000 and comp between the ETFs, we've talked about so far, 0:16:07.080 --> 0:16:09.720 like what's the action look like for this suite of 0:16:09.840 --> 0:16:11.840 ETFs in the energy space. 0:16:12.440 --> 0:16:15.160 Yeah, so he went over I think four of the 0:16:15.160 --> 0:16:19.600 big ones, maybe five, but XALE is the king. It 0:16:19.680 --> 0:16:21.720 sounds like from what Vince is saying and what I 0:16:21.720 --> 0:16:22.320 would you know. 0:16:22.400 --> 0:16:23.440 Also, Echo is like. 0:16:24.280 --> 0:16:28.680 You can't really get too hurt with XL. It holds 0:16:28.680 --> 0:16:31.680 a lot of stocks, it's diversified. The only thing is 0:16:31.720 --> 0:16:35.040 just it's not going to have the sensitivity to short 0:16:35.120 --> 0:16:37.400 term moves and oil Like if you look over the 0:16:37.440 --> 0:16:41.000 short term, USO is blowing away XL in the past 0:16:41.040 --> 0:16:44.720 like week or month, but XLE is up like one 0:16:44.760 --> 0:16:46.680 hundred and sixty eight percent in the past ten years 0:16:46.720 --> 0:16:49.720 something like that, and USO is like down. So it's 0:16:49.760 --> 0:16:52.280 that rolling of the futures that makes USO almost like 0:16:52.320 --> 0:16:55.120 a hot potato. You cannot hold it for longer, We'll 0:16:55.120 --> 0:16:57.960 just eat you alive. XLE you can hold for longer. 0:16:58.040 --> 0:16:59.920 So I think that's the main takeaway. And then x 0:17:00.520 --> 0:17:04.520 XCS they're going to have like more specific parts of 0:17:04.560 --> 0:17:07.479 the oil industry, so it's like almost like a subsector. 0:17:07.200 --> 0:17:08.480 Like a specific niche bet. 0:17:08.520 --> 0:17:10.480 But if we look at this year, the number one 0:17:10.640 --> 0:17:13.320 ETF by flows as xl E with five billion. Number 0:17:13.320 --> 0:17:14.439 two isn't even a billion. 0:17:15.560 --> 0:17:16.000 I funny. 0:17:16.240 --> 0:17:18.520 Number two is u ur a uranium jool even though 0:17:18.840 --> 0:17:24.040 that's t energy. Vd XOP is fourth. Oi H is 0:17:24.040 --> 0:17:26.920 another one. So I guess you know this is part 0:17:26.960 --> 0:17:31.479 of the dilemma. I'm want to go to James on USO. James, 0:17:31.480 --> 0:17:36.320 obviously holding these equity ETFs is monitored. You know, That's 0:17:36.320 --> 0:17:39.840 why these equity tfs get a green lightner system. They're diversified, 0:17:39.840 --> 0:17:43.320 they hold equities. They have obviously some sensitivity to oil, 0:17:43.359 --> 0:17:46.840 but not like USO. Now, can you go over USO 0:17:46.960 --> 0:17:49.000 a little bit here? It came out in like twenty 0:17:49.080 --> 0:17:53.679 years ago. It rolls futures, and then during COVID futures 0:17:53.680 --> 0:17:56.160 were about to go negative, and I think it had 0:17:56.160 --> 0:17:58.800 to like it was going to owe people money or something, 0:17:59.280 --> 0:18:03.080 so it had to like switch strategy to holding all 0:18:03.119 --> 0:18:05.679 of these different futures across the curve so that it 0:18:05.720 --> 0:18:08.840 wasn't like just holding the near month. And then I 0:18:08.880 --> 0:18:11.080 guess it switched back. Can you go through the story 0:18:11.080 --> 0:18:14.800 of USO, because honestly I wrote it off I thought 0:18:15.080 --> 0:18:18.960 it had become neutered by holding all these months, which 0:18:19.080 --> 0:18:21.679 gives it less teeth and less sensitivity to oil. But 0:18:21.720 --> 0:18:25.560 I guess it went back to its front month exposure. 0:18:26.920 --> 0:18:30.280 Yeah, that's exactly right. So what happened Oil went negative 0:18:30.359 --> 0:18:32.280 or was going negative. Things were going bad because the 0:18:32.280 --> 0:18:34.840 government the world was shut down due to COVID And 0:18:35.520 --> 0:18:38.280 what ended up happening really there was a few big drivers. One, 0:18:38.440 --> 0:18:40.760 they were heavily in the front month and second month contracts, 0:18:40.760 --> 0:18:42.960 which is what this product does, and they were not 0:18:43.080 --> 0:18:45.360 doing well. The other problem was the ETF was this 0:18:45.440 --> 0:18:48.800 was a case sometimes ETF's like there are a fish 0:18:48.840 --> 0:18:50.399 that gets too big for the pond that they're in, 0:18:50.720 --> 0:18:54.000 and in this case, USO owned like well over thirty 0:18:54.000 --> 0:18:55.960 percent of the contracts with the open interests of the 0:18:55.960 --> 0:18:59.280 futures that were getting exposure to the oil contracts. It 0:18:59.359 --> 0:19:02.280 was basically the tail wagging the dog, and the SEC 0:19:02.359 --> 0:19:05.159 was getting concerned, the CFTC was getting concerned. They had 0:19:05.240 --> 0:19:07.440 to go in and break, like bake the rules that 0:19:07.480 --> 0:19:09.720 they basically had and are in their perspectives saying what 0:19:09.760 --> 0:19:11.960 the fund would do, because all of a sudden, you 0:19:12.040 --> 0:19:13.919 have all this money in this fund that's holding this 0:19:13.960 --> 0:19:16.439 contract and it's all gonna flow out because it rolls 0:19:16.520 --> 0:19:19.439 to the next month contract like it's set to keep rolling, 0:19:19.760 --> 0:19:21.080 and all of a sudden, you're gonna have a ton 0:19:21.119 --> 0:19:23.160 of money pour out towards the end of this contract. 0:19:23.480 --> 0:19:25.919 It's already heading negative, so they're gonna dump more of 0:19:25.960 --> 0:19:28.520 these contracts onto the market as it's negative. ETF can't 0:19:28.520 --> 0:19:30.800 go negative. All these problems were happening. So what they 0:19:30.800 --> 0:19:32.760 did is, as you said, they went to all these 0:19:32.800 --> 0:19:35.520 other months. They went out twelve months essentially, so they 0:19:35.520 --> 0:19:38.520 went from we have high octane exposure to what's going 0:19:38.520 --> 0:19:42.119 on in oil right now, to we own the entire curve. Essentially, 0:19:42.160 --> 0:19:44.560 we own the curve out one year and so one 0:19:44.680 --> 0:19:46.320 a lot of investors who were trying to bet on 0:19:46.359 --> 0:19:48.200 oil rebounding all of a sudden didn't have a bet 0:19:48.240 --> 0:19:50.520 on oil rebounding because they were just bet across the curve. 0:19:50.840 --> 0:19:53.919 And the funny thing is the Unit US Commodity Funds 0:19:53.920 --> 0:19:56.280 actually has another fund that does this already. It's called 0:19:56.359 --> 0:19:59.879 USL and it holds the twelve month contracts. So essentially 0:20:00.000 --> 0:20:04.120 the USO started mirroring its it's sibling of USL, and 0:20:04.400 --> 0:20:06.719 it wasn't great. It took a few years. But in 0:20:06.800 --> 0:20:10.680 twenty twenty three, I believe they started moving back from 0:20:10.840 --> 0:20:13.360 the twelve month contracts just to the front two months, 0:20:13.640 --> 0:20:16.160 and I yeah, so this all happened. It was kind 0:20:16.160 --> 0:20:20.000 of crazy in twenty twenty three time range, but they 0:20:20.040 --> 0:20:22.080 got back. By January twenty twenty four, they were in 0:20:22.080 --> 0:20:23.439 the front and second month contracts. 0:20:23.600 --> 0:20:28.000 Okay, So change in strategy there. That brings us back 0:20:28.000 --> 0:20:31.359 to basically being like this thing was originally right. So 0:20:31.800 --> 0:20:34.080 we'll be curious to see how this one plays out 0:20:34.119 --> 0:20:35.359 since it's so volatile. 0:20:35.520 --> 0:20:38.720 Yeah, I mean, looking you're to date, USO's up fifty 0:20:38.720 --> 0:20:43.720 seven percent, UNL is up two percent. So but if 0:20:43.720 --> 0:20:46.200 you went back, UNL would have probably gone down less. 0:20:46.240 --> 0:20:48.840 It also doesn't have as much role costs. But honestly, 0:20:48.880 --> 0:20:52.439 here's my take. If you're looking for quick sensitivity and 0:20:52.480 --> 0:20:55.000 a short term trade, I mean, USO will do the job, 0:20:55.560 --> 0:20:59.120 but you can't hold it. You just you can't hold 0:20:59.119 --> 0:21:01.560 two things long term. You can't hold anything that rolls futures, 0:21:01.600 --> 0:21:03.560 and you can't hold anything has leverage. 0:21:03.760 --> 0:21:06.280 You have to treat it like a chainsaw. 0:21:05.920 --> 0:21:07.000 Or juggling the chainsaw. 0:21:07.119 --> 0:21:09.480 Yes, XL XOP. 0:21:09.680 --> 0:21:12.560 These are diversified ETFs that you can sort of bolt 0:21:12.560 --> 0:21:14.680 onto your portfolio as if you're you know, one of 0:21:14.840 --> 0:21:17.080 long term overweight to this sector. 0:21:17.320 --> 0:21:19.920 I notice you didn't mention crack when I asked you about, 0:21:20.600 --> 0:21:22.320 you know, Tom Screen, but you want. 0:21:22.160 --> 0:21:24.480 To talk about there's also frack. You want to like 0:21:24.560 --> 0:21:28.800 siblings crack and crack. So yeah, I mean, look, crack 0:21:28.960 --> 0:21:33.000 is a very specific oil refiners. Vince's case is good 0:21:33.080 --> 0:21:36.040 to me because you you can go out and speculate 0:21:36.080 --> 0:21:38.199 and try to drill the oil, but you have to 0:21:38.240 --> 0:21:40.159 refine it. So the refiners are kind of like in 0:21:40.200 --> 0:21:41.880 a sweet spot of like you have to come through 0:21:41.960 --> 0:21:44.760 us anyway, and that's a good spot to be in. 0:21:45.400 --> 0:21:48.120 I guess it just depends on and also, I think 0:21:49.119 --> 0:21:52.480 the more you get to subsector ETFs outside of xl E, 0:21:53.160 --> 0:21:57.080 the more you are not overlapping your regular portfolio because 0:21:57.080 --> 0:21:58.760 a lot of people own VOO and a lot of 0:21:58.880 --> 0:22:02.919 XL's top holdings are in VOO already or IVV or SPY. 0:22:03.000 --> 0:22:04.920 The more you go to subsectors, the more you're getting 0:22:05.240 --> 0:22:08.760 unique exposure that we call portfolio completion. So I think 0:22:08.800 --> 0:22:11.760 crack is a you know, a good novel choice for 0:22:12.160 --> 0:22:15.359 something that's like, you know, not the obvious one. We 0:22:15.480 --> 0:22:17.320 try to do that when we write our notes too, 0:22:17.400 --> 0:22:20.320 is like here's the big one, here's the cheapest one, 0:22:20.359 --> 0:22:21.960 and here's sort of like a wild card you might 0:22:22.000 --> 0:22:22.520 not have thought of. 0:22:28.920 --> 0:22:30.840 Okay, another wild card that I wanted to bring. 0:22:30.760 --> 0:22:32.440 Up, the Breakwater ETF. 0:22:32.920 --> 0:22:34.240 Yeah, talk about that one. 0:22:34.400 --> 0:22:37.639 Yeah, because Vin, you know, Vince, we're talking about stuff 0:22:37.680 --> 0:22:40.840 that's industry specific. But then there's gonna be the stuff 0:22:40.840 --> 0:22:42.680 that's sort of like peripheral. 0:22:43.160 --> 0:22:46.120 Right, so on the I didn't even know this existed. 0:22:46.200 --> 0:22:49.160 Sometimes, I you know, there's forty eight hundred. 0:22:48.480 --> 0:22:50.720 I was, you got to know these. 0:22:50.800 --> 0:22:53.360 So this is called the Breakwave Tanker Shipping ETF. 0:22:53.440 --> 0:22:55.600