On July 13–20, the ETFs that track US crude oil futures reported negative returns. The United States Oil ETF (USO) fell 2.2%, the United States 12-Month Oil ETF (USL) fell 1.8%, and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell 4.6%.
US crude oil September futures fell 2.4% last week, as we saw in Part 1 of this series. USO and USL outperformed US crude oil prices during this period.
USO holds active US crude oil futures contracts, while USL holds US crude oil futures contracts’ deliverable for each of the following 12 months. UCO tracks twice the daily changes of the Bloomberg WTI Crude Oil Subindex on a daily basis.
The fall in oil prices is also a negative development for oil-weighted stocks. Whiting Petroleum (WLL), Apache (APA), and Denbury Resources (DNR) fell 5.4%, 5.9%, and 10.8%, respectively, last week. They were the underperformers among oil-weighted stocks.
Returns of long-term ETFs
Between February 11, 2016, and July 20, 2018, US crude oil active futures rose 168.8% from the 12-year low. During that period, oil-tracking ETFs USO, USL, and UCO rose 77%, 70.6%, and 131.8%, respectively.
These ETFs have underperformed US crude oil since February 11, 2016. The negative roll-yield would have likely caused the lower returns. A negative roll-yield occurs when expiring futures contract prices are lower than the following month’s futures contract prices.
UCO’s actual and expected returns could also be different due to the compounding effect of price changes on a daily basis.
On July 20, the closing prices of US crude oil futures for delivery between September 2018 and August 2019 settled in descending order. The price pattern could be positive for these ETFs’ returns compared to crude oil’s returns.