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Aug 22, 2016

S3 BLACKLIGHT: Crude ETF Short Interest Rises Along With Crude Futures Price

With WTI Crude Futures up over 20% since its August 2nd sub $40/barrel low there has been a “short squeeze” in the crude futures and options markets as traders closed out short positions in an oil rally fed by rumors of an OPEC production freeze. While the futures markets moved up on these rumors, short interest in the two major crude ETF’s actually increased since crude hit its recent sub $40/barrel low.

Although OPEC has repeatedly voiced their intention of a production freeze in order to lift oil prices closer to the $50/barrel level, the truth is that they are actually pumping oil at a record level of 32.9 million barrels/day as of June 2016. In fact, five of their top producers (Saudi Arabia, Iraq, Iran, UAE and Kuwait) are pumping oil at near capacity levels. Additionally Russia, which exports 15% of the world’s oil, is also pumping at almost at max capacity and U.S.\Canada rig counts are up for the 12th time in 12 weeks.

With the rise in the price of crude therefore not supply based, we should see a dramatic increase in demand as the catalyst for the jump in the price of crude. But when looking at the major worldwide consumers of crude a surge in demand is not at all evident. China is close to maxing out their strategic oil reserves, which made up 15% of their overall demand; U.S. Strategic reserves up 3% for the year and are at 2.08 billion barrels; U.S. Cushing reserves are at 64.5 million barrels, just under their 65.4 million year to date average; Russian oil demand is relatively static this year; and European crude demand has been falling every year since 2010 and will probably continue the trend in this post-Brexit economy.

Short interest in the two largest crude ETF’s are, unlike oil futures, up since the end of July. Short interest in the $3.5 billion market cap United States Oil Fund (USO US) is at $711 million, up 19% since the end of July and up 94% year to date. The last time USO short interest was over $700 million was September 2015, which was the last time crude neared $55/barrel and within 5 months dropped 39% to $33.66. The smaller, but leveraged, $1.5 billion market cap VelocityShares Daily 3X Long Crude ETN (UWTI US) hit its historical high short interest of $367 million, up 52% since the end of July and up 644% year to date.

In addition to short sellers in these two ETF’s showing their bearish side, long holders have become notably less bullish. While these two ETF’s saw year to date inflows of $650 million, a 15% increase to their markets caps, August activity for the two ETF’s was a net outflow of $1 million.

It seems that while short sellers in the crude futures and options markets are covering their positions, short sellers in the crude ETF’s are building theirs with almost $250 million of new short activity in August alone.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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