The USO ETF has fallen by more than 9% since the start of the year, whereas front-month U.S. oil futures have dipped by less than 3% on account of roll costs, and as of last week, investors have started to exit this massive position en masse.
As Reuters reports, outflows from four of the largest oil-specific exchange traded funds reached $338 million in two weeks to April 8 – the first since September and largest since Jan 2014.
It seems Goldman was right about “misguided retail investors.”
As Reuters reports, oil investors who amassed a $6 billion long position in exchange traded funds, occupying as much as a third of the U.S. futures market, are now racing for the exit at a near record pace.
Outflows from four of the largest oil-specific exchange traded funds, including the largest U.S. Oil Fund (USO), reached $338 million in two weeks to April 8, according to data from ThomsonReuters Lipper.
That is the first two-week outflow since September and the biggest since early 2014, marking a turnaround from heavy inflows in December and January on bets that oil prices would quickly rebound from six-year lows.
If the exodus gathers pace it could signal new pressure on crude oil prices that had begun to stabilize at around $50 a barrel this year following their 60 percent plunge, says John Kilduff, a partner at energy fund Again Capital LLC in New York.
Retail investors may have been “trying to bottom fish and got washed out with the recent new low,” he said.
“Passive investors have become a problem,” Philip K. Verleger, a consultant and energy economist, said in a note on Monday. ETF inflows are “denying those in the Middle East the decline in non-OPEC output they hoped to achieve”.
“The news lately has been uninspiring. Investors don’t want to be long and wrong in perpetuity,” said David Mazza, head of research at State Street Global Advisors, an institutional asset management firm with more than $2.4 trillion in assets.
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For example, here is USO-specific flows.
We believe that the key force pushing commodity markets higher has been retail investor inflows into oil ETFs. Importantly, these strong inflows have emerged despite weak commodity fundamentals, and with arguably a more bullish outlook for equities than for commodities.
We believe that these inflows are generating selling opportunities in oil and copper precisely because they are at odds with commodity market fundamentals. As we have previously outlined, even with the rapid fall in the US rig count over recent weeks, rising rig productivity, the backlog of wells and the possibility of high-grading in the near future, means that US production growth has not yet slowed enough to balance the oil market.