Watching the May contract for oil futures this morning, I was shocked at the amount of coverage given to “oil’s plunge” Monday morning. That may be because I watch the May 2021 WTI futures contract, which has fallen $0.18 per barrel to $35.34 in early Monday trading, not the May 2020 contract which has fallen an astounding $7.42 (more than 40%) to $10.84 per barrel and drawn all the headlines.
The culprit here is obvious. The United States Oil ETF, USO. While USO’s website notes that, as it does every month, the fund rolled out of its position in the front-month (May) contracts last week, USO’s simultaneous creation of new positions in the June and July contracts added to the glut of “paper oil” that is causing this oil market spasm.
According to Bloomberg, USO owned 25% of the outstanding volume of May WTI oil futures contracts as of last week. With that contract set to expire Tuesday, the buyers of that “paper oil” have to sell or take physical delivery at the end of May. ETFs like USO are not created to take physical delivery of the oil contracts they hold, so in a long squeeze, the fund’s managers—USO’s general partner/sponsor is U.S. Commodity Funds, LLC (USCF) and, according to an 8-K filed on March 30th, the administration of USO will transition from Brown Brothers Harriman to Bank of New York Mellon, although it is unclear whether that change has been fully implemented—have to dump oil. Regardless of who is doing the selling, front-month futures prices have dropped more than 40% today. (by Jim Collins, Forbes Contributor)