Return of the Contango - TheStreet

NEW YORK (

TheStreet

) - If you are investing in commodity index funds or commodity ETF's, you are being played for a sap.

You are footing the bill for commodity storage and the free profits of physical traders and trade groups, all because you - as an investor - have fallen for the sales pitch and siren call of exposure to commodities. You are using these ridiculous, invented financial products in greater and greater numbers and these products ultimately only make money for the salesmen and not for you.

Let me try to explain this as simply as I can. In commodities, prices are broken down into months, each month creating a separate delivery price.

Unlike a stock, if you want to invest in a commodity price, you must choose a futures month in which to invest. For commodity ETF's and index funds, this is overwhelmingly done using the closest month available, known as the spot month.

As this spot month comes close to delivery, the investors who wish to stay invested must move to the next available month -- the one becoming spot. This action of selling the spot month and buying the next month out is known as the 'roll' (often called the 'Goldman roll' because the largest index is the Goldman Sachs Commodity Index or the GSCI).

As more and more money has invested in commodities, this roll has worked to skew the relative prices of the commodity months: As you move further out in time and further out on the "curve of prices," the expectation of the roll continues to push prices higher the further out you go.

This continual increase of prices throughout the curve is known as a "

contango

."

A contango is not natural. Before commodity investing became commonplace, a contango was a rare and strange dislocation which wouldn't ever last. But in oil, the contango has become the normal state of the curve.

Here's one big reason it's unnatural : It pays physical players NOT to deliver product. I'll give a simple example. Let's say crude sells in January 2010 for $71 dollars a barrel and sells in January 2011 for $83 dollars a barrel (true prices as of today). If you are a physical player and can store crude for a year, you are in essence being paid 18% to sit on your supply, minus storage and credit costs. But to take advantage of this, you need access to storage and credit, two things you and I don't have.

But Andrew Hall, the infamous trader from Phibro, which was part of Citigroup, had access to both this year. This carry trade of buying prompt barrels and storing them was the biggest single trade he made, accounting for a good piece of the $100 million-dollar bonus he demanded. Sometimes making money is so simple.

But it's only simple if investors continue to pour money into oil ETF's and Index funds. I expect them to, so for you and me, a good way to play this dislocation would be tanker stocks, like

Nordic American

(NAT) - Get Report

, which

Jim Cramer pointed out this week

.

He's dead right, this contango shows no sign of easing, and in fact the contango has recently gotten much more robust. This will continue to make storage, even cannibalized storage from floating tankers, an increasingly limited and profitable commodity that physical players with available credit will be ready to pay more and more for. That should translate well for the tankers.

And it also has enormous (and an unnatural) impact on the future prices of oil. But we'll tackle that in my next column.

At the time of publication, Dicker did not have any positions in the stock mentioned.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.