Why Interest in Oil ETFs Has Cooled Off

As oil prices soar ever higher, investors seem to be withdrawing funds from oil ETFs, reports Gregory Meyer in wsj.com. The largest oil-exclusive ETF, U.S. Oil (USO), for example, has seen its assets plummet from nearly $1.27 billion in January 2007 (figures from Morningstar), to $545.9 million in January 2008. Last month, USO's net assets slipped further still to $525.3 million. Barclays' iPath S&P GSCI Crude Oil Total Return Index exchange-traded note (OIL) had assets of $82.9 million last month, 20% off a year earlier. Why the lukewarm interest in oil funds, just at a time when prices of crude are rocketing?

One reason, Meyer argues, was that of contango, the situation the market found itself in last year where deferred deliveries were priced higher than their nearby counterparts. This cost funds that held only long positions as they "rolled" futures forwards into the next month. The damage was clear, Meyer writes:

The problem caused some funds to underperform and may be damping interest now, even though the oil market no longer trades that way. In mid-July, Nymex oil futures flipped into backwardation, the opposite trading pattern to contango in which the front-month contract costs more than later months.

The costs of contango weighed on some share prices. U.S. Oil (USO), for example, rose about 57% in the year ending in February, less than benchmark crude's 65% rise.

In addition, Kevin Rich, chief executive of DB Commodity Services, suggests that investors prefer to spread their commodity exposure, rather than restrict themselves to oil-only funds. Indeed the PowerShares DB Commodity Index Tracking Fund (DBC) has grown 167% in the last year, attracting cash inflows of $239 million in February 2008 alone. Barclays' iPath Dow Jones-AIG Commodity Index Total Return exchange-traded note (DJP) grew by 187%, to more than $3.3 billion in assets.

See also:
How Will Contango or Backwardation Affect United States Oil Fund?

Comments

[AmesTiedeman]

USO will be a great short then the tide turns. The problem is always trying to catch a top. It is just as hard as trying to find a bottom, regardless of what the chart reader tells you.

[knaug60]

What tide? Assuming world oil production has peaked, what force out there will cause the price to decline? I think anyone who shorts oil is taking a huge risk.