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Did Oil ETFs Underperform WTI Prices Last Week?

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Oil-tracking ETFs

Between January 4 and January 11, the United States Oil ETF (USO), the United States 12-Month Oil ETF (USL), and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) rose 7.1%, 6.2%, and 14.4%, respectively. These ETFs track US crude oil futures.

USO holds active US crude oil futures, while USL holds US crude oil futures deliverable for each of the next 12 months. UCO tracks daily changes in the Bloomberg WTI Crude Oil Subindex.

USO and USL underperformed US crude oil February futures, which rose 7.6% last week. Higher oil prices can boost oil-weighted stocks. Whiting Petroleum (WLL), Hess Corporation (HES), and Callon Petroleum (CPE), the strongest oil-weighted stocks, rose 10.9%, 12.2%, and 16%, respectively, last week.

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Long-term returns and the forward curve

Between February 11, 2016, and January 11, 2019, US crude oil active futures rose 96.8% from their 12-year low. USO, USL, and UCO rose 36.4%, 41.6%, and 29.3%, respectively.

A negative roll yield, which occurs when expiring futures contract prices are lower than the following month’s futures contract prices, may 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’ underperformances due to negative roll yields reflect storage costs. On January 11, US crude oil futures for delivery between February and August 2019 closed in ascending order, which could be a negative sign for these ETFs’ returns.

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