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The WSJ Reported Losses To Individual Investors Due To The Oil Crisis

The WSJ Reported Losses To Individual Investors Due To The Oil Crisis

The collapse in the oil market leads to losses for individual investors who invest in funds that are traded on the exchange (Exchange Traded Fund, ETF) and track oil prices, writes The Wall Street Journal.

Recently, there has been a strong influx of funds into these risky assets, including the United States Oil Fund (US Oil Fund), which invests in oil futures, despite warnings that such instruments are not suitable for inexperienced investors.

Assets under management of 16 oil and gas ETFs tracked by FactSet increased from $4.8 billion at the end of February to about $11 billion on April 17.

According to the WSJ, investors are counting on the recovery of the oil market after the removal of measures introduced to curb the spread of coronavirus.

The main increase is accounted for by the US Oil Fund. Since the beginning of the year, its assets have grown by $5 billion, most of which have been invested in recent weeks. At the same time, the value of the Fund fell by 25% on Tuesday.

Pouring money into oil ETFs contributes to volatility in the oil market, writes the WSJ. US Oil Fund mainly invests in upcoming contracts. By the expiration of the nearest future, the Fund sells it and buys contracts for the next month.

US Oil Fund changed contracts in the week ending April 13. According to traders, this process was accompanied by a sell-off of assets, which set the stage for chaos in the market this week.

Although changing contracts do not immediately affect their value, it is accompanied by transactions that contribute to price fluctuations. While waiting for this process to start, traders may try to collapse the price of the nearest contract and raise the value of the next one to profit.

Before the contract expires, its value approaches the prices on the physical market. Traders who remain on hand with expiring futures must either sell them or take delivery by the end of the relevant month. On Monday, the price of the may WTI futures, which expired on Tuesday, fell by more than 300% and turned negative for the first time.

As the WSJ notes, some investors most likely bought the oil Fund's securities in the expectation of a fall in may futures, not knowing that the US Oil Fund had already exchanged them for June contracts. Now they may face losses when the Fund starts selling June futures and buying July ones. This process is planned for the period from 5 to 8 May.

At the moment, the June contract is trading at almost $8 per barrel cheaper than the July one. Analysts expect that the change in contracts will bring down prices again.

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