Look out OPEC! Oil ETF investors head for exit, risking new slump

Tue Apr 14, 2015 1:44am EDT
 
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By Catherine Ngai and Barani Krishnan

NEW YORK (Reuters) - 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 oil futures 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".   Continued...

 
An oil well is seen near Denver, Colorado February 2, 2015. REUTERS/Rick Wilking