USO and Contango

I am currently involved in a long DUG-USO strategy. DUG is the double inverse of the Dow Jones U.S. Oil & Gas Index which is weighted 35% in XOM and 13% in CVX. The strategy entails that with oil at such depressed prices ($37.51 at the close of today), oil stocks need to come down. XOM is down 12% to USO's 78% decline from July 14, 2008.

The capex many oil companies were made when the price of oil, steel, and other inputs were much higher than they currently are. The premise is that at some point the price of oil will need to reach the point where their investments are again profitable and/or the the companies are overvalued.

I have researched the effects of contango before but did not connect the dots and look into alternative methods of the USO-DUG strategy.

USO and Contango:
Because USO purchases front-month contracts and rolls into the following month's prior to expiration, USO must buy contracts that are potentially more expensive which is definitely not in the benefit of investors. Take a quick peek at this article from the WSJ.

Use USL Instead:
The alternative is to use USL. This takes the following twelve months contracts, equally weights them, and takes a straight average to get a price. This mitigates the effects of contango. Additionally, USL has outperformed USO by about 10% since July 2008. Getting out of USO into USL will be something I do in the near future.