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I've read on the Internet that many people traded USO when WTI futures contracts expiring on 4/21 dropped to -$37.63/barrel. But many posts on Reddit discourage buying USO, like on r/stocks and r/wallstreetbets.

USO was designed as a short term investment. Contango causes negative roll yield, which in turn locks in losses. If you want more info, start searching and read this.

  1. So who ought to buy USO?

  2. How does USO profit if, as per Investopedia, "Over the long term, the negative roll yields add up, causing United States Oil Fund investors to experience losses"?

Even the Investopedia article is too complicated! Can someone explain like I'm 5?

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So who ought to buy USO?

People who think the price of oil will go up in the near future (or think it will go down and can short USO).

How does USO profit ...?

USO is not a company - it is an investment fund that investors can buy shares of. Its "profit" is not tied to the value of the actual fund itself, whose shares are bought and sold on the secondary market. The manager of USO profits when people pay the fees associated with the fund.

Can someone explain like I'm 5?

Imagine you have a friend that knows where to buy and sell baseball cards, and can spot a "good deal". Rather then buying thousands of cards himself, he gets friends to give him money and he uses that money to buy thousands of cards (keeping a very small portion for himself). If the cards that he buys go up in value, the friends that bought in share the profits in proportion to how much they put in. If the cards go down in value, everybody loses proportionally.

The friend doesn't "profit" when the cards go up in value - he profits when people buy in to the fund.

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A rise in the price of oil over a period of time can be greater than the loss due to contango over that time.

The problem is that if the price of oil just holds for some time then the fund will have a loss for that time due to the contango premium that winds down with time.

However, the USO fund is currently 30% July contract, 15% August contract, 15% September contract, 15% October contract, 15% December contract, and 10% June 2021 contract. (Now the July contract, for example, expires in June.)

And consider a bull-spread. A long-term futures contract is sold while a short-term futures contract is bought. If the price of oil just holds then there is a gain on the long-term contract from contango while the short-term contract has no loss except for contango. Also, a bull-spread is expected to be profitable from rising oil prices because the short-term contract should have more gain than the long-term contract has loss.

To currently use the USO fund as the short-term portion of a bull-spread would require a simple calculation to weight its current holdings.

Well, a few minutes ago the USO fund calculated as holding oil at 25.96 a barrel which is closest to the September contract. Then the UCO and SCO funds, as holding the September contract, are holding oil at 26.23 a barrel. And the DBO fund, as holding the March 2021 contract, is holding oil at 31.52 .

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