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The United States Oil Fund (USO) is an exchanged-traded product (ETP) that seeks to provide investment results corresponding to the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. The United States Oil Fund is designed for short-term investors who can continuously monitor their positions and who are bullish on short-term futures contracts on WTI crude oil.
Since the fund’s benchmark is the WTI crude oil futures contract traded on the New York Mercantile Exchange (NYMEX), the fund may experience contango when rolling the futures contracts, which is unfavorable for long-term investors.
In April 2020, crude oil prices collapsed amid the COVID-19 pandemic to 20-year lows. In late April, the price of USO dropped more than 30% to just above $2 per share and new trades were halted as the fund’s managers began making structural changes in efforts to avoid a complete collapse. USO management then announced a 1-8 reverse share split for USO to go in effect after the market close on April 28, 2020.A reverse split reduces the number of shares outstanding into fewer and proportionally higher-priced shares. Such an action is often interpreted by analysts and investors that the stock, or exchange-traded product, is having trouble holding its perceived value.
Background
The United States Oil Fund was issued on April 10, 2006, by the United States Commodity Fund. The fund’s investment objective is to provide daily investment results corresponding to the daily percentage changes of the spot price of WTI crude oil to be delivered to Cushing, Oklahoma. The daily changes are measured by the daily percentage changes in the price of near-month WTI crude oil futures contracts traded on the NYMEX. If the front-month futures contract is approaching two weeks until its expiration date, the WTI crude oil futures contract expiring the following month is the fund’s benchmark.
Although the fund invests its assets primarily in exchange-listed crude oil futures contracts and oil-related futures contracts, such as natural gas futures contracts, the fund may also invest in swap and forward contracts.
Since all futures contracts have an expiration date, the United States Oil Fund must actively roll its front-month futures contract to the WTI crude oil futures contract expiring in the next month to avoid taking delivery of the commodity. The fund primarily holds front-month futures contracts on crude oil and has to roll over its futures contracts every month. For example, if it holds WTI crude oil futures contracts that expire in September 2020, it must roll over its contracts and purchase those that expire in October 2020.
Overview
- Purpose: Seeks to track the performance of West Texas Intermediate (WTI) light, sweet crude oil.
- Investment Strategy: USO holds near-month NYMEX futures contracts on WTI crude oil.
- Net Assets: $3.1 billion (as of 6/29/2021)
- Expense Ratio: 0.83%
- YTD Performance: 52%
- Inception Date: April 10, 2006
- Average Daily $ Trading Volume: $5.3 million
Historical Performance
The United States Oil Fund has underperformed the spot price of WTI crude oil and has not correctly measured its daily performance over the past five years. Consequently, investors who are bullish on oil over the long term may want to stay away from this fund due to its underperformance. Oil prices have been quite volatile over the past two decades, rising as high as over $140 and as low as $20.
As of June 2021, the price of oil has started to increase and is trading around $76 a barrel. This is after a steep decline amidst the global coronavirus epidemic, when the price was trading at around $19 a barrel in May 2020. USO tends to track the price of oil pretty well, and its performance over the trailing 1-, 5-, and 10-year periods is 20.34%, -12.18%, and -19.8%, respectively.
Contango and Negative Roll Yield
Contango occurs when the price of a futures contract on an underlying asset is above its expected future spot price. Since the front-month futures contracts are cheaper than those expiring further out in time, the futures curve is said to be upward-sloping. This causes negative roll yields, because investors will lose money when selling the futures contracts that are expiring and purchasing further dated contracts at a higher price.
Contrary to contango, backwardation occurs when the price of a futures contract of an underlying asset is below its expected future spot price. Consequently, backwardation causes investors to profit when rolling expiring futures contracts to futures contracts expiring at a later month.
Crude oil and natural gas are among commodities that have historically experienced long periods of contango. Therefore, the United States Oil Fund suffers from negative roll yields when purchasing further dated WTI futures contracts as the front-month futures contract expires. Over the long term, the negative roll yields add up, causing United States Oil Fund investors to experience losses. Therefore, investors planning to gain exposure to the oil market over the long term should avoid investments in the United States Oil Fund.