Oil ETFs hit as sell-off transfers to longer-dated contracts

Apr 22nd, 2020 | By | Category: Commodities

Oil ETFs suffered sizable losses yesterday amid increased volatility as the rout, which at the start of the week sent the expiring West Texas Intermediate May delivery futures contract into negative territory, spread to contracts for later months.

Oil ETFs suffer as crisis spreads to later contracts

Oil ETF investors have suffered heavy losses as the market rout spread to futures contracts with later expirations.

On Monday, the (front-month) WTI futures contract for May delivery crashed a staggering 307%, closing the day at -$37.63, effectively meaning sellers were paying buyers to take their oil.

Oil ETPs such as the United States Oil Fund (USO US) and WisdomTree WTI Crude Oil ETC (CRUD LN) largely swerved Monday’s crash having rolled their exposure to June and July futures.

Not so Tuesday. Both products felt the full brunt of the sell-off.

Oil markets are in the midst of an unparalleled supply glut driven by feuding oil producers and a sharp drop-off in global demand due to the pandemic-induced economic shutdown.

The situation has led to a massive stockpiling of oil with storage facilities quickly approaching full capacity, raising questions about what buyers will do with future oil deliveries.

Monday’s frantic selling was driven by speculative traders desperate not to be stuck with oil and nowhere to store it (or face soaring storage costs).

While many investors were hoping to draw a line under Monday’s turmoil – some market commentators described it as a “glitch” – the meltdown in oil markets continued yesterday as futures for June delivery (now the most actively traded contract) came under strong selling pressure.

The WTI and Brent futures contracts for June delivery sunk more than 40% and 25%.

The rout’s move to June contracts confirms that Monday’s mind-boggling sell-off was not a technical anomaly, as some analysts have suggested, but rather driven by fundamental supply and demand forces that are wildly abnormal. The spread to later month futures also suggests the market anticipates these current unusual circumstances to persist for some time.

While most oil ETFs were spared from the carnage on Monday, many are now feeling the pain.

The $4.1bn United States Oil Fund (USO US), the largest ETF worldwide to provide exposure to oil prices, is currently invested 80% in WTI’s June contract and 20% in the July contract. Its NAV declined roughly 40%, although its shares closed only 19% down.

Trading in the fund is complicated by it having reached its current maximum authorized capacity in terms of registered shares available to issue. The ETF has seen strong inflows over the past month or so (see charts below) from a mix of speculative traders – bullish investors seeking long exposure in case of a rebound in oil prices, as well as bearish investors seeking new shares to enact short positions.

While the fund’s issuer, United States Commodity Funds, has filed with the SEC to register an additional 4,000,000,000 shares, these have not yet been declared effective. Consequently, it has had to suspend new creations with knock-on implications for the fund’s bid-ask spread and shares’ alignment with NAV (hence premium).

The $1bn WisdomTree WTI Crude Oil (CRUD LN) has not encountered any capacity constraints but nonetheless has taken a hit. It fell 29% in trading yesterday. The fund is fully invested in the WTI contract for July delivery.

USO flows



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