A popular $3.7 billion oil ETF plunges 20% as crude prices hit historic lows

  • United States Oil Fund shares slipped as much as 20% on Tuesday after a trading halt and continued pressure on the oil market.
  • The ETF’s manager, USCF, said in a regulatory filing it issued the last of USO’s registered shares and required SEC approval to create 4 billion more.
  • The vehicle’s connection to oil prices is now in jeopardy, as shares will exclusively trade on the secondary market and can’t be created to water down prices.
  • Watch USO trade live here.

United States Oil Fund, a popular exchange-traded fund for the commodity, dove as much as 20% on Tuesday as crude prices remained stuck at record lows.

Trading of USO was paused early Tuesday morning after the fund’s manager, USCF, said in a regulatory filing it issued the last remaining shares and required approval from the Securities and Exchange Commission to register 4 billion more. When trading resumed, the ETF slid further before paring some losses.

Assets tied to oil are positioned to endure extraordinary market turbulence. West Texas Intermediate crude contracts for May delivery reached negative prices for the first time in history on Monday. While those contracts rebounded in Tuesday’s session, June contracts slid as much as 42% as the market braced for a prolonged demand slump.

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The inability to immediately issue new shares leaves USO with the qualities of a closed-end fund, with little ability to keep its value tied to that of its underlying asset. Traders known as authorised participants typically keep the ETF’s value closely tied to oil by buying or selling shares in accordance with the commodity’s price changes. With share issuance paused, the traders are unable to maintain the value connection.

Trading will now take place exclusively in the secondary market and could push prices higher amid the supply freeze. However, a “create-to-lend” process could mint new shares for traders to short-sell and offset the demand surge, Bloomberg reported.

USO was likely insulated from Monday’s negative price event, as the fund typically sells front-month contracts two weeks before they expire. Yet the downward spiral for June and July contracts likely pushed investors away from the vehicle.

Pressure could also come from market makers being less likely to trade with the fund. Since no new shares can be created in the near-term, entities that buy oil futures to exchange with USO will likely slow their purchase activity until issuance rebounds.

Tuesday’s plunge likely upset a record number of traders. Investors piled $US1.6 billion into USO last week for its biggest inflow since its 2006 creation, Bloomberg reported. Since Friday’s close, the ETF’s price has declined roughly 30%.

US Oil Fund shares traded at $US3.04 as of 11:45 a.m. ET Tuesday, down roughly 76% year-to-date.

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