The biggest U.S. fund that tracks oil is heading for the largest outflow in four years as investors cash out following a 30 per cent rebound in crude prices.
Holders of the U.S. Oil Fund have pulled out more than $500-million this month, after pouring in almost $3-billion in the previous six months, according to data compiled by Bloomberg. Other oil exchange-traded products including ProShares Ultra Bloomberg Crude Oil also saw investor selling.
West Texas Intermediate crude has rebounded more than $10 from a six-year low in mid-March on speculation that the falling number of oil rigs will reduce U.S. production and ease a supply glut. Monthly output will decrease from June through September before rising back again in the fourth quarter, the Energy Information Administration forecast.
"Oil's had a heckuva bounce off the bottom, and I think people are just cashing in some of their short-term chips," said Matt Hougan, president of San Francisco-based research firm ETF.com. "It was easier to bet oil would go from $40 to $55 than it is to say it'll go back to $70."
A total of $518-million has been withdrawn from the U.S. Oil Fund, which follows WTI prices, heading for the biggest monthly outflow since April 2011. The fund's shares outstanding dropped to 138.9 million Monday, down from a record 188.4 million on March 19.
About $2.86-billion was poured into the ETF in the six months ended March 31, when the benchmark WTI futures dropped 48 per cent.
The fund gained 0.6 per cent to $19.63 at 12:45 p.m. Tuesday, up 23 per cent from a record low of $15.96 on March 17.
WTI futures climbed 10 cents to $57.09 a barrel on the New York Mercantile Exchange, up 31 per cent from a six-year low of $43.46 on March 17. Prices climbed 27 per cent in the previous six weeks, the longest streak of weekly gains since February 2014.
The ETF's gain is smaller than oil futures as the market is in contango, meaning futures for delivery in later months trade higher than nearby contracts. Contango erodes the fund's gains as the ETF sells the expiring contract and buys the more expensive next-month futures on a monthly basis.
"USO is not a buy-and-hold type ETF, so it is expected that some of the fast money that came in fishing for a bottom is leaving just as abruptly," said Eric Balchunas, a Bloomberg Intelligence analyst. The fund "suffers from brutal roll costs over the medium and long-term, so it is a bit of a hot potato and has traditionally burned investors who stay in too long."
Falling investment this month also came as oil price volatility eased. The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the U.S. Oil Fund, slipped to 36.6 on April 24, the lowest since December. The index was at 37.73 Tuesday.
The number of U.S. Oil Fund shares on loan to short sellers was 43 million as of April 15, or about 1.3 times of average daily volume, according to exchange data. That's down from 56.1 million on March 31.
The U.S. oil rig count declined to 703 last week, the lowest level since 2010, according to Baker Hughes Inc. The number of rigs has dropped by more than a half since it peaked in October at 1,609.
Oil production averaged 9.33 million barrels a day in March, according to the Energy Information Administration. That's the highest monthly level since 1973. Output will peak in April and start to decline in June, according to EIA's forecasts.