Thursday, February 19, 2009

Oil ETF's distorting oil pricing

The $3.4 billion ETF, The US Oil Fund, (USO) which mimics the return on the front month of the oil contract was being gamed by traders so much, that starting next month, the fund will rollover positions in four days, instead of one.

The exchange-traded fund, created in 2006, lets investors trade oil prices like a stock and uses their money to buy oil futures on major energy exchanges. The fund has become so popular that as of Tuesday it held 19% of all the crude for April delivery traded on the New York Mercantile Exchange, and 30% of a similar contract on the ICE Futures Europe exchange, according to data from the fund and the exchanges....

U.S. Oil's shift comes amid criticism that its size has skewed oil prices and traders were selling ahead of the widely known days it rolls front-month oil futures, pressuring the price the fund's investors get..

Kevin Norrish, a commodities analyst at Barclays Capital, said the new policy likely won't have much impact on the structure of the U.S. oil futures market as inventories surge. It is also unlikely to change others' appetite for trading around the fund's roll period. "The fundamental issue is there's a large amount being rolled, and people know when it's going to be rolled," he said.

Just another Wall Street product that doesn't work.

The fund, has to sell their position, in the front month contract of oil, and then buy the next month out. And this ETF had 20 and 30% of the oil that was traded, and they tell traders when they are going to "roll" their contracts.

Does anybody wonder why the front month contract becomes cheaper when they blow out of their position, and that the next month becomes more dear when they buy their position?

It used to be that traders could game the S&P whenever they would make adjustments to that index. Why bother when you have this annuity in the oil pits, courtesy of Wall Street?

It's a subsidy from stock investors for the traders in the futures pit!

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