USO & the WTI Rickroll
“Inside we both know what's been going on /
We know the game & we're gonna play it” - Rick Astley
May 5th: Texas RRC proration decision
May 11th: Oklahoma CC proration hearing
May 20th: Trading terminates on June WTI contract
June 10th: Next planned OPEC+ teleconference
BP kicks off earnings today.
Under normal circumstances, we’d be paying close attention to the details…
However - in this environment - what’s been going on with the price of oil, and that futures market, is simply more important.
With that note, we’ll move on to oil, and its derivatives -
THE WTI RICKROLL.
USO is an ETF that attempts to track the price of WTI.
Lately, it’s attracted retail investors.
USO has historically been structured to roll the front-month-contract to the next month, on a predetermined & published schedule.
And - historically - that worked, well enough at least.
A couple things changed:
Crude storage is running out
The adage “buy-low, sell-high” has manifested retail animal spirits
So far, it’s been “buy-low, get …”
The flow of money from retail investors into USO has been significant.
USO now has a market cap of $3.25BN:
At a price of $20 / contract, USO owns ~160K contracts
For context, there are ~240K outstanding July WTI contracts
Now, ask yourself, what happens when:
a market participant owns a significant portion of the market;
has to sell a defined amount on specific dates;
and the other traders know about it?
The CME - for one - doesn’t want to find out.
the size of USO’s holdings;
it’s known roll schedule;
and the CME’s actions
We think that the fact pattern points to:
partial responsibility for last week’s volatility;
potential future responsibility for volatility;
If - in the next 8x weeks - (a) Cushing is full & (b) when USO rolls, we won’t be surprised if we see sub $5 WTI, or lower.
Including negative prices.
Cartoonist John Cole
A Tweetstorm worth reading
That’s it for today, we’ll be back on Friday - if you haven’t seen it, the Homeland finale was 💯 -