Oil ETFs USO, BNO Surge as Backwardation Steepens

Oil prices rallied over the past week as geopolitical tensions escalated in the Middle East, with the Israel-Iran conflict stoking fears of potential supply disruptions. But even as front-month oil futures showed modest gains, oil ETFs are outperforming thanks to favorable futures market dynamics and a high-rate environment that has been quietly boosting returns.

As of this writing, front-month West Texas Intermediate (WTI) futures are up about 2% year to date, while Brent futures have barely budged, rising just 0.2%. Yet the United States Oil Fund (USO) and the United States Brent Oil Fund (BNO)—which hold futures tied to these benchmarks—are each up more than 7%.

That disconnect stems from the structure of the oil futures curve.

Both WTI and Brent have been in backwardation for much of the year, a condition where near-term futures trade at higher prices than contracts further out. That backwardation has steepened recently as geopolitical risks mounted. At last check, front-month WTI futures were trading at $73.65, more than 2% higher than the second-month contract.

How Backwardation Boosts Returns

In a backwardated market, ETFs that roll their positions monthly—like USO and BNO—can benefit from the ability to “sell high and buy low.” Each month, they sell expiring futures (priced higher) and replace them with contracts further out on the curve (priced lower). The result is a positive-roll yield that adds to the fund’s return over time, independent of what the spot price of oil does.

That’s a stark contrast to contango, the opposite market structure, where futures are more expensive the further out you go. In those environments, oil ETFs tend to suffer as they “sell low and buy high” during each roll, leading to a persistent performance drag.

The current macro backdrop is also playing a role. Higher interest rates have enabled ETFs like USO and BNO to earn meaningful income on the collateral they hold—typically U.S. Treasury bills or other cash instruments. This interest income now makes a material contribution to total returns, unlike in the ultra-low-rate environment that defined the previous decade.

In short, it’s a very different setup from years past, when contango dominated, interest rates were near zero and oil ETFs routinely underperformed the commodity itself.

The shift began in earnest in 2022, when inflation spiked, the Federal Reserve began aggressively hiking rates and the Russia-Ukraine war sparked renewed energy-market volatility. Since the start of that year, USO and BNO are each up roughly 50%, while front-month WTI and Brent are down around 2% over the same period.

What It Means for USO, BNO Investors

For those looking to gain oil exposure through ETFs, especially over longer holding periods, it’s not enough to simply guess where oil prices are headed. The shape of the futures curve—and the broader macro environment—can make a major difference.

Right now, the combination of steep backwardation and elevated interest rates is creating a tailwind for oil ETFs. As long as that structure persists, funds like USO and BNO could continue to outperform the price of oil.