Oil Price Rebound, USO ETF & More

In this episode of ETF Spotlight, I speak with Stacey Morris, Director of Research at Alerian, and Paul Baiocchi, Senior Investment Strategy Advisor at ALPS.

Monday, April 20, was a historic day for the oil markets as the price on the futures contract for West Texas crude fell to minus $37.63 a barrel. No one wanted to take delivery as there is no place to store the oil.

Despite an impressive rebound this week, oil prices are still down about 60% this year.

Oil has been under pressure for the past several months, even before the coronavirus brought global travel to a halt. Energy was the worst-performing sector last year. What happened to oil prices?

The world’s largest oil ETF—the United States Oil ETF (USO - Free Report) —has seen millions in inflows over the past few weeks. The demise of many other oil ETFs and ETNs, particularly leveraged ones lately, made this ETF more appealing to retail investors looking to bet on a rebound.

Many investors did not know that this ETF tracks oil futures contract, not the spot price. Every month this fund had to sell the nearest contract and buy the next month's contract. When the futures market is in contango, the rollover results in losses for investors. The ETF is down more than 80% this year itself. What do investors need to know about oil futures and contango?

With the implosion in oil prices, USO has made many changes in its strategy in the past few days. Investors should remember that leveraged, inverse and futures tracking products are meant for active traders. They are not meant for retail investors who do not understand them properly.

The ProShares Ultra Bloomberg Crude Oil (UCO - Free Report) which provides 2x the daily return of an index of futures contracts of WTI, and the Invesco DB Oil ETF (DBO - Free Report) which aims to minimize the impact of contango through optimized contract selection, have also experienced large inflows. UCO and DBO are down 97% and 47% respectively in 2020.

Oil has recovered strongly this week as many parts of the economy have started reopening. Can this rebound continue? Will global oil demand recover to pre-pandemic levels given rising investor interest in ESG strategies?

Disclaimer: Foreign exchange (Forex) trading carries a high level of risk and may not be suitable for all investors. The risk grows as the leverage is higher. Investment objectives, risk appetite and ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.