Crude Market Takes Another Beating as Oil ETF Forced to Dump Contracts

West Texas Intermediate crude oil futures plunged, again, on Monday after USCF Investments said it would sell all of its short-term contracts in its popular oil exchange traded fund due to regulatory pressure.

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, declined 16.2% on Monday while WTI crude oil futures plummeted 24.2% to $12.8 per barrel.

In a regulatory filing, the United States Oil Fund stated it would sell all of its futures contracts for the delivery of oil in June, or 20% of its $3.6bn portfolio, across over a four-day period, the Financial Times reports.

The oil ETF said it made the move due to “evolving market conditions, regulatory accountability levels, and position limits being imposed on USO with respect to oil futures contracts”.

The United States Oil Fund has traditionally bought front-month contracts and would roll over the contracts to the next month to avoid physical delivery. Due to the regulatory pressures, it appears the fund will spread out its exposure beyond the front-month contracts to include later-dated contracts, which may diminish the ETF’s exposure to short-term moves both on the downside and upside in the crude market.

USO currently includes 76,436 WTI crude future Jul20 contracts, 29,924 WTI crude future Aug20 contracts, 30,000 X4 WTI crude future Jun20 contracts, 13,939 WTI crude future Sep 20 contracts, 13,743 WTI crude future Jun20 contracts, and 7,725 X4 WTI crude future Jul20 contracts, along with other cash and cash alternatives. The ETF is also looking into buys for additional July, August, and September contracts.

“By selling shorter-dated future contracts and investing into longer-dated contracts, they are putting pressure on the front WTI contract,” Giovanni Staunovo, a commodities analyst at UBS, told the Financial Times.

Monday’s plunge in oil markets comes one week after U.S. crude prices for the first time ever dipped below $0, reflecting buyers’ attempts to take physical oil off their hands at any price. The price declines also came during a day before May WTI contracts were set to expire, so buyers had to take physical delivery of the oil.

The CME Group imposed limits on the amount the USO can hold in the June contract, along with its subsequent months. Last week, CME said USO could not hold a long position of over 15,000 contracts for June, of more than 78,000 in July, 50,000 in August, and 35,000 in September. The fund had 150,000 June contracts prior to Monday.

Market observers, though, argued that placing restrictions on short-term futures contracts would do little to change the volatility.

“Brokers restricting trading in the widow-maker world of oil futures will tend to reduce liquidity, and potentially add further volatility,” Paul Sankey, managing director at Mizuho Securities, told the Financial Times.

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