The U.S. Oil Fund (USO), an exchange-traded vehicle with $3.3 billion in assets, is getting so large it’s affecting the oil market, according to Carolyn Cui of The Wall Street Journal. Cui says “the sheer size of USO’s position, which accounts for about 22% of outstanding front-month contracts, is sending tremors through futures markets and contributed to oil’s dip below $40 a barrel in intraday trading Friday.” She says the volume of crude-oil futures on New York Mercantile Exchange was “nearly double the average volume posted so far this year.”
Most ETVs that track the oil market are commodity pools that hold futures contracts. While many investors think USO tracks the spot price of oil, it actually tracks the price of the future contract one month in the future. As the futures contract nears its expiration it must roll over the contract, that is sell the current contract and purchase the next month, or else take delivery of the oil. As oil prices sank from $145.29 a barrel in early July, the fund more than tripled in size, as investors predicted the price of oil would bounce. The National Stock Exchange says in December and January alone the fund received net cash inflows of $3.46 billion.
For more on USO see page 185 of ETFs for the Long Run.