Futures-based and leveraged products

Sophomore · enrolled learners

This lesson opens with United States Oil Fund, April 2020.

What happened

USO is an exchange-traded product that seeks for changes in its net asset value to track changes in the spot price of crude oil, and it received record investor inflows in early 2020. On 20 April 2020 the May 2020 WTI contract settled at negative $37.63 a barrel. In the same month USO's sole futures commission merchant told it that it would not execute any new oil futures positions for the fund, and in mid-April, under pressure from the SEC and the exchange, USO changed its methodology to spread exposure across second, third and longer-dated contracts rather than concentrating in the front month. On 8 November 2021 USCF and USO resolved matters with both the SEC and the CFTC. The CFTC order concerned a failure, from about 22 April to 12 June 2020, to fully disclose to participants that the fund's only broker had imposed position limits that would render it unable to purchase additional futures contracts in connection with the future offering of new shares, and USCF paid $2.5M.

The decision point

Investors bought a product whose stated objective was to track the price of oil, at a moment when oil looked cheap. What they held was a position in specific futures contracts, subject to the capacity of one broker and to exchange position limits, and the fund's ability to deploy new money was constrained by both. The tracking objective was not defeated by the oil price. It was defeated by the plumbing, and the plumbing was not on the marketing page.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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