Oil fund's biggest outflow in 6 years shows rally may stall

[NEW YORK] The biggest US exchange-traded fund that tracks oil is heading for the largest two-month outflow in six years, raising concern that crude's 30 per cent rally may stall.

Holders of the United States Oil Fund, known as USO, have withdrawn almost US$1 billion so far in April and May, according to data compiled by Bloomberg. Crude dropped about US$12 a barrel after a US$1.4 billion exodus from the fund in the two months ended June 2009.

Oil has rebounded from a six-year low in mid-March on speculation that the falling number of drilling rigs will reduce output. US crude stockpiles near the highest level in 85 years and Opec's refusal to cut production will continue to weigh on prices, according to Goldman Sachs Group Inc, Deutsche Bank AG and Citigroup Inc.

"The oil rebound has run out of gas and now you are seeing nervous investors with itchy trigger fingers bailing out of USO," Eric Balchunas, a Bloomberg Intelligence analyst, said May 27. "They don't want to get burned by another drop in oil."

West Texas Intermediate crude for July delivery added 69 cents to US$58.37 a barrel in electronic trading on the New York Mercantile Exchange at 11:41 a.m. London time, up from a closing price of US$43.46 on March 17. Futures rallied 25 per cent in April, the biggest monthly gain since May 2009, and have fallen 2.1 per cent so far in May.

The US Oil Fund was at US$19.56 on Thursday, up from a record low of US$15.96 on March 17. USO, which holds about 10 per cent of the front-month July WTI contracts, jumped 22 per cent in April and is down 4.6 per cent so far this month.

Crude's recovery has slowed this month. US production climbed to 9.57 million barrels a day last week, the most in Energy Information Administration data going back to 1983. Inventories were 479.4 million, 86 million above the previous year's level.

The Organization of Petroleum Exporting Countries, which supplies about 40 per cent of the world's oil, meets June 5 in Vienna to discuss output policy. The group will maintain its production target, Mohammad Oun, Libya's deputy vice prime minister for energy, said Thursday, joining Kuwait in predicting no policy change.

"We do not think that the bulls have enough supporting fundamental factors to make a case for a higher oil price," Harry Tchilinguirian, BNP Paribas SA's London-based head of commodity markets strategy, said on Thursday. The supply surplus will push oil down to "$55 and then possibly lower," he said.

The ETF's performance is trailing oil because the market is in contango, meaning futures for delivery in later months trade higher than nearby contracts. The structure erodes gains as the ETF sells the expiring contract and buys the more expensive next-month futures.

The iPath S&P GSCI Crude Oil Total Return Index ETN and ProShares Ultra Bloomberg Crude Oil, the second and third- largest US oil exchange-traded products, also had outflows this month and in April. Investors pulled money out of ETFs that focus on energy stocks such as Exxon Mobil Corp. in May for the first time in eight months.

A total of US$368.4 million has been withdrawn from the US Oil Fund this month, following US$591.6 million in April, the biggest single-month outflow since April 2011. Total assets are now US$2.28 billion, down from US$3.25 billion on March 26.

The 2011 outflow was followed by a drop of as much as US$17.02 in WTI prices. When the fund had a two-month withdrawal of US$1.44 billion in May and June 2009, WTI also fell. Not all outflows from the ETF were followed by declines in oil prices.

About US$2.86 billion was poured into the US Oil Fund in the six months ended March 31 as oil slumped. The rebound in prices has given ETF investors an opportunity to reap profit, said Matt Hougan, chief executive officer of San Francisco-based research firm ETF.com.

"Investors were anticipating a bounce and they started selling as soon as it happened," he said in an e-mail Thursday. "People are cashing in some of their short-term chips."

BLOOMBERG