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How Oil ETFs Are Reacting to Oil’s Weakness

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Crude oil ETFs

Between November 10 and November 17, the United States Oil Fund LP (USO) fell 0.6%, while US crude oil active futures fell 0.5%. USO is an exchange-traded stock-like alternative to track US crude oil near-month futures.

The United States 12-Month Oil Fund ETF (USL), whose objective is to track US crude oil futures contracts for the next year starting active futures contracts, fell 0.9% last week.

The ProShares Ultra Bloomberg Crude Oil ETF (UCO), meant to produce twice the daily changes of the Bloomberg WTI Crude Oil Subindex, fell 1.4%—the most on our list of oil ETFs.

February 2016

Between February 11, 2016, and November 17, 2017, US crude oil active futures rose 115.8%. On the former date, US crude oil (DBO)(OIIL) active futures fell to their lowest closing price in the last 12 years. However, USO, USL, and UCO rose only 42.0%, 39.6%, and 61.2%, respectively, between these two dates.

The negative roll yield could be an important factor for the underperformance of these ETFs. The roll yield is caused by the price difference between two consecutive futures contracts. If prompt futures, which are expiring, trade at lower prices compared to the following month’s contract, they result in a loss for these ETFs. See Are Crude Oil’s Oversupply Concerns Increasing? for more on the roll yield.

For UCO, long-term compounding of its daily price variations can also drive its actual return away from its expected return.

On November 17, US crude oil futures contracts prices between December 2017 and April 2018 settled ay progressively higher prices.

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