Top U.S. Oil ETF Tumbles 25% as Crude Prices Continue to Slide

OILMONSTER.COM- The biggest U.S. oil-focused exchange-traded product tumbled on Tuesday as a historic decline in oil prices continued rippling through markets.

Shares of the United States Oil Fund LP, an ETP that tracks the movements of oil, fell 25.3% at $2.80 after being halted several times during the session. The decline followed a drop in June West Texas Intermediate futures, the most actively traded U.S. crude contract, which settled 43% lower at $11.57 a barrel.

On Monday, front-month U.S. crude futures plunged below zero, trading in negative territory for the first time ever.

The tumble in oil has attracted investors hoping to profit from a potential rebound in prices, with $564 million flowing into USO alone on Monday. 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.

Other investors have bought options on USO in order to position for a possible bounce.

But bottom-fishers who have recently purchased USO could take a beating if June U.S. crude futures, which the fund holds, follow the May contract to or below zero.

“There’s no guarantee that it can’t go to a dollar,” said Dave Nadig, director of research at ETF Trends. “Novice commodity investors often feel there are natural floors on prices, and there really aren’t.”

Late on Monday after the historic plunge in U.S. crude futures, Barclays PLC announced that it would liquidate its iPath Series B S&P GSCI Crude Oil Total Return Index ETNs on April 30.

As June futures have fallen, United States Commodity Funds, which manages USO, has moved a significant portion of the ETP’s portfolio into later-dated contracts. On Tuesday, the fund said it had invested 55% in July futures and 5% in August futures. Later-dated oil contracts are currently trading at higher prices than nearer-term contracts, in a departure from the norm.

The surge in demand for USO has exhausted all of the fund’s shares that can be issued to ETP market makers, known as authorized participants. As a result, the authorized participants cannot create new shares for investors seeking to buy USO. Existing USO shares continue to trade, however.

United States Commodity Funds filed with the Securities and Exchange Commission on Monday to register an additional 4 billion shares, but that registration has not yet gone into effect. Reuters was unable to reach United States Commodity Funds for comment on Tuesday.

Because USO is structured as a limited partnership, it can issue only a certain number of shares, Nadig said.

Data from Robintrack, a site that tracks activity on the investing app Robinhood, showed that the number of Robinhood accounts that hold USO more than doubled since early on Monday to more than 145,000.

Courtesy: www.reuters.com