By Nicole Friedman
Money is pouring out of a popular investment tied to the oil
market, a sign that a monthlong crude-price rally may be running
out of gas.
Exchange-traded funds that invest in U.S. oil futures, including
the $3.1 billion United States Oil Fund LP, have registered about
$2.7 billion of investor outflows this month, according to
investment bank Macquarie Group Ltd.
That reverses an inflow that started in January as oil prices
tumbled. These ETFs took in roughly $6 billion this year through
mid-March, when the U.S. oil benchmark hit a six-year low,
according to Macquarie.
Traders and analysts are closely watching weekly production and
demand data for signs that the global glut of crude oil that sent
prices swooning last year may be shrinking. They are also watching
the ETF trends closely, because they say crude prices are
vulnerable to a pullback following a 32% run-up since March 17.
ETF buying "created a bottom in March," said Olivier Jakob,
managing director of Swiss consulting firm Petromatrix GmbH. If
investors "all exit at the same time, then it will also put
pressure on the market."
A renewed drop in oil prices could inject fresh uncertainty into
global markets. Last year's plunge upended economic forecasts,
government budgets and corporate earnings as oil producers
struggled to stay afloat and consumers pocketed fuel savings. Crude
prices on the New York Mercantile Exchange remain more than 45%
below their June 2014 high, settling Friday at $57.15 a barrel, and
global markets are watching for signs that the market has
bottomed.
Crude-oil ETFs, which can be bought and sold like stocks, invest
in crude-oil futures contracts. The U.S. Oil Fund, for example,
held 48,037 June crude-oil futures contracts on the New York
Mercantile Exchange as of Friday, accounting for 11% of that
contract's total open interest.
To many, oil below $50 a barrel earlier in the year offered an
enticing opportunity to jump into the market.
The price of oil "will drop to a certain point, but it's not
going to go to zero," said Michael Bilyeu, a sports massage
therapist in Portland, Ore., who said he bought shares in the
VelocityShares 3x Long Crude Oil exchange-traded note in mid-March,
when the U.S. oil benchmark was trading near $44 a barrel. The
VelocityShares ETN offers gains bigger than the market's when
prices rise.
However, as Mr. Bilyeu did further research on the market, he
got worried that prices might not keep going up. He sold his
position at a profit in mid-April, he said.
"It got a little frothy, and people kind of jumped on board," he
said of the market. "I would be shocked if oil doesn't pull back to
$50 a barrel."
The structure of the futures market may also be spooking some
investors away from ETFs. Many crude-oil ETFs hold futures
contracts continuously, meaning that when a futures contract nears
expiration, the fund will sell it and buy a later-dated contract.
Currently, later-dated crude-oil contracts are more expensive than
the front-month contract.
In 2009, after oil's last big selloff, front-month oil futures
surged 78%, while the U.S. Oil Fund only gained 19%. Similarly, oil
futures have gained 7.3% in the year to date, while the U.S. Oil
Fund has fallen 3.4%.
"If I think prices are going to go up 20% in the next two years,
given the current shape of the curve, half of that will be eroded"
by continuously holding the front-month contract, said Nick
Koutsoftas, co-portfolio manager for commodities strategy at Cohen
& Steers, who helps oversee $483 million in commodity
investments.
This time, oil ETF holders "are trading rather than investing,
which is the right thing to do," Mr. Jakob said. "They are a bit
quicker to take profits."
John Hyland, chief investment officer of United States Commodity
Funds LLC, which manages the U.S. Oil Fund, said flows in and out
of the fund don't move oil prices. Many market participants track
investment flows in ETFs as well as the futures market to see
whether investors are bidding the price higher or lower. But oil
prices are more responsive to physical supply-and-demand factors
than to ETF trading, Mr. Hyland said.
Since March 17, when U.S. oil prices hit a six-year low of
$43.46 a barrel, money managers including hedge funds raised their
net bet on rising oil prices by 91%. But most of the shift was due
to funds closing out bets on falling prices, rather than adding new
wagers that prices would rise, according to data from the Commodity
Futures Trading Commission.
If oil futures decline, those speculators who closed out bets on
falling prices might start selling again, analysts said.
"We have a 2-million-barrel [a day] surplus," said energy
economist Philip Verleger Jr. "It has all the makings for a very
serious financial washout."
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