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Largest oil ETF cleared to issue more shares, paving way for inflows

Both the SEC and the Commodity Futures Trading Commission have opened probes into USO, people familiar with the matter said late last month, examining whether its risks were properly disclosed.
Both the SEC and the CFTC have opened probes into USO, people familiar with the matter said late last month, examining whether its risks were properly disclosed.
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The largest oil ETF was cleared by U.S. regulators to issue 1 billion new shares, paving the way for renewed investments into the popular retail product that’s been at the center of controversy in recent months.

The SEC approval comes nearly eight weeks after the United States Oil Fund (USO) said that it issued all remaining registered shares, a move driven by tremendous interest in the sector as crude prices plunged into negative territory for the first time in history. In that period, it’s been subject to limits from the world’s biggest commodity exchanges, had to find new brokers and even found itself subject to regulatory investigations.

"It's now June and if you’ve been on a deserted island for the last five months you couldn’t have fathomed the movements we’ve seen," an expert says.
June 10

The $4.9 billion ETF has come under close scrutiny as oil’s rapid plunge forced it to quickly shift some of its giant positions on short notice. While West Texas Intermediate crude is down about 40% so far this year, USO has lost more than 70% of its value, becoming unhinged from tracking just the front-month futures contract due to restrictions from various regulators and brokers.

Both the SEC and the Commodity Futures Trading Commission have opened probes into USO, people familiar with the matter said late last month, examining whether its risks were properly disclosed.

While its ability to accept new money has been halted, United States Commodity Funds, which runs USO, has been actively signing agreements with new brokers, including Marex Spectron and ED&F Man. The moves supplement an existing agreement with RBC Capital Markets, whose risk mitigation measures had stopped the fund from being able to add more exposure.

Throughout April and May, the ETF roiled oil prices after receiving record inflows from investors trying to call the bottom in crude’s rout. Its position in the June WTI contract at one point grew to represent 30% of the total open interest, worrying some about its outsized impact in the market.

The growing scale prompted CME Group, the exchange, to instruct it to limit its position in several futures contracts. That forced it to spread its holdings out to different contracts for delivery as far in the future as June 2021, reducing its impact on any single calendar month.

Some of the USO’s stress has also been felt on other similar products after crude’s tumble toward negative $40 a barrel on April 20 forced issuers into a series of unusual steps. The broker for the $500 million Samsung S&P GSCI Crude Oil ER Futures ETF, for example, in early May restricted any new buying of crude futures. Royal Dutch Shell forced the $500 million WisdomTree ETP to shut down amid increased scrutiny of how retail investors are punting in the oil market. Others had to delist completely.

Bloomberg News