World's Biggest Oil ETF Suspends Sales Of Creation Baskets: "This Shock Is Real... Be Very Careful Out There"

Update (0855ET): USCF has suspended the creation process for its USO baskets...

In the Form 8-K filed on April 20, 2020 (“April 20 Form 8-K”), United States Oil Fund, LP (“USO”), indicated that it would announce through a current report on Form 8-K when USO has determined to temporarily suspend the issuance of additional Creation Baskets. Today, USO issued all of its currently remaining registered shares. The registration statement that USO filed on April 20, 2020 with the Securities and Exchange Commission (“SEC”) to register an additional 4,000,000,000 shares has not been declared effective. As a result, USCF management is suspending the ability of the USO Authorized Purchasers to purchase new creation baskets until such time as the new USO registration statement for the additional shares has been declared effective by the SEC.  The ability of Authorized Purchasers to redeem Redemption Baskets during the suspension of the sale of Creation Baskets will remain unaffected. In addition, trading of USO shares on the NYSE Arca, Inc. will not be discontinued as a result of the suspension of sales of Creation Baskets.

USO will issue a subsequent current report on Form 8-K to announce the effectiveness of the above-mentioned registration statement offering the additional, new shares as well as USO’s ability to resume offering Creation Baskets to its Authorized Purchasers.

In English that means the managers are basically transforming USO into a closed-end fund, and a ForexFlowLive notes, they are basically freezing new trades and probably going into management (or damage limitation) mode.

How long before retail oil investors demand a bailout? When will The Fed start buying USO? Somebody do something!! Think of the children!

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After posting his best month ever in March (up 63.5%), Pierre Andurand - manager of The Andurand Commodities Master Fund, considered by many to be the world's largest oil hedge fund - is someone worth listening to when it comes to the oil markets.

After yesterday's catastrophe in oil markets exposed the farcical and fragile relationships between physical and paper oil markets, today's price action in the 'out' futures...

... and the ETFs...

Have destroyed all the bullshit comments yesterday that this was all technical and be reassured that this is not a reflection of reality. It is!

The oil curve just got hammered all the way out, as “cash and carry” arb goes “out of business” along with likely basis-traders blow-outs - but, as Nomura's Charlie McElligott warned this morning, retail investors (who pumped a record $1.4B into USO last week) are also experiencing the pain of negative carry.

USO is trading at a massive premium to NAV...

Remember, USO ETF represents 30% of the June WTI contract open-interest now (CL2 down -20% right now), while any other systematic roll products were likely still long May contracts, judging from forced-selling over the final 30 minutes of the day closing-trade.

And this is what Pierre Andurand is most concerned about - that the link between the massively dominant Oil ETF and the actual underlying markets is about to snap and leave a gaping hole at CME...

I think the CME might have no other choice but to close out the ETFs positions. It cannot take the risk to have negative prices before the roll and be on the hook.

This shock is real. Be very careful out there. We are going to hear about crazy losses in the days and weeks to come

Nomura's McElligott goes a little further than Andurand in his questioning of the paper oil markets.

The entire strip for both WTI- and Brent- Crude are collapsing lower today in unison, because yes, there is nowhere to put the stuff (storage tanks, pipelines, supertankers are all full), but also because market participants believe things won’t be getting much better into the future either, as “nobody needs it,” and without storage since you cannot take physical delivery - then what is the “utility” of the futures contract itself?

As far as USO is concerned, despite there not being a redemption mechanism...

Josh Brown summed things up well...

USO will hold something like 30% of June futures at the open today because retail traders have poured money into it, thinking it was a long-term bet on oil. It's turning into one of the great incinerations of retail money of all time.

Nomura notes that there is certainly a scenario where if June futures were to also go negative, then USO would be “lights out” as a partnership and could actually “owe” money.