Stephen Schork of the Schork report highlights a response, as received from a reader, to his Wednesday point on the USO ETF:
A response to our USO observation from a client…
re: USO – they are NOT a hedger – why they are allowed to exceed the spec levels is beyond me – oh wait yeah NYMEX [now CME] and ICE love the volume and fees it gets from the USO trading… The CFTC should classify USO as a spec and require the NYMEX/ICE to impose spec. levels to USO – and if they try to roll out a USO II or USO III they should be treated as one entity and their position combined for the purposes of position totals .
They certainly have a point.
The “speculator limits”, says Nymex are there to “effectively restrict the size of a position that market participants can carry at one time and are set at a level that greatly restricts the opportunity to engage in possible manipulative activity on NYMEX.”
The position limit during the last three days of the expiring delivery month on Nymex WTI is 3,000 contracts. USO currently holds 60,656 contracts in April WTI on Nymex, which it rolls 2 weeks before expiry. (1 contract equals a 1,000 barrels). At any given moment, however, according to Olivier Jakob of Petromatrix, the accountability limit on any position in Nymex WTI is 10,000 — intervention decided upon on a case-by-case basis. However, one of the key issues over the summer when oil was racing up was theproposed enforcement of actual limits on large non-commercial traders. Either way, the accountability limit should by now have caught the eye of Nymex and the CFTC, with the regulator according to Platts having already contacted USO over its position.
In other USO news, the banks continue to rush out issues of reverse convertibles linked to the ETF fund, which (if sold successfully) can have the effect of cutting back their exposure to any significant losses on the USO. Deutsche Bank is the latest to join the likes of Barclays, Morgan Stanley, JP Morgan and Royal Bank of Canada in doing so. From FT Alphaville searches the banks only began issuing these securities in any significant volume in December 2008.