Photographer: Daniel Acker/Bloomberg

Oil Bulls Are Losing Money Even as Prices Rise

Really. Here's why.

Want to capture the rally in oil futures? It's harder than it looks.

Oil futures are up 12 percent this year. Yet because of the quirky way the commodity trades, investors would actually have lost money if they bought the front-month contract on Dec. 31 and kept rolling that bet forward until now.

That's because oil prices now reflect what's known as a "contango" market, where the near-month contract costs less than those for delivery further into the future. So every month, when the most-actively traded futures expire, you have to sell one and buy a more expensive contract to keep the investment going.

These charts explain how it works.

Like Skiing Uphill

The so-called futures curve -- a simple graph of prices for each month a commodity can be delivered -- shows higher oil prices in future delivery months.  

It Takes Two to Contango

The gap between the second-month contract and the first-month contract has widened, reaching a four-year high on Feb. 27. This means to maintain your position, you need to sell the first and buy the second, costing ever more money.

 Returns Lag

The U.S. Oil Fund, the biggest fund tracking crude, has performed considerably worse than the commodity itself. For example, on April 8, the fund started shifting from the May contract, trading at $50.42 a barrel, to the June contract, which cost $51.87. While this fund is meant to replicate the oil price, it's little changed this year. It was in the red until Wednesday.

Investors Bail

Investors pulled $672 million from oil ETFs this month as of April 29, the biggest outflow in four years.

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