Oil-Crazy Retail Investors Maxed Out USO ETF In Likely Wrong-Headed Bet

The USO had previously filed a prospectus authorizing a billion shares. I am sure when they created the ETF they needed an upper limit of the amount of shares that could be issued. Someone probably did their best Austin Powers impersonation and said, ‘put down a billion – we’ll never need that many, but it sounds good.’ Well, guess what? The USO recently had to refile their prospectus because they have run out of authorized shares to issue. As if negative oil prices wasn’t enough, they bloody well ran out of USO shares.

That’s from a Monday note by Kevin Muir, formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist“.

Diving quickly into the specifics, USO filed to up its shares outstanding to 4 billion yesterday amid abject carnage in crude, and on the heels of a record $1.6 billion in inflows last week. It had 1 billion shares out, but was close to hitting the limit.

Predictably, the fund saw another day of massive inflows, taking in $565 million on Monday.

Bloomberg’s ETF expert Eric Balchunas called it a “race against the clock” to get the registration statement for the additional shares declared effective. The inflows “eat up about half of the remaining shares out it had left, [before] it has to halt creations”, he estimated.

(BBG, h/t Eric Balchunas)

“United States Oil Fund offers it shares on a continuous basis under Rule 415 of the Securities Act of 1933, and when all registered shares have been sold, additional shares are registered in subsequent registration statements”, the fund said in a filing on Monday. “As of the open of the market on April 20, 2020, USO only has 299,900,000 shares registered with the SEC that are available for purchase by its Authorized Purchasers”.

Fast forward to Tuesday, and the fund halted creations. Here’s the official word from the 8K:

In the Form 8-K filed on April 20, 2020, United States Oil Fund, LP (“USO”), indicated that it would announce through a current report on Form 8-K when USO has determined to temporarily suspend the issuance of additional Creation Baskets. Today, USO issued all of its currently remaining registered shares. The registration statement that USO filed on April 20, 2020 with the Securities and Exchange Commission (“SEC”) to register an additional 4,000,000,000 shares has not been declared effective. As a result, USCF management is suspending the ability of the USO Authorized Purchasers to purchase new creation baskets until such time as the new USO registration statement for the additional shares has been declared effective by the SEC.  The ability of Authorized Purchasers to redeem Redemption Baskets during the suspension of the sale of Creation Baskets will remain unaffected. In addition, trading of USO shares on the NYSE Arca, Inc. will not be discontinued as a result of the suspension of sales of Creation Baskets.

The fund will let you know when the registration statement offering the additional new shares is effective, and, in turn, when USO can start offering creation baskets to APs again.

It’s “a shocker but not a shocker”, Balchunas remarked. “They’ll reopen creations when [the] SEC approves new shares. When will that be? I don’t know.”

I don’t either. But what I do know is that at least some investors buying on Monday did not understand that the vehicle had already rolled out of the May contracts. In other words, they were buying a dip, but perhaps not the dip they wanted to buy.

Here’s Kevin Muir again:

With only two days before expiry, regular traders are no longer trading the May contract… Speculators and financial market traders have long moved on to the next month. There is too much risk if something goes wrong and they get stuck with delivery to trade the May contract… Therefore, when casual traders saw [Monday] morning’s $10 or $5 or $1 price of May crude oil and rushed out to buy the USO ETF to capitalize on the historic opportunity, they were sorely mistaken. They weren’t buying an ETF that owned even one lousy May contract.

As of Monday, USO comprised around 30% of the June WTI contract open interest. “The size of the long positions in May WTI had therefore already shrunk significantly as all the major commodity indices and ETFs rolled earlier this month into the June contract”, Goldman noted on Monday evening.

On top of that, some retail participants likely weren’t considering that USO recently shifted some of its holdings to the second-traded month due to the exigent circumstances or, as the fund put it in the filing, “because of market conditions and regulatory requirements”.

And lest you should somehow persist in the notion that the trading in USO is actually pros who know what they’re doing, consider the following chart which appears to show that lots of Robinhood accounts hold the shares. (Full disclosure: I do not follow trends in Robinhood accounts – I am taking the visual below at face value as it’s appeared on social media over the past 24 hours).

The bottom line, from Muir, is that “the public is rushing into oil ETFs without understanding the terrible carry that is associated with the super contango'”.

And please do note, “rushing in” is an understatement. Earlier Tuesday, I highlighted last week’s $1.6 billion inflow into USO. Well, the six-day inflow (i.e., including Monday’s bonanza) is $2.17 billion.

Allow me to reiterate: The fund has received in excess of $2 billion of flows in the last six sessions.

Again, a lot of that money was unwittingly chasing the next month’s contract (and the one after that).

Read more: ‘We’re Going To Hear About Crazy Losses’ – Epic Oil Wipeout Poised To Ripple