U.S. Oil Fund Ordered to Limit Position, Faces Regulator Concern

(Bloomberg) -- The biggest oil exchange-traded fund has once again reshuffled its portfolio in the wake of an unprecedented crude price collapse this week -- not by choice but because it was ordered to do so.

On Friday, the United States Oil Fund disclosed for the first time that it was ordered to make changes to its position by exchange operator CME Group Inc. It’s the fourth time in just over a week that the so-called USO has disclosed revisions to its portfolio that have shifted its holdings to contracts for oil delivery further into the future. The move comes at a time when interest in the retail product has skyrocketed. Investors are pouring record levels of money into betting on a bottom to this year’s relentless plunge in oil prices.

The United States Commodity Funds LLC, which runs the long oil ETF USO, said in a regulatory filing that it received letters from the exchange on April 16 and April 23, ordering it not to “exceed accountability levels” in the June 2020 crude oil futures contract in excess of 10,000 lots. It also disclosed “regulator concerns about the size of its position” in benchmark oil futures.

Friday’s filing sheds light on how regulators are approaching the $3 billion ETF, which has drawn scrutiny in the past week over how much of the oil futures market it controls and its ability to impact prices. At different stages, the fund held about a fifth to a quarter of the May and June contracts for WTI. USO has repeatedly reshuffled its holdings over the past week, extending their average expiration amid an unprecedented supply glut that sent front-month oil futures negative for the first time.

“I think something needed to be done,” said Mohit Bajaj, director of ETFs for WallachBeth Capital. “They owned too much of the oil market.”

Stepping Back

USCF said in the filing that USO and related public funds could not assume a position in the June 2020 light crude oil futures contract that was in excess of the established position limit of 150,000 long futures contracts, citing an April 16 letter from the CME. Later, on April 23, the Chicago-based derivatives exchange ordered the funds not to exceed 15,000 long futures contracts for June. For July 2020, the limit is 78,000 long futures contracts while for August it’s 50,000 and for September 35,000.

With Friday’s tweak, the fund holds roughly 20% of its portfolio in the June contract, 40% in the July contract, 20% in the August contract, and 20% in September. Before the recent flurry of changes, it had held all its positions in the most active month, which is now June.

A CME Group spokesman declined to comment.

Part of the reshuffling by USO also included a move into trading ICE Futures. It wasn’t immediately clear whether ICE has had any conversations with USO or whether there is a limit for holdings. A spokesman for the exchange declined to comment.

Open interest in the ICE June contract for WTI was about 105,000 lots on Thursday. That would mean USO holds about 39% of that contract.

While moving to longer-dated contracts incurs roll costs, it helps buffer USO in the event that front-month oil futures turn deeply negative again.

USO sank 2.7% to $2.57 in New York, after earlier falling as much as 4.9%. The ETF has plunged roughly 80% so far in 2020. Meanwhile, crude oil rallied 2.7% to $16.94 per barrel.

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