Two exchange-traded funds contributed to the carnage in oil markets on Tuesday, selling vast quantities of benchmark U.S. oil futures as they shifted their exposure to later-dated contracts amid fears of negative prices.
The United States Oil Fund and the Samsung S&P GSCI Crude Oil ER Futures ETF sold about 110,000 contracts in the most-liquid June WTI futures on Tuesday, according to Bloomberg calculations based on the funds’ filings -- equivalent to 19% of the total open interest in the contracts at the end of the previous day.
The data point to one reason for Tuesday’s collapse in June WTI prices, which tumbled by as much as 68% to touch a low of $6.50 a barrel. At the same time, its discount to later-dated contracts -- known as contango -- also widened dramatically, with the spread between June and July almost doubling to a contango of as much as $10.99 a barrel.
A Giant in the Oil Market
The sales are an indication of just how important the ETFs have become to the oil futures markets in recent weeks, as they have attracted record inflows from investors hoping to pick the bottom of the price rout. As of Tuesday, USO, the largest oil-focused ETF, accounted for about 30% of the open interest in the June WTI contract, while the Samsung ETF accounted for about 10% of it in the September WTI contract.
The $3 billion USO, which historically has invested only in the front-month contract, said late on Tuesday it had shifted some of its holdings out of the June contract into the July and August ones. This was “because of extraordinary market conditions in the crude oil markets, including super contango,” it said. According to its website, it had sold 90,670 June WTI contracts at prices of $11.57 and $12.19 in trades that were still pending on Tuesday.
The smaller $400 million Hong Kong-listed Samsung ETF also switched its holdings out of June WTI futures on Tuesday. In a filing at around midnight Hong Kong time, Samsung Asset Management (Hong Kong) Ltd, which manages the fund, said it would shift its entire position from June to September WTI contracts “shortly after” the filing was published. That amounted to a sale of roughly 20,000 June WTI contracts, according to Bloomberg calculations.
