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Futures Spread: Confusion Persists amid Oil’s Fall

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Forward curve

As of June 10, the US crude oil futures contracts leading up to October are priced in ascending order. The price pattern is a negative sign for ETFs that follow US crude oil futures including the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12 Month Oil ETF (USL).

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. A negative roll yield, which occurs when expiring futures’ contract prices are lower than the following month’s futures contract prices, would likely impact these ETFs’ returns. UCO’s actual and expected returns could also differ due to daily price changes.

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Confusion persists

On June 10, the US crude oil July 2019 futures closed ~$0.5 above the July 2020 futures. On June 3, the futures spread was at a premium of $0.96. On June 3–10, US crude oil July futures were unchanged.

The market sentiment for oil supply and demand is reflected in the futures spread. Usually, future spread and prices move in the same direction. During the last five trading sessions, the spread’s premium has contracted. However, US crude oil prices were unchanged. The decrease in the International Energy Agency’s demand growth forecast for 2019 and the expectation of a rise in the oil rig count might have dragged oil’s futures spread. However, the market expectation for a second round of production cuts after June might have kept oil prices unchanged.

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