Market Overview

US Oil Prices Plunge As Storage Runs Out, Analyst Says Oil ETF Investors 'Likely To Burn Their Fingers'

US Oil Prices Plunge As Storage Runs Out, Analyst Says Oil ETF Investors 'Likely To Burn Their Fingers'

The shares of several oil stocks were trading lower Monday, after the price of oil fell significantly down to $11 per barrel as storage for the commodity runs out and demand remains depressed.

WTI Crude was down 40.72% at $10.83 at the time of publication. 

Oil prices plunged 40%, the biggest one-day price plunge and many investors are jumping into investing in oil ETFs.

Most active traders are now focusing on the June contract (CLM0), the most active in traded volume and open interest, Ole Hansen, Saxo Bank's head of commodity strategy, said in a note. 

The expiring contract is mostly in the hands of physical oil traders, and its movement confirms what observers already feared, Hansen said. 

“That the U.S. is running out of storage at Cushing, Oklahoma, the delivery hub for WTI crude oil futures traded in New York. The weekly stock report from the Energy Information Administration shows how the COVID-19-related lockdowns in the U.S. have temporarily killed demand for gasoline.”

Investors Flock To Oil ETFs, 'Are Likely To Burn Their Fingers'

The largest actively managed, long-only, oil-focused ETFs such as the United States Oil Fund LP (NYSE: USO) and ProShares Ultra Bloomberg Crude Oil (NYSE: UCO) have boosted their net holdings of crude by more than 400%, Hansen said. 

“These ETF’s are predominantly positioned at the front of the futures curve and will be exposed to rolling losses every month until the market fundamentals eventually stabilize, and that could take several months.” 

The soon-to-expire WTI May contract (CLK0) trades more than 50% below the June contract (CLM0), the commodity strategist said.

Unless the fundamental outlook changes over the next four weeks, the June contract risks the same fate as the expiring May contract, and the drop will be reflected in the price of these ETFs, he said. 

“On that basis we cannot reiterate enough how difficult and potential costly it can be to try to bottom fish 'cheap' oil when the fundamentals are this poor as reflected through a very steep contango.”  

Bjarne Schieldrop, chief commodities analyst at SEB, said investors are jumping into oil ETFs that typically hold front-end WTI contracts — the ones that are falling the most.

“They are likely to burn their fingers over the coming months with a further collapse in spot prices, as well as a very negative roll-yield which will drain money out of their pockets,” the analyst said in a note.  

Related Links:

Oil Analyst Expects Rise In Demand Later In 2020, Says V-Shaped Recovery 'Less Certain'

Oil Prices Rebound, Analyst Says Market Faces Tsunami Of Surplus


Related Articles (UCO + USO)

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