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

NEW YORK (Bloomberg) -- The biggest U.S. exchange-traded fund that tracks oil is heading for the largest two-month outflow in six years, raising concern that crude’s 30% rally may stall.

Holders of the United States Oil Fund (USO) have withdrawn almost $1 billion so far in April and May, according to data compiled by Bloomberg. Crude dropped about $12 a barrel after a $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. U.S. 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 $1.95 to $59.63 a barrel on the New York Mercantile Exchange, up from a closing price of $43.46 on March 17. Futures rallied 25% in April, the biggest monthly gain since May 2009, and are little changed this month.

Fund’s Gain

The U.S. Oil Fund was at $19.56, up from a record low of $15.96 on March 17. USO, which holds about 10% of the front-month July WTI contracts, jumped 22% in April.

Crude’s recovery has slowed this month. U.S. production climbed to 9.57 MMbopd 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% 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, 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. The supply surplus will push oil down to “$55 and then possibly lower,” he said.

Behind Oil

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 $368.4 million has been withdrawn from the U.S. Oil Fund this month, following $591.6 million in April, the biggest single-month outflow since April 2011.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

Crude Declines

The 2011 outflow was followed by a drop of as much as $17.02 in WTI prices. When the fund had a two-month withdrawal of $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 $2.86 billion was poured into the U.S. 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.”