The mess in the USO ETF continues to unfold as it trades 7.8% above NAV

Author: Adam Button | Category: News

This ETF is doomed

A popular take is that the May NYMEX oil contact isn't representative of crude because at this point it's oil for physical delivery while the June contract is a more liquid futures contract.

It's the opposite. The May contract represents the real demand for physical crude while the June contract is puffed up by retail money.

A full 25% of the June futures contract is now owned by the USO ETF and that will rise above 30% once pending trades are processed. It's an instrument used by retail traders to bet on one-day moves in oil. It's very likely that tourists in the oil market thought they were buying crude at $1 today or at negative prices in the May contract. In reality, they were buying an 80/20 split in the June/July contracts trading at $22/$27 respectively. These can fall much further.

Moreover, all the money flooded into the ETF faster than the managers could create new units. As a result, the ETF finished the day at $3.75 but with a net-asset value of $3.46, according to data just released. That's a 7.8% premium.

What's happened in the ETF is truly mind-blowing. Look at the massive number of newly-issued shares along with the unprecedented rise in volume today.
This ETF is doomed
The ETF alone now has $4 billion in assets and was the most-traded instrument on Robinhood yesterday.

Starting May 5, The June/July contracts will need to be sold and rolled into July/August contracts.

In the day or two ahead I expect more retail money to be ploughed into this ETF.
USO

It's a similar story in UCO, which is a 2x levered oil ETF. IT closed at $1.35 and its NAV is $1.21 and holds July contracts among other things. Add it all up and we have a retail slaughter in the making.
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