While the culprits behind last week's historic oil plunge to a negative $40/barrel have yet to be conclusively identified, with some pointing fingers at US retail traders, while others blaming tremendous losses in Chinese structured products, one clear usual suspect is the USO, the largest oil ETF and the preferred crude oil investment derivative for thousands of retail investors everywhere. As Bloomberg's Laura Cooper writes, oil trading negative last week brought to light the risks inherent in ETF’s easy liquidity: "while the market appears to be viewing the USO episode as an outlier, proof that funds can become unhinged from their benchmark leaves risk assets exposed."
Of particular interest remains the composition of USO's WTI futures holdings, with some speculating that the nearly 100,000 barrels held for May delivery may have precipitated the liquidation wave observed last Monday. Well, as it turns out, the CFTC data was actually stale, because as Bloomberg writes this morning, the USO wasn’t holding May WTI futures last Monday as it began rolling its underlying assets to June futures contracts in early to mid April – by construction to avoid trading complications near the date of contract expiry.
Even so, the tumble in both May WTI and USO quickly became a mutually reinforcing - and self-fulfilling - prophecy, and as the June price tumbled towards zero as May collapsed, the risk of liquidation from a negative NAV prompted the fund to take the unprecedented step to change its structure to lessen sensitivity to the moves and shift its mandate for future flexibility.
The chart below courtesy of Bloomberg summarizes how the USO - which historically only held the forward month leading to much pain...