World's Largest Oil ETF Halts Creation Of New Trades As Crude Prices Collapse

Trading has been halted for the USO Fund LP that was responsible for sending WTI May crude futures into negative territory on Monday.

The United States Oil Fund LP (NYSEARCA: USO) - an ETF for crude – said in an SEC filing on Tuesday it was suspending the ability of the USO Authorized Purchasers to purchase new creation baskets, which basically halts new trades after the historic 300% collapse in WTI Crude May futures contract on Monday.  

USO, one of the most popular oil-tracking ETFs for retail investors, was one of the reasons for the historic decline in May WTI futures on Monday. The reason? Because the futures contract expires on Tuesday.

Bloomberg sources suggest that as of last week, the USO held 25 percent of the outstanding shares of May 2020 WTI oil futures. But that contract ends on Tuesday. Buyers of these contracts must either sell these contracts for oil now or take physical delivery of the oil at the end of May. Of course, an ETF like the USO who deals in paper barrels is not eager to take physical delivery of any amount of oil - even if they could find somewhere to store it.

Before the announcement from USO, trade in the fund was halted and it was down by 20 percent pre-market on Tuesday.

Pierre Andurand, a well-known energy trader, warned traders on Tuesday of massive losses in ETFs.

“I think the CME might have no other choice but to close out the ETFs positions. It cannot take the risk to have negative prices before the roll and be on the hook. This shock is real. Be very careful out there. We are going to hear about crazy losses in the days and weeks to come,” Andurand said on Twitter.

He was also “Wondering what would happen to USO and other Oil ETFs that mainly hold June WTI if June WTI goes negative before the roll?”

At 9:42 a.m. EDT on Tuesday, the expiring May WTI contract was at a negative -$1.480 a barrel, while the June contract was down nearly 30% at $14.67 a barrel.  

By Tsvetana Paraskova for Oilprice.com

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