More Big Changes For Biggest Oil ETF

April 22, 2020

For the world's largest oil fund, the situation changes by the day—sometimes, by the hour.

Yesterday, several new developments occurred for the $5 billion United States Oil Fund LP (USO)including another portfolio overhaul, the emergence of sky-high trading premiums and an announced reverse share split.


Falling Oil Prices, Rising USO Demand

It's all connected to the continued troubles in the crude oil market. As pandemic-related lockdowns remain in force, oil demand has crashed and excess storage capacity has run thin, pushing crude prices to record lows.

Yesterday, the June 2020 WTI crude oil contract fell 43% to close at $11.57/barrel—only one day after the expiring May 2020 WTI contract settled at -$37.63/barrel. (Read: "Stunningly, Oil Prices Crash Below Zero.")

Falling prices have tanked USO's returns, even as the fund sees record inflows from investors looking to play a potential oil rebound. Year to date, USO has taken in $4.9 billion in new net investment assets, though the fund itself is down more than 70%.

USO's Holdings Change Again

Cratering oil futures prices and record investment demand have forced USO's issuer, US Commodity Funds, to take a series of unusual steps in recent days.

Last Friday, we reported that USO would be shifting its portfolio from front-month oil futures to an 80%/20% blend of front-month and second-month futures (and second-month/third-month, in the short period between roll and expiry). (Read: "Biggest Oil ETF Shakes Up Structure.")

However, yesterday, USO announced another, even more significant, portfolio change. Instead of the 80%/20% blend as described last week, USO will now begin investing in NYMEX and ICE crude oil futures "in any month available or in varying percentages," or in noncrude oil futures investments, "without further disclosure."

Functionally, this turns USO into an actively managed oil ETF that can invest in any crude oil futures contract across the curve, as well as contracts for other petroleum-based fuels, derivatives on those futures contracts, and related indexes and their derivatives.

USO Changes Due To Position Limits, Super Contango

As of yesterday's close, USO had invested 40% of its portfolio in NYMEX and ICE June 2020 WTI Crude Oil futures contracts, roughly 55% of its portfolio in July 2020 crude oil contracts, and 5% of its portfolio in August contracts.

The language of the announcement implied that USO plans to hold this configuration until at least the next roll period—though, as stated above, the managers have the discretion to change the portfolio as needed.

The portfolio change was a necessary move for an ETF that kept brushing up against position limits for individual contracts. Friday's portfolio change had been implemented in part to avoid exceeding the CFTC's 25% position limit in the deliverable supply of any single given contract (in this case, the NYMEX June 2020 crude contract).

While the change offered momentary relief, as investor money continued to flow into the fund, USO was forced to buy more futures and therefore once again ended up brushing up against the position limit by the end of Monday's trading session.

In its filing, USCF also cited "super contango" as a motivator for the portfolio change. Contango is a condition in which futures contracts that are slated to expire soon are cheaper to buy than those with later expiry dates, implying the expectation of future price rises.

"Super contango" is essentially contango in overdrive, and it emerges when the storage capacity for the underlying commodity is on the verge of running out—exactly what experts warn is happening right now in crude oil.

Massive Premiums Emerge For USO

Yesterday, USO also suspended creations, pending approval from the SEC to raise its outstanding shares to 4 billion. (Read: "Biggest Oil ETF Halts Creations.")

Shortly thereafter, a 36.41% trading premium to net asset value (NAV) developed in the fund—the second-highest such premium ever recorded:


Source: Bloomberg; Data as of April 22, 2020

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