Extreme Concentration
Even before oil fell to minus $37.63 a barrel on April 20, investors who concluded the rout had bottomed out rushed to purchase shares of USO to bet on a rebound. That buying surge contributed to USO amassing a quarter of all outstanding front-month WTI contracts, those which are closest to expiring. Such extreme concentration prompted CME to inform USO in late April that it was placing limits on the fund’s holdings of June, July, August and September contracts.
The fund said in an April 24 SEC filing that investors should expect “continued deviations” between USO’s performance and the WTI benchmark, in part due to the new restrictions. The fund added that it might not be able to meet its objective of reflecting changes in the spot oil price.
Risk Management
USO faces issues separate from regulators’ investigations. For instance, its sole broker, RBC Capital Markets LLC, has decided against adding new futures positions that would grow the size of the fund because of risk management concerns, according to a Tuesday SEC filing. In addition, USO has been awaiting SEC approval for more than a month to sell additional shares to investors eager to keep wagering on oil. WTI has rallied more than 75% in May, while USO has risen about 30%. In a filing on Friday, USO said that Marex Spectron will serve as an additional broker.
SEC and CFTC officials have been in contact with each other about concerns related to USO, according to one person familiar with the matter. The CFTC also issued a rare public warning last week to retail investors to highlight the “unique risks” of commodity exchange traded products.
“The value of the shares in the commodity pool may not track the value of the underlying asset over time,” the CFTC said in its May 22 statement. “This difference is because unlike with stocks, a futures contract cannot be held indefinitely in hopes that a fallen price will recover.”
--With assistance from Jack Farchy and Alex Longley.
This article was provided by Bloomberg News.