USO Wreaked Retail Investors This Past Week
According to S3 Partners, doubled down on USO shorts in recent weeks and was handsomely rewarded last week, making nearly $300 million so far this year. Because trading is a zero sum game, who was on the other end of the trade.
Traders on Robinhood and SoFi Invest flocked to buy the United States Oil exchange-traded fund, or USO, this week as its price plummeted below $3. But many got in for the wrong reasons.
Still, USO was the most-bought name on Robinhood, a free stock-trading app that has attracted roughly 10 million, mostly millennial, users. By Wednesday, it was among the top 30 most-held names on Robinhood, according to the start-up.
SoFi Invest — another trading platform used mostly by traders under 40 — USO was “by far” the highest-volume security on Tuesday and Wednesday. Account ownership of USO has grown by 20% to 30% every day since April 20th, according to SoFi.
Current oil production is about 90 million barrels per day in the world with demand of 75 million barrels per day in the world. This past week, the EIA reported that oil inventories in America went up 15 million barrels for the week. The EIA also said that inventories at the Cushing hub rose by another 4.8 million barrels. Cushing has capacity for 90 million barrels and right now they are 30% from being at full capacity. And tank storage capacity in Europe and the Middle East each are at 60% capacity.
The ETF, USO seeks to achieve its investment objective by investing primarily in futures contracts for light, sweet crude oil, other types of crude oil, diesel-heating oil, gasoline, natural gas, and other petroleum-based fuels. USO originally holding the most current oil futures contract and two weeks prior to the current month expiring, the fund’s managers sell the current months contract and buy about the same amount of the subsequent futures’ oil contract. So each month, USO is selling and buying at a lost due to contango.
But we are in what’s call super contango. With storage tanks filling up quickly, there is limited storage space left. Thus, there was no demand for May’s oil contract that expired this past week. That’s why oil prices turned negative…oil producers are paying to people/entities to take the oil of their hands.
As a result, USO has changed their buying criteria recently. Now USO may invest approximately 20% of its portfolio in crude oil June futures contracts, approximately 50% of its portfolio in crude oil July futures contracts and approximately 20% of its portfolio in crude oil August futures contracts.
USO is also doing a 8-for-1 reverse stock split in an effort to boost the stock price and stay attractive to retail investors. Hopefully retail investors learned their lesson because we could see negative oil prices again in mid-May.
Despite Texas and the shale producers stating to cut production by 1 million barrels / day and despite and despite OPEC cutting oil production by 10 million barrels / day, these cuts aren’t enough because most of the world remains shut down.
In conclusion, don’t be on the other side of the Smart Money’s USO trade because USO could suffer from the same pressures that pushed oil prices into negative territories when the June futures contracts expires.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
Posted Using LeoFinance
