United States Commodity Funds, the group behind the USO and UNG exchange traded funds, is keenly protesting its innocence regarding the group’s possible connection with volatile energy market moves in 2008, and 2009.
In January, the group addressed accusations that the USO may have stoked record prices to record highs in 2008 with the following SEC statement.
The argument focused on the below chart, which they said proved the USO if anything had had a dampening effect on prices, and not vice versa:
The group put forward the same defence to the CFTC hearings on energy speculation last summer.
For the record, FT Alphaville has always seen the logic in this argument.
If anything, we were concerned about the possible distorting effect of the funds’ large sizes on the front-end of the futures curve, not their influence on outright prices.
USO’s chief investment officer John Hyland has, however, addressed this latter point too. In a SEC filing dated January 28, he claimed on behalf of the group that:
Since the end-of-day settlement prices of the futures contracts for light, sweet crude oil as well as USO’s daily holdings and roll schedule are all publicly available, management was able to determine what the price spreads were immediately prior to USO’s roll, what they were during the roll and what they were immediately after the roll was concluded.
Since the crude oil futures market was in contango throughout 2009, if USO’s rolls were affecting the prices of crude oil futures contracts, one would expect that the price spreads would have widened as a result of each monthly roll. However, as shown below, this was not the case. Instead, the price spreads actually narrowed half the time.
The table below measures the changes in the spread over the past year in two fashions. The first compares the price spread between the nearest month to expiration contract and the next nearest month to expiration contract on the last day before USO’s roll began and compares it to the average price spread during USO’s roll. The second measurement compares the average price spread between the nearest month to expiration contract and the next nearest month to expiration contract on the four days before USO’s roll began and compares it to the average price spread during USO’s roll.
Meanwhile, in a filing issued last Friday, the group also addressed concerns about the funds becoming a destabilising force in the event of mass forced liquidations upon redemption requests. After analysing historical data the group concluded:
In sum, management strongly believes that the net buying or net selling activities of USO have not historically been of such size as to raise concerns about USO’s ability to impact the market.
While we have some sympathy for the USO managers being turned into a bete-noir of the commodity-fund world — in our opinion unfairly cited as an example of speculators run wild — we cannot say we’re 100 per cent sold on the latter two defences.
Regarding the January 28 SEC filing, we suggest the data glides over the problem by focusing on the whole year rather than the critical three months during which the distortions came about — hence diluting the effect. The statement also doesn’t touch upon the rollover effect of the USO’s sister fund, the UNG, whose rollovers arguably caused a much greater market distortion than the USO.
As for liquidation risk, the USO managers are undoubtedly right when it comes to their track record. However, we’re not sure just because it hasn’t had an effect in the past it won’t do so in the future.
Separately, Bloomberg reported on Tuesday that the Chinese sovereign wealth fund CIC had for the first time invested in the USO, joining Morgan Stanley and Goldman Sachs as among its top holders with 2m shares, equal to 3.48 per cent of outstanding units (some $78.6m).
Which presumably makes for a potential liquidation risk of a different sort.
Related links:
China Becomes Oil ETF’s No. 4 Holder, Buys SPDR Gold (Update1) - Bloomberg
CIC takes on the world – FT Alphaville
The United States Oil Fund mystery – FT Alphavill