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

(Reuters) – The United States Oil Fund LP, the most important oil-focused exchange-traded product (ETP) within the nation, is transferring to unfold out its investments in oil futures in response to excessive market turbulence, it mentioned in a submitting here on Wednesday.

FILE PHOTO: Natural fuel flares are seen at an oil pump web site outdoors of Williston, North Dakota March 11, 2013. REUTERS/Shannon Stapleton/File Photo

USO mentioned it might make investments 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 beforehand invested primarily in front-month contracts.

The fund is adjusting its portfolio in response to “extraordinary market conditions,” it mentioned within the submitting.

The transfer is the newest 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 world financial exercise.

By diversifying its holdings in a wider vary of contracts, the fund might probably allay strain on its shares. Later-dated oil contracts are buying and selling at greater costs than nearer time period ones.

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

USO ended 10.7% decrease at $2.51 on Wednesday regardless of front-month U.S. crude futures’ settling 19.1% greater, at $13.78 a barrel. The fund traded at a steep premium to its internet asset worth on Tuesday after it suspended the creation of recent shares.

With Wednesday’s losses, USO has fallen for 9 straight periods and plummeted practically 50% over the previous month.

Despite the declines, the fund has continued garnering inflows from buyers in search of to place for a doable rebound in oil costs. The ETP had $538 million in internet deposits on Tuesday, in accordance with Refinitiv.

Exchange-traded merchandise are a preferred method for particular person buyers to wager on strikes in crude costs, as buying and selling commodity futures could be tough for retail market members.

The turbulence in oil markets has caught some buyers wrongfooted. Those holding May U.S. crude futures, as an example, noticed steep losses because the contracts fell beneath zero on Monday. Interactive Brokers Group Inc mentioned on Tuesday it had incurred an $88 million provisionary loss, as buyer accounts with positions within the May futures triggered margin calls.

USO didn’t maintain May futures on the time. But a persistent scarcity of oil storage capability might push down costs of oil futures once more, in addition to the ETPs that maintain them.

“There’s a good argument to say at some point oil prices should be negative,” mentioned David Miller, chief funding 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


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