A self-propelled pyramid?
Posted by Izabella Kaminska on Feb 25 11:37.
Stephen Schork of the Schork report jumps on the United States Oil Fund issue on Wednesday. He too is blaming the size of the ETF for current distortions in front-month Nymex WTI contracts.
He refers specifically to the March/April roll when spreads moved from $3.26 to $8.18 and expired at $1.09. Quite a volatile move. He explains (our emphasis):
As we outlined at the time, this volatility was largely attributable to âthe rollâ by long-only commodity index funds, particularly the United States Oil Fund ETF (USO). Open interest in the March contract was 363,757 on February 05th. Per the fundâs website, the USO rolled 85,057 contracts the next day. In other words, the USO held sway over the market, i.e. these funds (USO, S&P GSCI et al) are artificially skewing the front of the NYMEX curve; putting downward pressure as they sell a massive percentage of open interest in the spot over the course of a few sessions.
The USO has since announced it will roll over the course of four sessions instead of one; the April/May roll will take place in between March 06th and 09th. The fund is holding length of 61,940 NYMEX futures, 4,000 NYMEX WTI financials and 30,583 ICE futures, 96,523 contracts in total with a market capitalization (as of last nightâs close) of $3.86 billion.
All this length will have to get rolled in a couple of weekâs time. Whatâs to prevent front running the roll? Nothing, thatâs what. Over the last three sessions the April/May contango has moved from $2.14 (-5.1%) to $2.80 (- 6.6%).
Which leads him to make one very brave assertion, a comparison to a pyramid scheme. To clarify - Schork is not saying the USO is an outright pyramid scheme itself. He is asserting the nature of the market, the established participants and the fundâs structure is such that it inadvertently encourages a passive self-propelled pyramidization to take shape. One fuelling the other so to speak. As he explains: ....
