April 30, 2020 / 11:47 PM / 3 months ago

Biggest U.S. oil ETF may not be able to reflect crude spot prices

April 30 (Reuters) - The United States Oil Fund LP, the largest oil-focused exchange-traded product (ETP) in the country, said it may not be able to meet its investment objective of reflecting the spot prices of oil any longer, according to a filing on Thursday.

USO's actions come as it looks to cushion the blow from a historic sell-off in oil markets hit by oversupply and a coronavirus-induced plunge in fuel demand.

The fund has been trying to mitigate potential losses from falling crude prices by spreading its holdings through contracts expiring in July, August and September.

USO said on Monday it would sell all its front-month crude contracts and hold contracts expiring as late as June next year, a reversal for the fund, which previously invested mainly in front-month contracts.

The fund expects factors limiting its investments in the benchmark oil futures contract to continue due to the COVID-19 pandemic and oil market volatility.

"The inability to closely track the benchmark oil futures contract, the changes in its portfolio of investments and the impact of higher levels of contango, will impact the performance of USO and the value of its shares," USO said. (bit.ly/3d2VKJV)

During several trading sessions over the past two weeks, the fund's performance has diverged sharply from oil prices as USO has moved away from front-month contracts.

It is on track for a 7% drop this week even as U.S. crude futures have risen 11% over the same period. Even with increases in oil prices, the cost of rolling futures contracts has wiped out those gains.

Some fund managers are wary of USO and similar oil ETPs, saying the funds are ill-equipped to handle drastic swings in futures prices.

"We've seen this, where some ETFs are unable to adjust to new market realities," said Matt Forester, chief investment officer at BNY Mellon's Lockwood Advisors. (Reporting by Shanti S Nair in Bengaluru and April Joyner in New York; Editing by Shounak Dasgupta)

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