A historic plunge in oil prices in the wake of the COVID-19 pandemic has highlighted the risks of oil-focused exchange-traded products (ETPs).
FILE PHOTO: Crude oil storage tanks are seen from above at the Cushing oil hub, in Cushing, Oklahoma, March 24, 2016.REUTERS/Nick Oxford
But many of these products - including the United States Oil Fund LP , the largest U.S. oil ETP - have the potential for steep losses as oil markets are roiled.Oil ETPs hold crude futures but can be bought and sold like stocks. The products are a popular way for individual investors to bet on moves in crude prices, as trading commodity futures can be difficult for retail market participants.
With oil markets currently in contango, a condition in which later-dated futures trade at higher prices than nearer-dated ones, the ETPs are forced to buy next month’s contracts at a steep premium, exposing their shareholders to additional losses on top of falling oil prices.USO has seen heavy inflows since early March from investors seeking to position for a possible rebound in oil, tripling its assets under management year-to-date to $3.61 billion even as its price has fallen by around 80%.
USO has tried to further mitigate potential losses by spreading its holdings throughout contracts expiring in July, August, and September, in addition to front-month contracts expiring in June.
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