Jackson Ryder, a self-employed accountant based in Lubbock, Tex., first took up positions in a fund that tracks the oil futures market last week.
Since then, it has been a wild ride. Prices plummeted on Monday far below $0 a barrel for the first time in history. That same May futures contract for oil on Tuesday rebounded to US$9.06.
Mr. Ryder is not the only first-time oil investor to be lured by low prices. In the week before Monday’s US$55 drop to about minus US$37 a barrel, “oil tourists” pumped US$1.6-billion of net deposits into the United States Oil Fund LP, hoping to profit when oil bounces back from massive demand destruction as coronavirus pandemic lockdowns have paralyzed global economic activity.
Exchange-traded funds trade the same way stocks do and typically offer the same diversity benefits of a mutual fund by investing in a basket of securities. Apparently, even U.S. crude’s plunge into negative territory did not kill appetite among retail investors in the fund.
“For me, the sell-off is too extreme, and I don’t know anyone else who’s going to be selling at these levels, leaving it likelier to go in the upside direction,” Mr. Ryder said late on Monday.
Investors put another US$564.1-million into the fund on Monday, even as its value took a beating. On Tuesday, its shares dropped another another 25 per cent to US$2.80.
As oil sank over 300 per cent at one point on Monday, the USO ETF pulled back a more modest 11 per cent. The big fall was on the contract for May crude, which the fund no longer holds, said John Love, chief executive of United States Commodity Funds LLC, in a statement. USCF manages the ETF.
Instead, it was invested in more forward contracts and the relative safe havens of short-term U.S. government debt and money-market mutual funds, disclosures showed.
He declined to say if the fall in prices had prompted even more investors to buy into the fund.
The ETF’s net assets have more than doubled in size in the past month to US$4.1-billion, according to Refinitiv data. On Tuesday, the fund said it had issued all of its remaining registered shares, which totalled 3.22 billion at the beginning of the year. It plans to issue four billion more shares once it gets regulatory approval.
“Managers who run funds such as USO seek to anticipate future usage to the extent possible and register shares appropriately. USO is simply registering more shares to meet demand,” Mr. Love said.
Before trading began on Monday, investors’ growing appetite had whittled down its remaining available shares.
“All the money flowing into the fund are people trying to catch the bottom of the oil market,” said Dave Nadig, head of research at ETF Trends.
Prices sank as low as minus US$40.32 on rising concern that storage options were running out.
The United States Oil ETF attempts to track the price of West Texas Intermediate light sweet crude oil. As with other ETFs, it had sold out of May contracts and bought June and other contracts further forward well before the meltdown on Monday.
That does not mean the fund is in the money, yet, but investors are banking that will happen.
For the first quarter of 2020, oil prices crashed more than 65 per cent, the most on record. Before trading began on Tuesday, the fund’s year-to-date total return was -71 per cent. Over the past five years, its annualized total return was -28.4 per cent, according to Morningstar data.
As of Monday, the U.S. oil fund held about 158,000 June WTI contracts, representing about 27 per cent of the contract’s total open interest, according to its website. The June contract fell 43 per cent to US$11.57 on Tuesday.
On Monday, Goldman Sachs said in a note that retail investors with outright positions may have been caught in the session’s sell-off, rather than retail investors that had bought into ETFs.
“This is what happens when ‘Oil Tourists’ buy up more than 25 per cent of the open interest,” said Scott Shelton, energy specialist at United ICAP.
“There is no bid for May WTI as there is no buyer and we have yet to see a significant reduction of supply at Cushing to offset it.”
Oil collapsed as storage filled at the delivery point for the contract in Cushing, Okla. With nowhere to put the oil, nobody wanted to buy into expiring May contracts and keep the actual crude oil.
But for retail investors such as Mr. Ryder who are often looking at chart levels instead of fundamentals, storage levels are less of a concern.
“I focus on the charts. I can’t focus on the news (i.e. storage) because there’s a bullish and a bearish interpretation to every news event,” Mr. Ryder said.
“My position isn’t that big. But I think it’ll go up. I just don’t know who would be selling down here. Not enough reward.”
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