Oil Fund Investment: A Smart Move?

The United States Oil Fund (USO) is an exchange-traded product (ETP) that offers investment results corresponding to the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. The fund is designed for short-term investors who can continuously monitor their positions and is best suited for those bullish on short-term futures contracts on WTI crude oil.

USO's investment objective is to reflect the daily changes in the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, by investing primarily in futures contracts, swaps, and forwards. While it provides certain features like intra-day pricing and various order types, investing in USO involves risks similar to those associated with direct investment in the oil market.

Before considering investing in the United States Oil Fund, it is essential to conduct a comprehensive analysis and carefully evaluate your investment objectives, risk tolerance, and market conditions.

The United States Oil Fund's investment objective

The United States Oil Fund (USO) is an exchange-traded product (ETP) that aims to provide investment results corresponding to the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. The fund's objective is to provide daily investment results that align with the daily percentage changes in the spot price of WTI crude oil delivered to Cushing, Oklahoma.

USO's investment objective is to include the changes in percentage terms of its units' net asset value (NAV) in its evaluation of the changes in percentage terms of the spot price of light, sweet crude oil. This is measured by its performance relative to the price of oil through its oil futures contracts on the New York Mercantile Exchange (NYMEX). USO seeks to achieve its investment objective by investing primarily in futures contracts traded on the NYMEX, ICE Futures Europe, and ICE Futures U.S., among other exchanges.

USO's goal is to ensure that the average daily percentage change in its NAV, for any period of 30 successive valuation days, remains within plus/minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period. This means that even if there are significant deviations between the daily changes in NAV and the Benchmark Oil Futures Contract, USO can still meet its investment objective as long as the average daily percentage change is within the specified range.

The fund is designed for short-term investors who can actively monitor their positions and are bullish on short-term futures contracts for WTI crude oil. It is important to note that USO may experience contango when rolling futures contracts, which can be unfavorable for long-term investors.

The fund's performance

The United States Oil Fund (USO) is an exchange-traded product (ETP) that aims to provide investment results that match the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. The fund's objective is to ensure that the average daily percentage change in its net asset value (NAV) is within a 10% range of the average daily percentage change in the price of the Benchmark Oil Futures Contract over a 30-day period.

USO's investment strategy involves holding near-month NYMEX futures contracts on WTI crude oil. As of July 25, 2024, the fund's net assets were valued at $1.25 trillion, with an expense ratio of 0.70% and a year-to-date (YTD) performance of 18.99%.

However, it is important to note that the fund has underperformed the spot price of WTI crude oil since 2020, failing to correctly measure its daily performance. This underperformance could be a concern for investors who are bullish on oil over the long term. Oil prices have been volatile, with prices fluctuating between over $140 and as low as $13 per barrel over the past two decades.

As of July 2024, the price of oil was around $82 per barrel, recovering from a steep decline during the global coronavirus epidemic in May 2020, when it traded at approximately $19 per barrel. Despite this recent increase, USO's performance over the trailing 1-, 5-, and 10-year periods was 25.13%, -3.88%, and -12.73%, respectively.

USO's performance is impacted by the structure of the oil futures market, particularly the occurrence of contango and negative roll yield. Contango occurs when the price of a futures contract is above its expected future spot price, leading to negative roll yields when investors sell expiring futures contracts and purchase more expensive, longer-dated contracts. This has contributed to the fund's underperformance relative to the spot price of oil.

In summary, while USO seeks to track the performance of WTI crude oil, its historical performance has been mixed, with periods of both positive and negative returns. The fund's performance is influenced by various factors, including oil price volatility, contango, and negative roll yields.

The fund's risks

The United States Oil Fund (USO) is an exchange-traded product (ETP) that provides investment results corresponding to the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. The fund is designed for short-term investors who can continuously monitor their positions and who are bullish on short-term futures contracts on WTI crude oil.

As with any investment, there are risks involved with the United States Oil Fund. Here are some key risks to consider:

Risk of Loss and Volatility

Oil prices are known for their volatility, and the fund's performance is closely tied to the price of oil. Oil prices can be influenced by various factors, including global supply and demand, economic conditions, geopolitical events, and more. This volatility can lead to significant losses for investors.

Contango and Negative Roll Yield

The fund's benchmark is the WTI crude oil futures contract, and it must actively roll its front-month futures contract to the next month to avoid taking delivery of the physical commodity. When the market is in contango, which is common for oil futures, the fund incurs negative roll yields. This means that it has to sell expiring futures contracts at a lower price and buy futures contracts for the following month at a higher price, resulting in losses for the fund and its investors.

Regulatory and Legal Risks

In 2024, the United States Oil Fund faced investigations by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regarding its risk disclosures to investors. The fund lost 75% of its value in a two-month period, and there were questions about whether shareholders were adequately informed about the risks. These included the possibility that the fund's value might not move in tandem with the spot price of oil and the potential impact of its decision to purchase crude contracts expiring further in the future.

Tracking Error

Commodity exchange-traded funds (ETFs) like the United States Oil Fund may not always deliver the same returns as the underlying index or crude oil prices. This is known as tracking error, and it can occur due to various factors, including the structure of the fund, market conditions, and the timing of contract rollovers.

Liquidity and Market Conditions

Oil is a highly liquid market, but market conditions can still impact the fund's performance and ability to meet its investment objectives. For example, during the COVID-19 pandemic, oil prices collapsed, and the fund had to make structural changes to avoid a complete collapse. In addition, market conditions can affect the fund's ability to roll over its futures contracts and manage its holdings effectively.

How to buy shares

The United States Oil Fund (USO) is an exchange-traded product (ETP) that offers investors exposure to the oil market, specifically the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil.

USO is designed for short-term investors who can actively monitor their positions and is listed and traded on the NYSE stock exchange.

• Brokerage Account: You will need to set up a brokerage account, either with a full-service broker or an online brokerage account. Some online brokerages, like Robinhood, offer the ability to buy and sell USO without commissions, although other fees may apply.
• Complete an Application: If you choose to go with an online brokerage, you will need to complete an online application and wait a few days for approval. Some brokerages may require a minimum account value for trading USO.
• Margin and Review: To trade futures through an online brokerage, you will need to obtain margin and pass a broker's suitability review. This typically involves an online application and a short waiting period.
• Fees and Commissions: Be sure to review the fees and commissions associated with trading USO, as these can vary depending on the brokerage.
• Alternative Options: If you prefer to avoid brokerages, you can also consider investing in USO through an exchange-traded fund (ETF) or exchange-traded note (ETN). These products offer exposure to crude oil futures and are often more accessible to retail investors. Examples include the Invesco DB Oil Fund (DBO) and the iPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL).
• Consider the Risks: Investing in the oil market carries risks, especially due to the volatile nature of oil prices. USO, in particular, has historically underperformed the spot price of WTI crude oil, and investors seeking long-term exposure to the oil market may be better served by other investment vehicles.
• Monitor and Evaluate: Once you have purchased shares of USO or other oil-related investments, be sure to actively monitor their performance and stay informed about news and developments in the oil market.

Please note that this response is for informational purposes only and should not be considered as financial advice. The content provided here is based on publicly available information and does not constitute investment recommendations.

The fund's outlook

The United States Oil Fund (USO) is an exchange-traded product (ETP) that aims to provide investment results that match the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. The fund is designed for short-term investors who can actively monitor their positions and are bullish on short-term futures contracts for WTI crude oil.

USO's investment objective is to reflect the daily percentage changes in the spot price of WTI crude oil delivered to Cushing, Oklahoma, by investing primarily in futures contracts and over-the-counter swaps. The fund seeks to achieve its objective by investing in futures contracts traded on exchanges such as NYMEX, ICE Futures Europe, and ICE Futures U.S.

USO's performance has been mixed. As of July 2024, the fund's YTD performance was 18.99%. However, it has underperformed the spot price of WTI crude oil since 2020, which may deter long-term investors. Oil prices are highly volatile, and USO tends to track the price of oil. As of March 1, 2022, USO's price was down nearly 90% since its launch in 2006.

It's important to note that USO is subject to risks similar to those associated with direct investment in the oil market. These risks are significant, and investors should be aware that USO may not be a suitable investment for everyone.

Additionally, USO may experience contango when rolling futures contracts, which is unfavourable for long-term investors. Contango occurs when the price of a futures contract is above its expected future spot price, resulting in negative roll yields. This can lead to losses for investors in the long term.

In summary, while USO seeks to provide investment results corresponding to the daily price movements of WTI crude oil, its performance has been mixed. The fund may be suitable for short-term investors who are comfortable with the associated risks and actively monitor their positions. However, long-term investors may want to consider other investment options due to the potential for negative roll yields and underperformance relative to the spot price of WTI crude oil.

Frequently asked questions