Olivier Jakob, managing director of Petromatrix, points out that USO’s WTI holdings are still short of its record of 96,523 contracts in 2009, compared to 61,793 contracts Tuesday, but it is still nine times higher year-over-year, according to Financial Times.
The funds’ presence in the global oil market is “attracting more and more attention” from professional oil traders, Jakob said in the FT article. After oil picked up earlier this month, Goldman Sachs argued that “the key force pushing commodity markets higher has been retail investor inflows into oil ETF.”
As more people get into oil ETFs, new investors should understand the potential risks of trading futures-backed funds. Specifically, oil traders should be aware that USO tracks front-month WTI future contracts and the underlying oil market is currently in a state of contango. Consequently, USO could experience a negative roll yield when rolling a maturing futures contract. [Positioning for an Oil ETF Rebound? Watch For Contango.]
“Contango is deadly. If you’re going to own one of these things that’s susceptible to contango you’ve got to be a trader,” not a long-term investor, Herb Morgan of Efficient Market Advisors, said in the FT article.
For more information on the oil market, visit our oil category.
Max Chen contributed to this article.