Shares of the United States Oil Fund (USO -0.68%), the largest exchange-traded fund (ETF) directly exposed to U.S. oil markets, fell 16% in morning trading on Monday. The slide came after the fund's manager, USCF, announced in an SEC filing that it planned to sell off all of the fund's current (June 2020) oil futures contracts in favor of longer-term futures contracts.
The announcement also sent benchmark WTI Crude prices lower, as traders followed USCF's lead and dumped their June contracts, which govern currently quoted WTI prices. By noon, WTI Crude prices had fallen 26%, to about $12/barrel. Other global oil prices also tumbled, with international benchmark Brent Crude down 7.8% for the morning.
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Looking long term
The move is extraordinary, as the USO Fund's stated mission is to mirror current U.S. benchmark crude oil prices, allowing investors to receive the economic equivalent of an investment in WTI Crude without directly purchasing futures contracts.
The June contract sell-off is seen as an acknowledgement that U.S. oil prices -- negatively affected by oversupply, a lack of storage, and suppressed demand due to coronavirus travel restrictions -- are unlikely to recover in the short term. One week ago, on Monday, April 20, May WTI Crude futures prices plunged to negative $37.63 per barrel as physical storage constraints prevented holders from meeting their obligations under May contracts.
The fund will now invest in futures as far out as June 2021. It plans to make these changes over three days, ending Wednesday, April 29. Previously, it initiated a reverse 8-for-1 split, which takes effect Tuesday.
The USO has dramatically changed its portfolio makeup over the past two weeks, reducing its exposure to current contracts from 80% to zero, and assigning 40% of its portfolio to prices more than three months out.
