Sometimes I think there's a conspiracy in the financial markets. There are so many nuances to investing that it's hard to get it right and no one person can know it all. I guess that's why we created this site. We might as well learn from each other's successes and failures.

Case in point: You can be right about the price movement of oil and still get short changed. I know. It happened to me. It can happen to you. Here's how.

There are a few vehicles out there for taking a position in crude oil. One of them is the United States Oil Fund (USO), the goal of which is to track the % price movement of oil. So I bought into this fund quite a while ago and expected that I would have done really well with the runup in prices over the last year. In fact, from January 18 of last year to January 8 of this year the fund is up almost 76%. Awesome, right?

Well, I can't leave well enough alone so I had to analyze this further. You see, the price of oil is up almost 91% in that same time frame. So where did that 15% go? Contango! No, it's not a way to buy movie tickets online. It has to do with the fact that USO takes their position in oil by buying futures contracts because they can't exactly pile barrels of oil up in the parking lot. Only problem is that during much of the time frame in question the future price of oil was higher than the spot price and as their contracts approached expiration that premium dissipated, reducing their profit. Now the futures markets are in the opposite situation - backwardation - so going forward USO's profits might actually exceed what would be attributable to oil price movements.

However, if you don't like this complication there is an alternative. A couple of months ago I posted on another way to play the price of oil - The Macroshares Up (UCR) and Down (DCR) Funds. This pair doesn't use futures contracts to take their position. Rather, they simply pass the price changes back and forth between the two funds so they don't have to deal with contango and backwardation. But they do have to deal with a different problem - trading at a premium or a discount. And the widening of the discount on the UCR fund over the last year has eaten into the return just like contango ate into the profits of USO. However, as I posted on before, these price discrepancies almost certainly will go away over time. Currently, if you buy UCR you are essentially getting oil at a discount of almost $13 per barrel, which is a pretty good deal.

I actually switched my USO investment to UCR back when I wrote my earlier post and I've already benefitted from the narrowing of the discount since then. Of course, now that the oil market is in backwardation USO will benefit but I believe that the narrowing of the discount on UCR is a better bet.