Unfortunately for USO, oil contango has been the norm lately despite its opposite, “backwardation“, having generally been the case for the oil market in the past.
The main problem USO faces is that it must constantly sell near term futures contracts and buy longer dated ones as it rolls over its positions. When the market is in contango this results in the ETF selling low and buying high over and over, and losing small amounts of asset value every time in the process.
Most recently, Trader’s Narrative has done an excellent job of visualising how this process slowly shredded USO’s value. The chart below shows the deterioration in ETF’s value vs. crude oil futures. Roughly two years of rolling positions into more expensive contracts has indeed done a lot of damage.
A second oil ETF, United States 12 Month Oil Fund (USL) employs a broader strategy than USO, by buying contracts for twelve different months in order to reduce the problems associated with USO explained above.
Yet Trader’s Narrative shows that even this fund has still had some trouble.
Trader’s Narrative: The conclusion is that you shouldn’t simply assume that an ETF will do what it is supposed to do. Almost all ETFs and for that matter any retail structured product is created to “feed the ducks” when they’re quacking.