Exchange traded funds that track oil futures have accumulated a huge following as various traders utilize the investment tool to time the markets or implement complex trades.
For instance, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has attracted $1.15 billion in net inflows so far this year, according to ETF.com, growing to $3.6 billion in total assets under management.
Additionally, the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude, saw $718.6 million in net inflows year-to-date, growing to $1.1 billion in AUM.
Meanwhile, WTI crude oil futures continued to slip this year and are now trading around $29.1 per barrel.
As oil prices plunged, these oil ETF plays have grown more popular. Retail investors are betting on a bottom in oil prices, short-sellers are increasingly utilizing the ETFs as an easy way to hedge bets and arbitragers tried to capitalize on potential opportunities, reports Gregory Meyer for Financial Times.
Due to the surge in popularity, the oil-related ETFs now hold a huge stake in the energy markets. For instance, USO now makes up a quarter of all contracts for April delivery on the New York Mercantile Exchange.
USO holds WTI futures contracts in the nearby month and rolls its cash into the next month’s contracts before being forced to take physical delivery.
Despite oil prices dropping to a 12-year low of near $26 per barrel, oil-related ETFs continue to see heavy inflows.
“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.