USO Could Strongly Decline Due To Roll Yield

Apr. 13, 2020 10:26 PM ETThe United States Oil ETF, LP (USO)73 Comments
QuandaryFX profile picture


  • Unprecedented levels of contango are currently in the crude markets which is a strongly bearish signal for USO.
  • USO’s methodology confines it to only hold exposure in futures contracts which are heavily in contango due to the supply glut.
  • Roll yield is poised to strongly impair USO’s shares, which means that price is likely headed lower from here.

Over the past year, investors in the United States Oil Fund (NYSEARCA:USO) have taken a clobbering as shares are currently sitting at a year-to-date decline of 61%. While these returns are painful, it is my belief that unfortunately shares of USO are going to continue to decline – and potentially dramatically so. The primary reason for my caution against holding USO at this time has to do with historic levels of contango which means that roll yield is going to be a very real problem for shareholders over the coming weeks.

Roll Yield

In a recent article about USO, I spelled out the major fundamentals impacting oil futures at this time. In this piece, my primary objective is to dig into the roll yield mechanics of the current market as per how they relate to USO’s returns. We are currently at very strong levels of contango in WTI futures, which means that USO is facing serious headwinds at this time – headwinds which I believe most oil investors are currently not monitoring.

To start this piece off, here is a chart of the last few years of returns in USO compared to the actual returns in WTI futures. If you notice, there is a difference between these two datasets in most years.

There is a general trend in which USO underperforms the price movements of WTI futures in most years. What this tangibly means is that if you take the percent change in the price movement of crude oil in a given year and compare this change to how much USO moved up or down during that same time period, you often see USO perform below WTI. In some years, this magnitude of underperformance is dramatic – for example, in 2009, we saw USO lag the actual price change in WTI by an astounding 74%. So why is this

This article was written by

QuandaryFX profile picture
I work within the trading and money management industry. I have been trading and investing for several years. My style is technical execution with a fundamental thesis in place. I rely heavily on statistical analysis of the correlations between fundamental changes and price movements for generating most ideas.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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