Oil investors who amassed a $6 billion long position in exchange traded funds, occupying as much as a third of the U.S. futures market, are now racing for the exit at a near record pace.
Outflows from four of the largest oil-specific exchange traded funds, including the largest U.S. Oil Fund (USO), reached $338 million in two weeks to April 8, according to data from ThomsonReuters Lipper. That is the first two-week outflow since September and the biggest since early 2014, marking a turnaround from heavy inflows in December and January on bets that oil prices would quickly rebound from six-year lows.
If the exodus gathers pace it could signal new pressure on crude oil prices that had begun to stabilize at around $50 a barrel this year following their 60 percent plunge, says John Kilduff, a partner at energy fund Again Capital LLC in New York.
Retail investors may have been "trying to bottom fish and got washed out with the recent new low," he said.
Global oil ETF holdings were equivalent to 150 to 160 million barrels' worth of crude oilfutures as of last week, according to ETF Securities. That would represent as much as 30 percent of open interest in the most-liquid U.S. oil futures contract, which saw record open interest of 530,000 lots in March, although some of those fund holdings are in other contracts.
It is probably premature to say the two-week outflow marks a sustained sell-off that could trigger another slide in crude prices given the ETFs saw their biggest ever weekly inflow of $818 million just weeks earlier.
In any case, the funds have become an unpredictable irritant for Saudi Arabia and other OPEC producers, first slowing the slide in prices that could force higher-cost producers such as U.S. shale drillers to curb output, and now blurring the outlook.
"Passive investors have become a problem," Philip K. Verleger, a consultant and energy economist, said in a note on Monday. ETF inflows are "denying those in the Middle East the decline in non-OPEC output they hoped to achieve".
Traders say two factors may be behind the recent exodus.
First, there is a growing sense that any rebound in crude prices may be months if not years away. Secondly, there is a growing awareness of the financial penalty of the current "contango" market, in which investors must sell cheaper near-term futures contracts to buy more costly next-month contracts every month.
Recently, top producer Saudi Arabia said it pumped more crude than ever before in March;Iran reached a framework deal with western powers that may unleash a torrent of oil next year; and U.S. stockpiles continue to set record highs.
"The news lately has been uninspiring. Investors don't want to be long and wrong in perpetuity," said David Mazza, head of research at State Street Global Advisors, an institutional asset management firm with more than $2.4 trillion in assets.
A market configuration where futures contracts months ahead are more expensive than the near-term ones makes holding on to long positions increasingly costly.
For instance last week, when the United States Oil Fund ETF began rolling its positions, the May contract was trading at between $1.25 and almost $2 a barrel below the June contract CLc1-CLc2. The fund had rolled more than 40,000 lots to hold some $2.2 billion worth of June futures by Friday; it still had another 14,000 lots to roll forward, fund data showed.
The USO fund has fallen by more than 9 percent since the start of the year, whereas front-month U.S. oil futures have dipped by less than 3 percent, data show, on account of roll costs.
USO manager John Hyland says investors tend to redeem when prices rise - as they have since mid-March - and invest when they fall. He refutes the idea that ETFs cause prices to move.
Since March 18, the total number of shares outstanding is trending down, he said. "You'll see that our move lags the prices, not the other way around: The price started to go up first, and then our shares started to decline."