Oil ETFs Outperformed Oil’s Fall Last Week



Oil ETFs

On October 5–12, the United States Oil ETF (USO) and the United States 12-Month Oil ETF (USL) both fell 3.6%. The ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell 7.7%. These ETFs track US crude oil futures.

US crude oil November futures fell 4% last week. USO and USL outperformed US crude oil. USO holds active US crude oil futures, while USL holds US crude oil futures’ deliverable for each of the following 12 months. UCO tracks twice the daily changes of the Bloomberg WTI Crude Oil Subindex.

A fall in oil prices could be a concern for oil-weighted stocks. Whiting Petroleum (WLL), Denbury Resources (DNR), and California Resources (CRC), the weakest among the oil-weighted stocks, fell 9.4%, 11.5%, and 14.8%, respectively, last week.

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Long-term returns

Between February 11, 2016, and October 12, 2018, US crude oil active futures rose 172.2% from their 12-year low. Meanwhile, oil-tracking ETFs USO, USL, and UCO rose 89.2%, 88.2%, and 161.2%, respectively. A negative roll yield, which occurs when expiring futures’ contract prices are lower than the following month’s futures contract prices, might have caused the lower returns. UCO’s actual and expected returns could also be different due to daily price changes. In a cost-of-carry model, ETFs’ underperformance due to negative roll yields reflects storage costs.

As of October 12, US crude oil futures for delivery between November 2018 and October 2019 closed in descending order, which could be a more positive sign for these ETFs than for crude oil.


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