World News

Battered U.S. oil ETF to diversify investment in later-dated oil contracts

By April Joyner and Shariq Khan

(Reuters) – The United States Oil Fund LP, the largest oil-focused exchange-traded product (ETP) in the country, is moving to spread out its investments in oil futures in response to extreme market turbulence, it said in a filing on Wednesday.

USO said it may invest about 20% of its portfolio in crude oil futures contracts on the NYMEX and ICE platforms for June, about 50% in July, 20% in August and 10% in September contracts. The fund previously invested mainly in front-month contracts.

The fund is adjusting its portfolio in response to “extraordinary market conditions,” it said in the filing.

The move is the latest effort by USO to mitigate the blow of a historic sell-off in oil, as crude markets reel from oversupply and diminished demand stemming from the coronavirus-led slowdown in global economic activity.

By diversifying its holdings in a wider range of contracts, the fund could potentially allay pressure on its shares. Later-dated oil contracts are trading at higher prices than nearer term ones.

“What that’s designed to do is dampen the downside exposure and volatility,” said Greg Trinks, head of Americas fund investment solutions at UBS Global Wealth Management.

USO ended 10.7% lower at $2.51 on Wednesday despite front-month U.S. crude futures’ settling 19.1% higher, at $13.78 a barrel. The fund traded at a steep premium to its net asset value on Tuesday after it suspended the creation of new shares.

With Wednesday’s losses, USO has fallen for nine straight sessions and plummeted nearly 50% over the past month.

Despite the declines, the fund has continued garnering inflows from investors seeking to position for a possible rebound in oil prices. The ETP had $538 million in net deposits on Tuesday, according to Refinitiv.

Exchange-traded products are a popular way for individual investors to bet on moves in crude prices, as trading commodity futures can be difficult for retail market participants.

The turbulence in oil markets has caught some investors wrongfooted. Those holding May U.S. crude futures, for instance, saw steep losses as the contracts fell below zero on Monday. Interactive Brokers Group Inc said on Tuesday it had incurred an $88 million provisionary loss, as customer accounts with positions in the May futures triggered margin calls.

USO did not hold May futures at the time. But a persistent shortage of oil storage capacity could push down prices of oil futures again, as well as the ETPs that hold them.

“There’s a good argument to say at some point oil prices should be negative,” said David Miller, chief investment officer at Catalyst Funds. “There’s nothing ETPs can really do about that if that turns out to be the case.”

(Reporting by Shariq Khan in Bengaluru and April Joyner in New York; Additional reporting by Tim McLaughlin; Editing by Shounak Dasgupta, Leslie Adler, Ira Iosebashvili and Tom Brown)