It is a situation that gold futures have faced due to the once rising popularity of bullion-backed exchange traded funds. Just how much can those ETFs affect spot and futures prices if a slew of investors decide to liquidate their holdings in a condensed time frame?
Futures-based oil ETFs, including the United States Oil Fund (NYSEArca: USO) could soon be facing a similar issue.
“While speculative long-positions in WTI crude may be close to bottoming out, liquidations by exchange-traded funds that invest in U.S. oil futures still pose a threat to oil prices, Citi Futures says. With CFTC data showing managed money long positions in WTI crude fast approaching the bottom of their five-year range, the market may be sufficiently oversold to begin attracting more profit-taking off short positions to help stem the price decline, analyst Tim Evans says. However, oil prices are still vulnerable to further declines as ETF holdings remain relatively high,” reports Eric Yep for Dow Jones Newswires.
The impact of mass selling of oil ETFs in a small window on oil futures remains to be seen because even as crude prices have plunged this year, investors have piled into USO and rival oil exchange traded products.
USO has tumbled more than 37% year-to-date while the United States Brent Oil Fund (NYSEArca: BNO) is off 34%. However, those slides have not kept investors away. In fact, USO has seen year-to-date inflows of nearly $2 billion while investors have added over $64 million to BNO.