uploads///uso ETF

USO: Suboptimal Instrument to Play Crude Oil in a Contango Market

By

Updated

USO increased

The United States Oil Fund LP ETF (USO) was up by 1.73% and settled at $18.50 on April 14, 2015. USO consists of NYMEX traded WTI (West Texas Intermediate) crude oil futures. It has assets worth $2.8 billion. It has an average monthly volume of 32 million. USO is the largest oil ETF. It has an expense ratio of 0.45%.

Article continues below advertisement

Disadvantage of USO

The crude oil market is in contango. This means futures contracts are trading higher than spot contracts. The difference between WTI crude June futures contracts and May futures is $1.58. USO tracks the performance of WTI crude oil futures. During roll over, USO has to purchase more expensive futures contracts. This can cause significant tracking error versus the index. This makes USO a suboptimal instrument to play crude oil prices for the longer term. As a result USO fell 7.56% YTD (year-to-date). In contrast, WTI crude oil gained 1.11% YTD.

Investor risk

Generally, rising oil prices mean more fund flow into large oil ETFs like USO. However, according to Reuters sources, $338 million in funds went out of the major four oil ETFs between March 25 and April 8, 2015. This is the largest outflow since January 2014. This could mean oil prices are set to fall again. However, the last time this happened oil prices gained in January 2014.

The sluggish demand, high inventories, and contago market are positive for crude tanker companies like Tsakos Energy Navigation Ltd. (TNP), Frontline Ltd. (FRO), and Nordic American Tanker (NAT). Higher oil prices are positive for oil and gas ETFs like the Energy Select Sector SPDR ETF (XLE).

Advertisement

More From Market Realist