The Securities and Exchange Commission has accused the U.S. Oil fund, an exchange traded product that has become the most popular vehicle for trading U.S. oil, of failing to disclose key facts about the fund when the oil market was in deep distress last April.
The fund (ticker: USO) and the company that controls it, the United States Commodity Funds LLC, paid $2.5 million to settle with regulators, without admitting or denying the allegations. Half of that money will go to the Commodity Futures Trading Commission, which had also found that USO had violated CFTC regulations. USO holds $2.7 billion in assets.
In April 2020, the oil market was dealing with two enormous challenges. Covid-19 lockdowns had led to a sharp decline in oil demand and oil producers were still producing too much oil for the market to absorb. USO owns West Texas Intermediate crude futures contracts, which settle with the delivery of actual crude oil each month — the European equivalent, Brent futures, settle in cash. On April 20, just before the May contract settled, storage at the hub where buyers take delivery of WTI filled up completely. With nowhere left to put the oil they were buying, sellers panicked and the price of oil went negative for the first time ever.
Amid the tumult, the sole broker buying futures contracts for USO told the fund company that it would not execute any more contracts for the fund, the SEC order says. That left USCF in a bind, and meant that it might not be able to achieve its investment objective, which was to track oil prices.
“This meant that those proceeds would have to be invested in U.S. Treasuries or cash equivalents or simply held as cash, thereby introducing the risk of tracking error between USO’s investment objective and its [net asset value] whenever the suspension of new creations was lifted,” the SEC order says.
The SEC said that USCF did not adequately disclose this information to investors in the weeks ahead. USO did change its investment style after the crash, putting more money into longer-dated futures that are less vulnerable to shocks like the one that happened in May. Since then, the oil market has steadily risen, and USO is up 59% this year.
Asked for a comment, USCF directed Barron’s to a securities filing it made late on Monday detailing the SEC and CFTC charges. The events of last April, including the limits placed by its broker, are listed on the front page of the USO website.
Write to Avi Salzman at avi.salzman@barrons.com
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November 09, 2021 at 07:15AM
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Popular Oil Fund Misled Investors, SEC Says - Barron's
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