“The flows aren’t necessarily indicative of what the market’s view is,” Chris Jabara, director at AccuShares, told the Financial Times.
The recent bout of inflows may be coming from greater demand among short sellers or traders betting on further declines, as well as investors trying to catch a falling knife. For instance, at the end of January, short interest in USO was about 40 million shares, or about 60% of average daily volume in the fund.
Marcos Bueno, managing partner of Argon Capital, argues that the size of the oil ETF also makes it an attractive and liquid option for arbitragers. Since USO needs to roll contracts upon expiry, the ETF will be subject to contango issues – near month March 2016 contracts trade at $29.12 while next month April 2016 contracts trade at $31.22, according to CME Group. Consequently, more sophisticated traders may short USO and go long later-dated futures to take advantage of the arbitrage opportunity when the fund rolls its contracts. [Positioning for an Oil ETF Rebound? Watch For Contango.]
On Tuesday, oil futures weaken despite speculation of a potential production freeze from major international producers. Traders argued that major Organization of Petroleum Exporting Countries may not be able to meet a consensus on production limits, especially as Iran looks to ramp up exports after sanctions on the country was lifted.
United States Oil Fund
Max Chen contributed to this article.