WTI sinks 25% as USO fund moves to liquidate prompt positions

US crude futures moved sharply lower Monday as the world's largest energy exchange-traded fund said it would exit its NYMEX June WTI contracts this week, exacerbating a selloff of the crude benchmark.

NYMEX June WTI settled $4.16 lower at $12.78/b, a decline of nearly 25% from Friday, while ICE June Brent down $1.45 on the day at $19.99/b.

The United States Oil Fund announced Monday morning it would shift its portfolio away from prompt-dated futures and invest more in contracts extending into 2021. The fund said it will complete the rollout of its prompt positions by April 30, completely exiting the front-month June contract that comprises about 20% of its portfolio.

"Record inflows in recent weeks by investors wanting to benefit from low oil prices resulted that the ETF was holding large exposure in the front WTI contract," said Giovanni Staunovo, an energy analyst with UBS. "By selling shorter-dated future contracts and investing into longer-dated contracts, the ETF is putting pressure on the front WTI contract."

The July WTI contract settled down just shy of 15% on the day, falling $3.14 to $18.08/b, widening the contango to the front-month to $5.30/b, out from $4.28/b on Friday.

Steep contango between front and second month contracts was a contributing factor in last Monday's sell off that pushed crude into negative territory.

Edward Moya, a senior market analyst with OANDA, said he attributed about half of Monday's June WTI dip to the US Oil Fund actions.

"Before we had that historic plunge a week ago, there was a tremendous amount of retail interest that suddenly came to life," Moya said. "A bunch of people that didn't usually trade in oil piled in."

The fund, which trades under the USO stock ticker, is designed to track the ups and downs of crude pricing, and was a popular way for retail investors to passively put their money into the energy sector and bet on the price of oil going forward. But it has seen its value plunge by more than 80% this year amid the coronavirus pandemic and the collapse in global oil demand.

"A lot of people are becoming extremely bearish on how this ETF is going to survive going forward," Moya said. "It's a mess. Everything is a mess in energy right now. But that one in particular is going to eat at people's confidence in the sector."

NYMEX May ULSD settled down 3.63 cents at 61.04 cents/gal on Monday, and May RBOB moved 1.29 cents lower to finish at 64.83 cents/gal.

Second-month ULSD futures settled at 9.32 cent premium to front month, the widest contango in that part of the curve since March 2013.