The oil contango has been exercising energy market watchers for months now. There is a good explanation of contango and its associated debates here but, in short, prices are higher for future oil contracts than for front-month, or nearest, oil futures contracts. This is in contrast to most of the recent past, when oil contract priced fell as they moved further into the future.
The latest newsletters from both PetroMatrix and Schork Report point out that long-only index funds, such as the USO, are taking such a large share of the open interest that the front month/next month spread is dramatically affected when they ‘roll’ to the next month’s contracts.
“2009 appears to be shaping up to be the year of the ETF” says the Schork Report, arguing the large weighting of EFTs is skewing WTI front month prices:
For example, whereas the Mar/Apr spread crashed by 421 bps last week, the
May/Jun (which is not being rolled) was virtually
unchanged. Last Monday this contango was $1.45 (-
3.04%), by Friday it was $1.54 (-3.06%). However, with
USO long 85,057 Aprils (not to mention the length sitting
on the books of other long-only index funds)… what do
think is going to happen to the Apr/May spread next
While PetroMatrix says:
The USO ETF now holds 77’889 WTI April contracts which are equivalent to 58% of the April Open Interest on the day prior the USO roll. After the Friday roll we estimate that the USO now owns 33% of the April WTI Open Interest. We find ludicrous for an ETF of that size to have a one-day only roll but we find even more alarming that the NYMEX has nothing to say against an institution that is forcing such a large shift of WTI Open Interest in a single day.
FT Alphaville has pointed out a couple of weeks ago that the roll itself – and the USO rolls its entire position on a single day – is significantly costly to the ETFs. Meanwhile Goldman has predicted that investors may be inclined to pull out of these passive-style long ETFs once they begins to realise those losses.