In the past month oil prices have rallied more than 250% with WTI oil trading at $32/barrel. Also, Oil ETF United States Oil Fund (NYSEARCA:USO) has rallied with the increase in oil prices but has failed to match price movements. Oil traders are in a dilemma on whether this stock is an ideal play for the rebound.
USO faces issues with its strategy
The oil ETF focuses on oil futures contracts rather than physical oil especially those with close expiration. But because of the volatility experienced this year the oil ETF has changed its strategy. Among the issues in its strategy is the need to pay a high price when rolling contracts so as to get new ones before they expire.
This means that the price could be high for oil futures in contango as the value of the contract going forward could be high compared to those expiring soon. The constant rolling impacts on the fund’s returns in the long term
For instance while WTI rallied around 60% from 2016 to last year the fund’s stock gained only 16.5%. This is due to the effect of rolling and the fees it levies investors in managing the fund. The underperformance deepened this year due to the oil market volatility and because of tracking issues the fund’s shares shed around 30% in the last month despite oil rallying.
Tracking issues impacting on returns of the fund
Similarly because of tracking the stock bottomed on April 28, a week after the US benchmark. However the stock has only rebounded by around 40% with WTI surging over 158% during that period.
Normally oil traders will buy the fund to benefit for a rally in oil prices if it is timed correctly. As a result traders could still buy USO on the presumption that WTI will continue rallying. This could be possible as OPEC members cut production and demand starts to rebound as COVID 19 restrictions are eased.