Tag Archives: U.S. Oil Fund

Hyland Calls Allegations “Gibberish”

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

Suspected Front Running Cost USO $120 Million in February

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.

U.S. Oil to Change Roll Policy

Aha! The Wall Street Journal obviously read my interview with John Hyland about its take on the U.S. Oil Fund’s (USO) influence on the futures market and is fighting back. Or did someone read my post and get to Hyland?

OK. I might be giving myself too much credit. But then again …

I’m not quite sure what to make of the fact that the day after I spoke with Hyland, the WSJ reported that the exchange-traded product with $3.4 billion in assets will abandon its practice of rolling its entire oil future position in one day. USO now says it will renew the expiring contracts over the course of four days.

The New York Mercantile Exchange says that last Tuesday USO held 19% of all the crude for April delivery. Meanwhile, the ICE Futures Europe exchange says the fund holds 30% of its April contracts.

The Journal says the size of the fund was affecting oil prices and hurting the fund’s investors. With the fund announcing what day it would roll, oil traders would front-run the fund by selling the front-month futures contract before that date. This would push the price down, hurting the fund’s investors. With oil for delivery currently higher than the spot price, USO would then need to pony up more to buy the second month contract.

WJS says “U.S. Oil paid anywhere from a $4 to $6.10-a-barrel premium when it sold March and bought April futures contracts, as robust oil supplies and weak demand pushed down near-term prices relative to outer months.” It also reported analysts at Goldman Sachs published a note saying long-term holdings in near-term commodity contracts are “not investable,” citing the large roll cost. According to WSJ, the USO’s share price had fallen 71% over the 52-weeks ending Wednesday.

USO said it will continue to hold the front-month contract, as that is the structure of the fund.

Debating the WSJ’s Assessment of USO

In a continuation of yesterday’s post, It Takes Two (Months) to Contango, I want to focus a little more on the roll. The roll is what an investor, or speculator, in the futures market needs to do to keep their investment open and avoid taking delivery of the commodity in question. Remember, futures are an obligation to buy or sell a commodity at a certain price on the day the contract expires. If you don’t close the futures contract before it expires, you can expect a big truck to unload 1,000 barrels of oil on your lawn in a few days. Unless you’re running an oil refinery, this is not a good move.

Before expiration, investors betting on a commodity need to sell the contract for next month and buy the contract for the second month out. When the first month expires, the second month contract, becomes the new first month contract. Yesterday’s post dealt with the cost involved with the roll and how when the price of oil is rising, a trend called “contango,” you will earn less than the total movement in the spot price of the commodity. However, unless you want to take delivery, this is the closest way to play the spot price.

Last week I highlighted an article in the Wall Street Journal. It said the U.S. Oil Fund (USO), the exchange-traded product that is a pure play on the first month oil futures contract, is getting so large it’s affecting the oil market. The Journal writer Carolyn Cui says the $3.3 billion in assets held by USO accounts for 22% of the outstanding front-month contracts. According to Cui the fund is so large that on the day it moved from the March to the April contract, Feb. 6, it had a visible affect on the oil market.

I called John Hyland, the portfolio manager of the U.S. Oil Fund, to get his take on this. Hyland says you can’t blame a huge one-day move solely on USO without looking at the trend three days before the roll and three days after.

“The people who look just at the day we roll and say the spread was “X”, that doesn’t tell you anything,” says Hyland. “You have to look at the days leading up to and the days after. You might miss the trend going on if you just look at USO.”

For instance, if the three days before the roll, the spread on the contract was $1 and the day of the roll the spread jumped to $2, then you can say there was an affect.

According to Hyland, the three days before Feb. 6, when USO rolled over its contract, the spread between the March and April contracts were $3.99, $3.87 and $3.88. The day USO rolled it jumped to $4.55. However, the next day the spread grew to $4.76 and over the next few days jumped to $4.81, $5.24 and $6.06, eventually widening to $8.19.

“The spread is tending to move wider as you get into the middle of the month, as March gets closer to expiration. Is that USO’s doing? How are we doing it after our roll?” asks Hyland. “It looks to me that as we get closer to expiration, it’s more of an inventory issue. The people who say it must be USO are not really looking at everything.”

Inventories are rising. If demand for oil drops off a million barrels a day and OPEC produces the same amount of oil, then inventory goes up million barrels a day. A lot of oil in the tanks is not bullish for the March contract. With supply rising and inventories hitting 52-week highs, one would expect the oil price to weaken. If OPEC cuts production, the shortfall will be made up from the current inventory. As inventories get smaller, the front month contract will stop trading at a big discount to the contracts further out.

People are assuming inventories will not build up indefinitely. OPEC will have to reduce production, if for no other reason than they will run out of storage tanks. Since the cheapest place to store oil is in the ground before you pump it out, they will cut production. At that time, inventories will start to shrink.

Market Folly, the blog posting I ragged on yesterday, actually has an interesting slide presentation from the International Energy Agency from November called The Era of Cheap Oil is Over. It’s a good read for anyone investing in oil.

USO Affects Futures Market

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.