United States Oil Fund generates returns for investors as backwardation booms

By Jessica Summers on 2/2/2018

NEW YORK (Bloomberg) -- This year is proving to be a lot better for investors of the biggest exchange-traded fund that tracks crude oil prices. And it’s being helped by backwardation.

The oil market is in a structure where the price of front-month crude futures are more expensive than longer-dated contracts, typical of times when demand is rising and supplies are tightening.

The United States Oil Fund holds front-month West Texas Intermediate contracts and has the luxury of buying cheaper contracts and selling more expensive ones as they expire each month, helping the fund to beat the U.S. benchmark’s gain in January for the first time since 2014.

“The concept of positive return in oil--we haven’t seen that since 2014,” Mike McGlone, a commodity strategist with Bloomberg Intelligence, said by telephone. The market structure “is a good indication of how things have changed. Overall, backwardation is very good for total returns.”

The price of WTI crude rose 7.1% last month, while the USO jumped over 8%, according to data compiled by Bloomberg.

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