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Friday, March 4, 2011

Finance Friday #4 : Don't Be Surprised If ETF USO Takes a Header

...warns Dian Chu in her latest post.  Why ? 

"...basically, there’s not a real physical oil shortage, and crude prices primarily have been moving from fear and speculation depending on news and rumor coming out of MENA.

" Now with crude prices bid up so much, traders are left with a dilemma - to be in the crude oil trade, players basically either have to take delivery, or rollover contracts and options come expiration time. However, with storage at Cushing, Oklahoma pretty much at capacity, and price curve front month (April) loaded, it is doubtful that anybody would be in a position to take physical delivery.

" And don’t forget that the humongous United States Oil Fund (USO) is a futures-based ETF that has to rollover as scheduled (from Mar. 8 to Mar. 11). Because of the USO effect, plus the record open interest almost exclusively long and heavy in April, there will likely be a massive rollover starting with USO around March 8, then to all the other market players, when April contracts and options expire (See Chart, click to enlarge). That will push down the April price for both Brent and WTI, regardless of what’s going on in Libya and MENA. "