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Can The US Oil ETF Go Negative?
As we discussed on Monday, this is not quite a story of “the price of oil is negative”; it is more a story of “the price of physically settled front-month West Texas Intermediate oil futures is negative.”
As the May expiry rolled around, all the financial buyers wanted out, but none of the refiners wanted to take their positions and so the financial traders had to pay someone quite a bit of money to take the oil off their hands. Events in the real world caused this—but oddities of financial markets exacerbated it.
It is not impossible, for the futures price to flip to negative. It is unprecedented, and it is strange. But dealing with a negative futures price is fairly straightforward and intuitive. Futures trade on an exchange, there is a clearinghouse, traders have to be creditworthy and post daily margin as the price moves. If the price goes down, money moves along well-understood channels if the price goes negative, those channels keep working.
What is problematic, is that people have built retail financial products using oil futures, and those products assume that the lowest possible price for oil futures is zero.
The problem is that oil futures prices can go negative, but ETF share prices can’t. If you buy an ETF on a stock exchange, and its value goes to zero, you can walk away; no one can ask you for more money. USO’s value hasn’t gone negative—it avoided Monday’s negative prices—but the structure has become a problematic.
What does it mean that oil prices turned negative? https://youtu.be/dfqmjSOD7pQ
What is going on with USO – The US Oil ETF? https://youtu.be/BIqIjbHeV-g
