While West Texas Intermediate crude oil prices plunged into the negatives for the first time ever, ETF investors may be wondering why Brent didn’t mirror the slide.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, declined 12.0% on Monday while the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, decreased 7.5%.
Meanwhile, WTI crude oil futures plunged 309% to a negative -$38.2 per barrel, compared to the 8.0% in Brent crude to $25.8 per barrel.
Brent crude is a type of trading classification of sweet light crude oil. It is designated light because of its relatively low density and sweet due to its low sulfur content. The Brent crude oil is largely extracted out of the North Sea. Oil coming out of Europe, Africa, and the Middle East are typically priced relative to this benchmark.
West Texas Intermediate, or also known as Texas sweet, is also a type of sweet light crude oil, but it is slightly lighter and sweeter, or lower density and lower sulfur content, than its Brent counterpart. It also acts as the underlying commodity on the New York Mercantile Exchange’s oil futures contracts.
Both benchmarks used to trade closely, but their prices have begun diverging, which may be associated with a number of factors like storage inventory, refining capacity in the United States or overseas political risks.
On Monday, the pricing diverges widened largely due to factors on the U.S. side. WTI May contracts expire on Tuesday and were hit hardest since it applied to physical crude oil set to be delivered while most of the country was under lockdown, which contributed to diminished demand. Consequently, the only buyers for that contract were those that are taking away physical delivery like refiners or airlines, but storage tanks are already full, so sellers are scrambling to find any takers.
“There is still a lot of crude on the water right now that is going to refineries that do not need it,” Helima Croft, global head of commodities strategy at RBC Capital, told CNBC. “Right now we don’t see any near-term relief for this oil market … we remain really concerned for the outlook on oil near-term.”
The oil ETF is also diverging from the price WTI futures contracts, and that may largely be associated with the way futures-backed ETFs work since USO does not take physical delivery and would roll its contracts to avoid delivery.
USO currently includes 144,652 NYMEX WTI Crude Oil CL JUN20 contracts and 23,794 ICE WTI Crude OIL EN JUN20 contracts, along with various cash and cash-like holdings like Treasuries. The ETF is also looking into buys for additional June 2020 and July 2020 contracts.
Consequently, USO’s Monday price drop is largely in line with what is going on in next month’s futures. According to the CME Group, May 2020 contracts were trading at negative -$34.00 at last check, compared to June 2020 positive $21.02 and July 2020 positive $27.28.