Two of the most popular and least understood ETFs are the U.S. Oil Fund (USO) and the U.S. Natural Gas Fund (UNG). Many have blamed these funds for being partly responsible for excessive speculation that caused the surge in oil and gas prices.
In its effort to decide whether to impose limits on speculators in the energy markets, the Commodity Futures Trading Commission held three days of hearings in Washington.
John Hyland, the chief investment officer for both ETFs testified before the CFTC on Wednesday. Bloomberg gives a good overview of the testimony in which Hyland calls the allegation that his funds are responsible for rising prices “self-serving statistical gibberish.”
IndexUniverse offers the full transcript of Hyland’s testimony before the CFTC. In it Hyland rebutted the CFTC’s allegations by noting that there were only 325,000 investors in the fund and that between 75% and 90% were comprised of individual and retail investors, not institutions or investment funds. He added he believes the funds are widely held because no single investor has filed a 13G of 13F filing with the SEC. These filings are required of an investor holding an interest of more than 5% in a fund.
As for the charge by certain media outlets that the huge popularity of USO and UNG has caused prices to move artificially, Hyland fought back, saying “the management of USO believes that readily available information from USO’s website and other widely available financial news and data sources indicate that many or most of these claims lack merit.”
In February, the Wall Street Journal said USO had gotten so bit it was it’s affecting the oil market.
I followed the story with the following postings.
* Debating the WSJ’s Assessment of USO
* U.S. Oil to Change Roll Policy
* Suspected Front Running Cost USO $120 Million in February
And It Takes Two (Months) to Contango
Posted in Business, Commodities, ETFs, Stock Market, stocks, Wall Street
Tagged CFTC, gas prices, John Hyland, natural gas, oil prices, U.S. Natural Gas Fund, U.S. Oil Fund, UNG, USO
The Wall Street Journal today reports that U.S. Oil (USO) has lost 20% of its value year-to-date, while the price of crude fell just 2.2%. The fund, which has grown from $7 million three years ago to $3.8 billion, is essentially losing money, and unable to track the crude oil market, because traders are front-running the roll. The roll is the movement from the first month contract that is soon to expire to the second month and soon-to-be front month contract.
Regulators are paying attention because it appears the fund is actually moving the market. Since U.S. Oil is so big and announces the day it will make the roll it appears speculators are making bets on these moves before they happen. The Journal says this is “adding to the costs of U.S. Oil’s roll and raising concerns among regulators that traders may be manipulating prices.”
“It’s like taking candy from a baby,” said Nauman Barakat, senior vice president at Macquarie Futures USA in New York, told the Journal. And this is hurting the fund’s investors.
The Journal reports that on the last roll, Feb. 6, U.S. Oil moved 80,000 contracts out of March into April. Thirty minutes before the New York Mercantile Exchange closed, the spread between the two month’s oil contracts jumped from $4 to $5.98, which cost the fund $120 million more than it would have a day earlier. At the same time, a trader could have pocketed $1,390 on each spread trade, which costs $810 to place.
The Journal says U.S. Oil complained to Nymex the following week. Last week, the Commodity Futures Trading Commission began investigating the trading.
Posted in Business, Commodities, ETFs, Exchanges, New York, Stock Market, stocks, Wall Street
Tagged CFTC, Commodities, crude oil, NYMEX, U.S. Oil Fund, USO, Wall Street Journal