The managers of the infamous USO ETF really do not want to be dissolve this “retail killer” which in Kyle Bass’s words has “vaporized billions from unweary investors this week alone.”
Just hours after USCF investments, the managers behind the largest oil ETF announced a 1-for-8 reverse stock split, moments ago the USO – which was briefly halted – unveiled yet another shift to its composition to relieve pressure on the June WTI Futures, and to spread the pain among even more forward months. Specifically, the USO announced that it would reallocate as follows:
- June: 40% down to 20%
- July: 55% down to 50%
- August: 5% up to 20%
- Sept: 0% up to 10%
Why is the USO doing this? To avoid a repeat of the May WTI implosion, and to prevent a crash on May 19 when the June WTI contract expires. Now that we have seen what happens on maturity day, when on Monday the maturity of the May contract sparked a liquidation wave as nobody wanted to take delivery, traders were preparing to frontrun the USO getting delivery next month by shorting the hell out of the June contract. And since, it is all so very circular, by removing selling pressure on the front contract, the USO may fight to live another day.
That was not all, however, because separately the USO also announced it may “also invest in other oil-related investments such as cash-settled options on Oil Futures Contracts, forward contracts for oil, cleared swap contracts and non-exchange traded OTC transactions that are based on the price of oil, other petroleum-based fuels, Oil Futures Contracts and indexes based on the foregoing”
“USO intends to attempt to continue tracking USO’s benchmark as closely as possible, however significant tracking deviations may occur above and beyond the differences described herein.”
It wasn’t clear just what other oil-linked assets the USO may invest in, however by now it is clear that the best return it can hope for is to merely be long puts on the USO itself.
In short – anything to if not avoid, then at least delay liquidation.
And while we admire the USCF’s efforts to keep the USO alive, what would be very bad is if all 3 or now 4 WTI futures in which it has positions, were to turn negative. That’s when the USO would have no choice but to finally fold.