(Bloomberg) -- The $3.8 billion U.S. Oil Fund, which accounts for about 25% of all outstanding contracts in the most-traded West Texas Intermediate crude futures, said it will alter some of its position, citing market and regulatory conditions.
The exchange-traded fund, which normally holds WTI futures for the nearest month, will now move 20% of its contracts to the second-traded month, as an unprecedented global supply glut pushes down prices for contracts near their delivery dates. The change takes effect Friday and will be in place until further notice, it said in a filing with the U.S. Securities and Exchange Commission.
The shift, announced late on Thursday, comes as the market faces an historic dual shock of collapsing demand caused by virus-related lockdowns worldwide and a flood of supplies that risk filling storage tanks to the brim. That has caused a sharp gap between plunging prices for the nearest dates and the following months, a structure known as contango that reflects declining demand in an oversupplied market.
“As a result of these changes, USO may not be able to meet its investment objective,” according to the filing.
As of Thursday, the fund held almost 150,000 June Nymex WTI contracts, which is more than a quarter of the total outstanding. It has received more than $1 billion-worth of inflows so far this week, the biggest weekly inflow on record.
Investors betting on a rebound in oil have been piling into exchange-traded funds as WTI prices have plummeted below $20 a barrel. The largest actively-managed oil-focused ETFs boosted their net holdings of crude by more than 400% over the past month, a sign of surging flows to the funds. USO has seen weekly inflows each week since the end of January.
“The amount of buying in Oil ETF has been staggering,” hedge-fund manager Pierre Andurand wrote in a tweet. “Wondering how well those investors understand what can happen to the roll yield when inventories are full or close to full.”
Retail investors typically use USO to make bets on short-term price reversals, buying dips and selling rallies. Though low prices are attractive to some investors, they come at a cost. Contango derails profits for those holding USO longer-term. The fund loses money in a contango market when it sells futures as they near expiry and buys the next month.
“The more positive supply outlook, along with a spot price at lows not seen in decades, may have lured many into the market,” Bart Melek, head of commodity strategy at Toronto Dominion Bank said in a note. “Of course, the underlying ETF holdings consist of futures contracts which are required to be rolled, and thereby to incur the steep cost associated with the extreme contango.”
WTI’s June contract discount to July deepened 44 cents to $4.46 at 10:58 a.m. in New York on Friday. The move will see selling of June contracts and buying of July ones, which could widen the spread further.
USO, ICE Futures Europe, the New York Mercantile Exchange and the Commodity Futures Trading Commission didn’t reply to requests for comment. The Chicago Mercantile Exchange declined to comment.
(Updates with background on fund flows, analyst and investor comments throughout story.)
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