Did Oil ETFs Diverge from Oil Prices Last Week?



Oil ETFs

On November 23–30, the United States Oil ETF (USO) and the United States 12-Month Oil ETF (USL) fell 0.9% and 1.2%, respectively. The ProShares Ultra Bloomberg Crude Oil ETF (UCO) fell 2.7%. These ETFs track US crude oil futures.

However, US crude oil January futures rose 1% last week. USO and USL underperformed US crude oil prices. Factors, like management fees, might have caused the divergence in the returns. 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 rise in oil prices could have a positive impact on oil-weighted stocks. Denbury Resources (DNR), Whiting Petroleum (WLL), and Diamondback Energy (FANG), the strongest among the oil-weighted stocks, rose 3.2%, 4.5%, and 5.2%, respectively, last week.

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Long-term returns

Between February 11, 2016, and November 30, 2018, US crude oil active futures rose 94.3% from their 12-year low. Meanwhile, oil-tracking ETFs USO, USL, and UCO rose 34.3%, 36.7%, and 29.2%, 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’ under-performance due to negative roll yields reflects storage costs.

Forward curve

As of November 30, US crude oil futures for delivery between January and December 2019 closed in ascending order, which could be a negative sign for these ETFs’ returns.


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