USO is “moving the goalposts yet again”, Nomura’s Charlie McElligott wrote Monday, after the largest oil ETF delivered another update on its futures positions, which are being shuffled anew in order to stave off what feels like an inevitable denouement.
The fund (which has come under heavy scrutiny over the course of crude’s epochal collapse), is dumping its entire position in June WTI futures, adding insult to injury for a market where demand remains severely depressed and supply cuts have barely begun.
Here’s the new mix, from the 8K:
Commencing on April 27, 2020 and through April 30, 2020, for the reasons set forth below and, in particular because of evolving market conditions, regulator accountability levels and position limits being imposed on USO with respect to the Oil Futures Contracts, and risk mitigation measures taken by its FCM with respect to USO acquiring additional Oil Futures contracts, USO has determined that it will invest in Oil Futures Contracts as follows: approximately 30% of its portfolio in crude oil futures contracts on the NYMEX and ICE Futures in the July contract, approximately 15% of its portfolio in crude oil futures contracts on the NYMEX and ICE Futures in the August contract, and approximately 15% of its portfolio in crude oil futures contracts on the NYMEX and ICE Futures in the September contract, and approximately 15% of its portfolio in crude oil futures contracts on the NYMEX and ICE Futures in the October contract, and approximately 15% of its portfolio in crude oil futures contracts on the NYMEX and ICE Futures in the December contract, and approximately 10% of its portfolio in crude oil futures contracts on the NYMEX and ICE Futures in the June 2021 contract. USCF will roll the current portfolio positions into the positions described above over a three-day period with approximately 33.3% of the investment changes taking place each day on each of April 27, 2020, April 28, 2020, and April 29, 2020.
June futures dropped more than 30%, diving below $12. USO also filed for eight billion new shares.
This is the fifth time (by my count) that the fund has reshuffled its positions in response to the ongoing turmoil in the market – turmoil to which the ETF is contributing. Monday’s move comes after the CME ordered the fund to limit its positions and to avoid “exceed[ing] accountability levels”.
“June contracts will be getting dumped to zero % from the prior 20%, so folks look to be front-running”, Nomura’s McElligott noted.
The ETF fell about half as much as WTI itself.
In case it’s somehow not clear, the tail is wagging the dog here, and now USO is into ICE contracts too. You’d be forgiven for suggesting the vehicle should be forcibly “retired” by regulators, before something even weirder happens to the market, although to be fair, it’s not clear how things could get any weirder than they were last week.
“This (along with not imploding) is the upside to broadening exposure out across the curve”, Bloomberg’s ETF maven Eric Balchunas remarked, referencing USO’s outperformance to WTI on Monday. “Although if [a] rally comes, it will only feel half of that too”.
Another $1.2 billion poured into the fund last week after a record $1.6 billion inflow in the week prior.
Obviously, USO is not the proximate cause of the problem in the oil market. But it is most assuredly an irritant. At this point, it is almost self-evidently true that a non-trivial percentage of the retail investor base in this product has no idea what’s going on and no conception whatever of what it is they actually own. And even if they can figure it out today, it may change on them without warning.
While it’s not USO’s responsibility to ensure everyone who buys shares understands the underlying mechanics, common sense dictates that when things get so acute that CME starts sending letters, and when things are so tedious you’re rolling your exposure out the curve not because you want to, but rather because you’re trying to avert a situation where, to quote Bloomberg’s Balchunas again, the fund “implodes”, it might be best to just hang it up.
For the sake of everyone’s sanity, USCF should at least consider duct taping USO’s mouth shut, dragging it out to the pier, zip-tying a cinder block around its ankles and sinking it in the harbor.
Then you light a cigarette and pause a moment for reflection.
“It had a good run”.
Then you flee the scene in a black Lincoln.
Let’s face it. This is another star-crossed product that should have never been born. It’s time for it to got the way of XIV, the most legendary of all retail product martyrs.
Oh, and meanwhile…
VIDEO: US Coast Guard says it’s keeping an eye on 27 oil tankers anchored off the coast of Southern California. Another great example of floating storage build-up as demand for oil and refined products plunge | #OOTT #Contango video via @USCGLosAngeles pic.twitter.com/B7pjWIsdnp
— Javier Blas (@JavierBlas) April 24, 2020