The scramble to jettison exposure to near-month WTI futures exposes the design flaws of ETFs in a world drowning in oil.

While a higher tracking error won’t deliver investors the exposure they thought they were buying, it is hoped the September contract will be less volatile and insulate it from another bout of negative prices.
BetaShares was blunt about the consequences of negative prices in an updated product disclosure statement: “In such circumstances the responsible entity may need toconsider whether the fund should be terminated.
The surprising move by S&P Dow Jones Indices – and its launch of a review of its commodity indices, rollovers, and negative oil prices – looms as the denouement for futures-based exchange traded oil products.
It highlights how the combination of oversupply and demand destruction sparked by COVID-19 – and the attendant warping of prices into negative territory – has investors scrambling for a solution amid expectations for a protracted period of weak and volatile prices.
The profound flaws of oil ETFs have been revealed by the swelling glut of oil that pushed WTI prices to negative $US40 a barrel last week.
The market contango, or when longer term prices are higher than short term prices, has made them forced sellers at low prices and motivated buyers at high prices.
The bringing forward of the rollover from the June contract to July contract saw the contango between the two widen to over $US7 a barrel at one point.
But amid the misadventures in ETF structuring lies the domineering presence of the growing glut of oil.
The tsunami of oil flooding into US storage was confirmed by data from the American Petroleum Institute that showed crude oil inventories increased by 9.9 million barrels over the last week.
The inventory build at the Cushing storage hub was 2.5 million barrels over the week.
The global surplus of oil, estimated to run at 15 million barrels a day in the second quarter, will be slowly evaporated by this Friday’s start of a 9.7 million barrel a day output reduction agreed by the Organisation of Petroleum Exporting Countries.
But the ability of producers to quickly open the spigots, as showcased by the short price war between Saudi Arabia and Russia, should serve as a warning about the longer term risks for retail investors who fancy a punt on oil prices using futures-based ETF products.
Their structure has made them an easy target for professional oil traders, especially at a time of excess supply.
The informational and analytical gap between retail investors and oil industry professionals was underscored by BP’s March quarter earnings call this week.
Quizzed about its trading results, BP chief financial officer Brian Gilvary revealed the company had taken downside protection across their oil business given their concerns about the impact of COVID-19 on demand.
While acknowledging the “constructive” impact of the contango market, which will motivate supply cuts, Mr Gilvary warned “the markets still remain volatile, and I think downside protection is an important thing to have in these markets going forward.”
That’s sound advice retail investors in long-only exchange traded products may want to take on board.