Oil exchange traded funds experienced their largest intraday jump in over six years on Thursday as supply disruptions overseas and rising global sentiment triggered short-covering from bearish traders who were caught with their pants down.
On Thursday, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil, increased 7.6% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, gained 6.3%. The bounce comes after USO fell 37.3% and BNO retreated 33.0% year-to-date.
Meanwhile, COMEX WTI crude oil futures were trading 9.2% higher at $42.2 per barrel. Brent crude oil futures gained 8.2%, rising to $46.7 per barrel.
Oil prices regained some ground Thursday after Royal Dutch Shell declared force majeure, or unforeseeable circumstances that impeded its ability to fulfill a contract, on shipments of Nigerian crude oil due, reports Barani Krishnan for Reuters.
The global market rebound and an upwardly revised second quarter U.S. economic growth also added to further gains in crude prices.
Additionally, the swift turn around in oil prices caught many bearish short traders off guard, prompting many traders to unwind those positions.
A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit.
A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of a sudden share appreciation – short sellers are essentially being squeezed out of their short positions, typically at a loss. Consequently, the additional buying momentum from short sellers covering their options contracts help bolster prices even further.
“It’s the squeeze on short-sellers that we’ve been anticipating after the oil markets saw panic selling and capitulation trade in the $30 levels,” Chris Jarvis, analyst at Caprock Risk Management, told Reuters. “Couple this with strong continued demand for gasoline and solid GDP numbers out of the U.S., and China’s actions to reinflate their economy with a very shorted market, the near-term bounce we have been calling for appears to be working out.”
Leveraged oil ETFs were also jumping on the action. On Thursday, the ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO), which takes two times or 200% daily performance of WTI crude oil, was up 15.9% and the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude, was 24.1% higher. [Investors Capitalize on Oil Swings with Leveraged ETFs]
United States Oil Fund
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Max Chen contributed to this article.