To understand the United States Oil Fund (AMEX: USO), Ivan Martchev emphasizes the importance of the terms contango and backwardation.

The editor of Vital Resource Investor explains, "A contango is when the price of a commodity for future delivery is higher than the spot price, while backwardation is when the price for future delivery is lower." Here, he explains how the change from one to the other now makes the oil ETF a buy.

"The futures market now suggests that oil isn't as plentiful as it was at the same time last year when the sector began to weaken. For the first time in two-and-a-half years, the oil futures actually suggest that oil's in short supply.

"The market's gone from the notorious contango that made buying and holding the oil exchange traded funds (ETFs) much more painful than the oil stocks, to the current backwardation that looks like a smooth ski slope.

"The current backwardation status favors the buy-and-hold strategy for the oil ETF, the U.S. Oil Fund, which I first recommended as a special situation at the end of March.

Continue reading Best energy ideas: Backwardation bet on US Oil Fund (USO)

Best energy ideas: Backwardation bet on US Oil Fund (USO) originally appeared on BloggingStocks on Sat, 20 Oct 2007 15:10:00 EST. Please see our terms for use of feeds.