Crude tumbled into a bear market last week, but investors never gave up pouring money into the $3.15 billion United States Oil Fund LP, the world’s biggest tracking the commodity.
Sound weird? It’s not. The ETF, which holds futures contracts on WTI crude, has become an unlikely magnet for investor cash whenever the price of oil crashes.
Take the week ended March 10, when crude fell 9 percent and the fund, symbol USO, took in $80 million. Or the first week of November, when a barrel of WTI lost more than $4 — investors still poured money into the fund.
They’re sticking to the pattern this month. Investors have added $779.5 million to USO despite crude’s 8.4 percent slide through June 27. In fact, June is shaping up to be the best month for inflows since January 2016, according to data compiled by Bloomberg.
"Volatility in USO is like chum in the water," said Eric Balchunas, an analyst for Bloomberg Intelligence. "That’s what a lot of people who use this like to see."
Oil prices in London and New York are keeping traders on edge this year as they’re buffeted about by two opposing forces. On one side, there’s the Organization of Petroleum Exporting Countries trying to combat oversupply through production cuts. On the other are U.S. drillers unleashing a geyser of crude from Permian and other domestic fields. In the minds of traders at least, U.S. producers appear to be winning. WTI sunk to $42.53 last week, its lowest in 10 months, before rebounding to close at $44.24 on June 27.
Tony Spangenberg, managing member at West Portal Investment Group LLC, said he owns the ETF on the expectation that crude prices are going to rise in the next 12 to 18 months. "It might be a more short-term play if it hits a target price of $55. Then we might get out of it," he said.
The "vast majority" of recent inflows are coming from retail investors, according to Matthew Collins, head of U.S. product for ETF Securities LLC. Moms and Pops tend to pile into assets like gold and oil when they see them in the headlines, he said.
In fact, stories that suggest oil is in a bear market may even have a positive impact on crude prices, according to a Bloomberg analysis. When news reports that include the key words "bear market" and "oil" start to appear in large numbers, prices often rally afterward, the analysis shows.
Of course there’s an alternative explanation for the inflows, one that is slightly less kind to Mom and Pop.
"I would think we are in the presence of a create-to-lend episode," said Sebastian Mercado, ETF strategist at Deutsche Bank AG. He’s referring to the situation where demand for ETF shares from short sellers rises, leading authorized participants to create new securities solely for the purpose of lending them out.
Mercado sees this happening with USO and points to evidence of bearish activity, such as rising short interest in the fund, the disconnect between flows and performance and the dearth of cash going into other commodity ETFs.
If the inflows belonged solely to bulls, that "would imply they are great market timers, which I don’t believe is possible," he said.
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