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[email protected]. Oil Ground Up is distributed in partnership with ClearComodity Network at ClearComodity.net and also the Oil and Gas Global Network, the leading podcast network for oil and gas. Our guest today is John Love, president and chief executive officer of USCF Investments, which manages among other exchange traded commodity funds, United States Oil Fund, ticker USO, generally recognized as the largest crude oil ETP in the United States. John also previously served as the portfolio manager for USO. We discussed the idiosyncrasies of managing such a visible futures portfolio during moments of acute crises, from negative WTI prices in April 2020 to the current record prompt backwardation of WTI on the back of the Iran War and the Hormuz oil crisis. John Love, welcome to the Oil Ground Up podcast. Thanks for joining us. Thanks for having me, Rory. So before we get into all the kind of nitty gritty of what it's been like from your position in the Iran War and the kind of Hormuz energy crisis, could you start by just describing to our audience who you are in your background and what USO is? Sure. Well, I am the president CEO of USCF Investments. That's actually an acronym. It used to be a longer name, United States commodity funds. We are known as a commodity ETF issuer and we had branched out into some other things. So we just shortened the name to an acronym, so it made sense. But we actually started off 20 years ago this week. April 10th is the 20th anniversary of our first ETF, which is USO. I was the portfolio manager when we launched that product and did that job for about a decade before I assumed this role. So we're quite well known in the space for USO, the United States of Oil Fund, UNG, which is our natural gas fund. We have a copper ETF, number of other strategies and also broad commodities. So we're one of the first commodity ETF issuers. We were the third commodity ETF to launch and we've been very active in the space over the last hard to believe two decades. Well, congratulations and happy anniversary. We are filming this on April 7th, but probably by the time this goes live, it will actually be in the 20th anniversary, so happy anniversary. And for those that aren't familiar, what is a commodity ETF? And specifically, talk about what does USO own? Sure. Well, the very first commodity ETF, not ours, but it was GLD, the gold ETF. And that actually, because it's possible to hold physical gold, that is a physical fund. It's taxed as a collectible, so it's a little different. But that is considered a commodity ETF in the first one. The second was a broad commodity ETF. And then the third was USO. Most commodity ETFs hold futures contracts. So the idea 20 years ago and even now is holding a futures contract is not the easiest thing to do. You have to manage margin. Certainly, you could put up, you want to have enough collateral if you take a futures position on to be able to meet margin calls. But you could find a day where if you don't have enough cash on hand, you're having to sell positions, things like that. It can be a stressful thing to manage. Also you have to roll futures contracts. And depending on the type of futures contracts you have, you can end up with, you know, owing the full value of the contract. The common joke is you're going to end up with barrels of oil in your backyard or filling your pool up. But in reality, there is a market where you could go offload the oil that you would technically own. I mean, you would own it if a contract expired, but there is a place you could, with difficulty, go sell that. But the idea with the commodity ETFs was, hey, let's, let's equitize the, let's make this easy for people to be able to get access to commodity markets. And so the first thing we did and the easiest thing at the time was, you know, pick a single commodity and oil, you know, being the most important, most liquid futures contract is where we started. So that's probably a long answer to your question. The short answer is it's generally an ETF that invests in futures contracts on the commodity that's in its name. So to your point about the kind of big part of owning futures contracts and kind of managed futures portfolios broadly is managing role. And one thing we talk about a lot on this podcast is term structure. We're currently in a situation where we have record backwardation. I think yesterday, you know, it was on Thursday. We had over $15 a barrel prompt backwardation on WTI. Talk to me a bit about how, so like, for instance, the, you know, if you look at the long term price of USO, you know, you pulled your Bloomberg terminal, you put USO in, look at the price. It looks kind of like the price of oil, but not exactly the price of oil as you would expect to see it. Part of that is that you are both benefiting from moments of positive role yield and backwardation and you are being penalized by moments of kind of negative role yield on kind of a whim or in contango or deeply oversupplied markets. Could you talk a bit about the mechanics around how that works and kind of how USO has kind of changed that, it changed how they deal with that over time and kind of how the, you know, it's not a long term representation of the price of oil, but rather a kind of a shorter term kind of exposure to, you know, short term moves in the price. Sure. Well, there's a lot we can talk about there. We can go into a lot of detail, but maybe the simplest way is to say that something like USO, when it is invested in the front-month futures contract and it's rolling at some schedule, you know, maybe, you know, first five days of the month or second five days, you know, there's different strategies that have slightly different role strategies. You know, if you look at USO or anything else that's doing that kind of thing, what I like to say is it gives you the economic return of the futures contract over time. It does not track the price. And so, you know, for sophisticated investors with a Bloomberg terminal, you know, you pull it up and let's say you're unsophisticated, but you have a Bloomberg terminal, I don't mean to say unsophisticated, but you're not used to futures markets. You're not used to doing this. And even the first time I, you know, I did it, it's like, oh, you know, it's not tracking. You have to do is adjust that futures contract for a role, some kind of role schedule. So in Bloomberg, you say, hey, you know, roll it every month, 30 days before expiration or 10 days or whatever it may be. And you will suddenly see a fund like USO or another commodity, T.U.P. tracking, another commodity, very closely tracking the return of that commodity over time. So now, USO is designed and the objective is to track the daily return. And that's stated, you know, in the perspective and you look at any commodity ETF, they tend to have language along those lines and say something like, it's not intended to give you the long term price of the commodity. It's intended to give you, you know, the daily changes. So something like USO, when it is in the front month, oil goes up 1%, it should go up about 1%. You know, give or take expenses, interest income earned on the cash, that kind of thing. But within a few basis points, it generally does that. You look over a longer period of time. And if you do not adjust your futures contract, you can see a return that looks very different than the commodity. So as you said, you know, we're in backwardation right now. USO or any ETF in a commodity with backwardation would look better relative to the unadjusted price return. And when you're in the reverse in a contango market, you would see the reverse. So that's kind of what it's doing. But I think the key thing is to expect the economic return in general. It's not going to be a perfect match and expect, you know, the daily return of whatever it's holding. It's a front month future than, you know, generally like I said, a 1%. And once you roll with the second month, you'd want to be tracking the second month. And if you had a fund that, you know, permanently or for a period of time had, you know, say multiple months, then you'd want to, you know, track track that. So that's probably a lot to start with. And maybe I'll let you direct me, you know, where we want me to focus. But yeah, there's a lot more we could say about that. I'd love to talk about contango. I'm a weirdo. Yeah. So let's start there. And yeah, we can't get nitty or nitty or gritty enough on the oil ground up podcast as the name indicates. So we want to go all the way deep, all the way nitty gritty. And so you mentioned contango there. I think the most extreme example, oh, and I guess the first question, is it, is USO just for our listeners who are global? It's largely or entirely WTI, correct? Correct. Correct. Correct. Yeah. It does have the ability, if it were to get very large, it could use, as it has, it could use a dish.
months of WTI could also use brand, it could even use other commodities, but for its history, it's been WTI and it could get quite a bit larger and remain WTI. Yeah. So when we're talking about Contango and WTI in particular, one date in particular jumps to mind, which is April 20th, 2020, when for the first time in the history of the oil market, we had a major crude oil benchmark, expire in negative territory. And that I think was, I think, a shock to everyone involved. And I'm sure a very acute shock for you as well, given that at various points, and I don't know how much you had rolled at that particular point, but obviously you were exposed to that dump out in a way that was probably quite painful to the actual fund itself. Could you talk to me about what that was like and kind of how that experience changed any of the ways that you so managed that type of exposure? Sure. Well, the period in general one was we're an unprecedented period now. Yes, we're out of here. And that was an unprecedented period. And you see that word thrown around all the time, but truly, literally off the charts, things were happening and not just like, okay, 10% lower than the charts ever gone before. I mean way different. And one way I like to look at it is shortly before that, that, you know, the COVID crisis materialized, we looked at returns and I think there'd been maybe five, a handful of days where you'd had a return greater than 15% or less than 15% in oil futures. On the biggest one was Gulf War I when the Desert Shield turned into Desert Storm, the price plummeted 33% because everybody said, okay, we're going to restore that supply from my rack. So you only had a handful of days like that. And then it's COVID ramped up going towards April and then getting into April. You started to have, you know, just, you know, lots of days where you had moves in that magnitude. And then of course culminating in April 20th where, you know, the drop was on the futures price 306%. So yeah, there were two things. You know, you can't have more than 100% negative decline. You're like, oh, accurately, you can. Yeah. Well, you couldn't in the future a month before that happened because there was actually a zero floor on the pricing mechanism on the CME. And so, you know, there's lots of stuff. But, you know, basically what you had happened in March, not only did you have a demand crisis like we've never had before of everybody's at home, economy shut down. I mean, it's nobody ever seen this. But then you had an OPEC, you know, price war where they decided, let's have a supply crisis at the same time. So a supply and demand crisis at the same time is just, I mean, it was, it was crazy. And so towards the end of March, I think it was that, you know, you started to hear some scuttle about about a first, the CME did adjust, you know, the exchange of the price could technically go negative. And the reason for that is I think some people saw that the price in the field could go negative. And that's happened before that, that wasn't unprecedented. You can have, you know, tanks fill up and, you know, at localized areas, you can have, you know, negative pricing here and there, not a common occurrence. But, you know, that can happen where somebody's saying, I'll pay you to take the oil away. And so, you know, I think the concern was, well, what if that happens at a massive level and, you know, tanks were filling up, so on and so forth. But honestly, we, you know, when we started here in this, we thought, you know, the probability of that happening is extremely low in the futures market. Yeah. We thought, I would agree with you. Yeah. I mean, even the night before, you know, we were talking about that the price was still above $20. And, you know, we thought it's, you know, probably not going to keep going down. But I think you had a couple things that happened with that one. The contract that was, the contract was expiring. It was in its, you know, it was the last day of trading. So you had an extremely thin market. So that greatly exacerbates what's happening. And if it had been, you know, if it had two weeks to expiration, you know, would that have happened? Would it have happened two weeks later when it did go in an expiration? Who knows? But you saw a massive disparity between the front month and the second month. The fear in the market was that, well, the front month does that as a second month going to do that. And it's the third month going to do that. And how long does this go on for? And that kind of thing. So that was kind of the prevailing, you know, nobody knew because we ran uncharted and charted territory. But, um, USO, um, to your question about, you know, what, what went on at, we had always had the ability to add additional contracts. If the fund got large enough, in fact, I remember conversations early on in, in 2005, 2006 that, you know, if we get to a certain size, we may have to add a second month. And the third month or, you know, you know, maybe we would have to even add Brent or something someday. And we always managed not to do that. We added swaps. We used ice contracts. We found ways to stick with the front month until 2020. And then what you had is actually, I think a lot of people thought, well, the oil price has gone down so much. It can't go down more. It's bound to, to go back up. Y'all said just a lot of volatility. I think maybe people, you know, options trading. And in ETF, you don't, unlike a mutual fund, you don't know directly who your investors are. Some of them you do, but not, you don't have great data. So it's hard to say. But never the bottom line was we, we had a lot of money coming in. And as we, you know, as the price was going down for every dollar that comes in or, you know, $100,000, you haven't to buy more futures contracts. So if oil is $100, that's one futures contract for $100,000. If it's $20, that's five futures contracts. So there's, there's not an infinite supply of futures contracts. It's a massive market. It's the most liquid futures market in the world, but it's not infinite. And so, you know, we got to the point where, you know, we did have to, you know, first of all, we rolled two weeks before that contract expires. So we were already out of the front month. Yeah. And, you know, had nothing to do with it going negative on, like some pundits on, we're saying it's like, we weren't even in the contract. And in fact, we had started to migrate to multiple contracts. So that's, that's really what, you know, our, you know, what happened in 2020 is that we just simply added first, we moved some of our position to the second month. And then, you know, that we kept getting bigger in the third month. And, and we ended up with a multi contract basket that we held on to for a period of time. We also, just to ease concerns, we expanded our role period. It had been four days. We expanded it out to 10 days. Okay. And so we actually maintained that sort of stability for a number of years. You know, that was the new, or that was the, the, you know, positions in the role period we'd gotten into. But USOs now back to just owning the front month that came down in size over time after 2020. And so as we, as we came down starting around 2022, 23, we started to move back to just the front month. And we also shortened our role period to start this year from 10 days to five days. So that, those are the major changes in the fund in those sort of five years between 2020 and, between the two crises of 2020 and the current Iran War. Yeah. So you were mentioning in 2020, you had a record dislocation between the front and the second month in WTI on the negative. And now we once again have a record dislocation with the front and the second month in WTI, but this time on the positive. So I, I don't actually remember off the top of my head where the, where the prompt WTI spread traded, but I think it was on like negative $40 as I like that on in, in 2020. Today or, you know, as of last Thursday, we had a $15 a barrel backwardation in the contract. So equivalently kind of insane in many ways. I guess probably not as theoretically unthinkable at the time. I guess backwardation is backwardation, but still, backwardation we've, you know, we've never seen before. So as I'm looking at the, the ticker just offer USO on the terminal right now, USO is back up to more than a 10 year high back, I think at the highest level since 2015. Talk to me about obviously 2020 was a very negative kind of experience. Now kind of as the exact polar opposite for, for a fund that's job is to hold front month and kind of profit from that role. So talk to me a bit about how kind of record backwardation has manifested for you in this, in this, in this fund. Well, I get a lot less confusion and complaints about when Contango's happening and, you know, I, you know, people look at a year where say there's a 15% that, you know, the start of the year you saw oil at $50 and then in the end of the year, there's a price where it's up 15% and you're like, well, I didn't get that return and if Contango was in place, well, so all you got a 7% return and it's like, well, I thought it should have been 15 and that's again, if you adjust for the role, you see, well, that's pretty much exactly what it was. The difference now is backwardation. What you'll see when backwardation has been in place or is in place over time is USO apparently out performing the. benchmark that it holds. I mean, reality again, it is tracking the the roll yield that you would get from owning the futures contract. So your listeners are probably where there's three sources of return and a commodity. A commodity future one is the spot price obviously. Second is the shape of the futures curve that roll yield, which can be positive or negative. And third is the the interest rate. And those last two are kind of related. Contango for a long time was in place, but there's also a period we had negative interest rates. So now we have positive interest rates. We have backwardation. But this record backwardation, yeah, it's been a different period to your question. I mentioned that when the oil price is going down, with inflows, we have to buy more contracts with the price going up. You buy the same dollar amount. I mean, you get a 10 million of flows. You buy 10 million of oil. It's fewer futures contracts. It's just been interesting. You get both going up this backwardation and positive price. Well, you also have a lot of volatility. That's something I think is worth mentioning as well. There's all kinds of things, directions we could go with this and what's happening right now. But it is worth, when you're talking about single commodity, it's worth getting into the volatility as well. Actually, could you expand that? Because I think at the top of all, we see the benefit of the backwardation. Volatility and increased margin requirements and everything else comes with this as well. So talking about some of the less happy side of extreme backwardation. Yeah. Well, I think it's the fundamentals right now just going on. There's so much we could talk about. But again, unprecedented situation. All the past oil crises, by the way, when they were supplied driven, only affected a much smaller amount of the, at least theoretically, the smaller amount of global oil. I mean, Ukraine in 2022 prices was about the same level. And yet that was about 3% of global supply. Now we're talking 20% threatened in reality so far. Maybe 8 to 12% has been offline. And that's going to increase as this month goes on if there's not a resolution. But at the same time, I think the market has been sensitized to President Trump doing the taco trade. It's kind of like, well, why is an oil 150 dollars? Well, physical dated Brent has hit 140 last week. And well, the future is about 110, something around that. So not only do you have backwardation in the futures curve between the physical and the futures contract as well. But I think the reason futures haven't gotten there, the financial markets haven't gotten there yet, is there's this expectation that, well, if there's a resolution here, you may see a very rapid price drop. And we've seen that on some scale. I mean, Trump has tried to taco a couple of times. You haven't seen the whole premium geopolitical premium wiped out. This is going to take some while to take a while for the markets to get back to normal, even if you have a resolution. But I think that's been the thing kind of holding markets back. Is everybody's like, well, can this really go on? Is there, is there going to be a resolution? So you have sort of this, I think the risk to the upside, but you have concerns about a rapid drop to the downside. And we've seen that play out with a volatility. And so where that comes in is, I mean, if you're an individual investor, I would look at a single commodity, like a single stock. And we think commodities in general, broad commodities, is something that, if you're thinking of allocation, you might want to look at that. Whereas a single commodity, that is, it's a riskier play because it doesn't have anything to balance it out. And so, things can change on a, change on a dime. Sometimes it seems really clear, especially when supply is tight, and it's all just fundamentals. It's just, hey, there's persistent demand, there's persistent fundamentals. You know, a lot of, you'll see a lot of pundits say, hey, we're bullish on energy this year. But a situation like this, it's very hard to say, what is going to happen? It's April 7th. We don't know what's going to happen tonight. Trump has given a deadline to Iran. And who knows what's going to occur between now and tomorrow. So, I think investors just need to be prepared for volatility. Anytime you're in a single commodity, especially in times like this. And if your view is to the upside, I just make sure you're watching the markets, you're where the potential risk and be ready for anything. We'll be right back after a short break. The dynamics of the natural resource trade changes every day. Get the full view of the commodity markets every week with commodity compass hosted by me, Jennifer Pickerel. From metals to energy, to agriculture, we break down the key moves, market drivers, and macro forces shaping the resource world, all in one sharp insightful podcast from the Clear Commodity Network. Whether you're a trader, investor, or industry pro, commodity compass helps you stay grounded and informed. Listen on Apple podcasts, Spotify, or at clearcomodity.net. Clear commodity network, digital news on the physical markets. I'm Rory Johnston, Post-Avoila Groundup and Founder of commodity context. If you enjoy how we're all about digging in and providing more context here on the podcast, you'll love my newsletter research service, commodity context. Subscribers can expect a mix of real-time event analysis, data reviews, and deeper thematic research, as well as the oil context weekly, marker report every Friday. If that sounds like your kind of edge, head to www.comardicontext.com or find us on substacks to join for free or go deeper with paid. We're offering oil ground up listeners an exclusive 20% discount off their first full year subscription by going to commoditycontext.com/roundup. That's commoditycontext.com/roundup for 20% off your first full year. And now back to my conversation with John Love. Let's forget about the interest rate for now. But let's just focus on flat price and term structure. So when we looked at, say, the second Monday, what I still refer to as the Monday when it comes to oil prices, which is the second Monday after the Iran War started. And I think we got up to just shy of 120 Brent and at one point there was a 35 day intraday route. Which to my knowledge is the largest route, maybe excluding April 2020 in terms of nominal dollar moves. It's a negative. But certainly one of the largest who've ever seen intraday like that, kind of in a non-completely broken market moment. Talk to me a little bit about the difference in the way that the fund reforms again, just add like a little bit of intuition here if you could. For say you're down, you know, $20 on a day, but backwardation is still extreme. Like you're still having this very, very extreme positive role, which is kind of almost like the earned income of a fund, even if the actual asset price level deviates. You talked me a little bit about how to think about that as an investor or as an analyst. Sure. I think there's two key things, there's a lot of things we could say, but there's two key things that I would keep in mind in that scenario. One, backwardation and contango, the shape of the curve, the impact of that is something that happens over time. It doesn't happen at the point of the role. It's not something that, you know, on a daily basis is huge. I would think of it as, you know, maybe options time decay or something like that. But the idea is that if you have a curve and backwardation where the price is going down, as you roll forward, if there's no change in the price, let's just say the price is $50 of a commodity. And the next month contracts $49 and the next one's $48. You roll from $50 to $49. If there's no change in the next month, then that $49 is going to kind of move up towards $50 as it approaches expiration. And then you roll again and the same thing happens. Now, of course, you know, this is happening in a dynamic market. So, you know, it's, it's, but that's the easiest way to kind of look at it. It's imagine the spot price doesn't change. So it doesn't happen all at once. But as an investor, one thing to keep in mind is you're in an ETF that does roll sometime before expiration. You do not want us to wait until the last day to roll our position. And no money manager does that, whether it's a public fund, private fund, people roll out ahead of the drop in liquidity. Unless they're extreme speculators or they're planning to take delivery of those those contracts. So you guys you guys have like a like a secret storage tank and cushion on that in case in case you forget to roll it, right? Exactly. Exactly. So, so when we do and we roll from the front month to the second month, one thing you will see you get the most volatility in the front month. So prior to the roll, you're tracking the front month entirely and you're getting that volatility. So price jumps up 10%. You're like, oh, I got a 10% return. Price drops 10%. You're like, ah, I got a 10%
drop. When we're rolling and we're doing it over a few days, you're getting a mix of the contract. So we're rolling 20% a day. So it's 80% the first day of the roll. It's 80% for month and it's 20% second month and so on and so forth. Tell when you're done with the roll, you're in the second month. So now you're tracking that second month price, which does generally have less volatility than the front month. They're usually very highly correlated. But in times of crises 2020 and now, you're going to get that spread between the front and second month and you're also going to have a difference in returns. So if we're pretty much complete or we're finishing up the roll, we're getting towards the end of the roll. As we move into that second month, you have a big price pop. Generally, we would expect we wouldn't go up as much because the second month is what we would be tracking once the roll is complete. The price drops. Same thing. We would expect probably not, probably wouldn't go down as much. You'd see that more in the front month. You'd see it mostly in the spot, physical price, than the front month and the second month. So I think that's one thing that people want to keep in mind. You could see this again back in January with natural gas when we had winter storm fern come in. Natural gas prices went up super high. You look at some of the leveraged in-burst natural gas ETFs that are out there. Somebody might have thought, "Well, okay, when the price goes up, it always after winter storm drops back down." But if you rode that up on the front month and then the ETF switched the second month and you were say, "Sure, you might not experience that same level of drop as you were expecting." So I hope that explains it. But in a nutshell, the front month is where the volatility, and the most of volatility is in the second month a little less, third month a little less, and so on. It's an interesting thing. One of the things that I've been observing and writing myself about constantly over the last, particularly the last two weeks, is the way in which extreme backwardation distorts so much of the industry. We're seeing right now Western Canadian select differentials. I'm at the Toronto. So we spent a lot of time looking at Western Canadian oil. Because of the travel time inherent in shipments between part of St. Alberta, down to Cushing or Chicago or the Gulf Coast, and if traders need to eat upwards of a month or even just weeks of backwardation, you get this discounting that's kind of baking this backwardation and travel time in. And in a similar way, normally, even in a normal, backwardated market, you probably wouldn't experience that much of a difference in the USO's performance between depending on what part of the role you're in. But in moments like this, you could actually see, depending on which part of the month you are in USO, you could see very different levels of perceived sensitivity to front versus second month in a way that wouldn't normally be perceptible because we're normally talking like there's been prompt and second and third month backwardation, maybe 10 cents, 20 cents. Now it's like $5, $8 or whatever more. You see a much different movement. And is that something that do you find that in terms of communication with any of the investors? Or I guess you don't speak to your point. You're not a mutual fine. You don't have a personal connection with all the investors at the degree. But the way people discuss it, is that something that comes up in terms of confusion? Well, you know, general, I think you hit it. I mean, most of the time, it's not, it's not an issue. Not a single month. Yeah, they're about 99.9% correlated. So you can have a 1% return in the front month and 99 basis points, 98 basis points in the second month, 1 where the other. It's these extreme times when you see it. So, you know, we've talked, you know, we'll talk to institutional investors saying, you know, folks that are more familiar with it. So I think that is something that, you know, to some degree, people are aware of. But it's one, it's something that people want to know. When does the role occur? And what is, what are the ramifications of being in the second month versus the front month? And I think that, you know, that's, I think you probably hit the nail on the head is, you know, most of the time is normal times. It's, you know, it's going to be close. And so looking over, you know, again, reflecting that economic return over time, you know, if you make that adjustment for the role, you might see that. But, you know, if you're tracking the front month and you get these big, big ups and downs, you know, there can be a difference. So we're trading may WTI right now, expiring and, you know, just shy of, of two, basically almost exactly two weeks. And you guys say that you're just kind of nearing the end of the role out of prompt into second month, so into the June contract. Is that, so that's typically the timeline you'd expect kind of, you know, you know, 10 days ahead of, or at least 10 days ahead of expires when you normally have ruled out entirely. Yeah, we, we now roll the first five business days of the month. So there were two days last week and then three days this week. So I guess I means tomorrow would be the last day of the role. So yeah, the first part is the calendar month, not the contract month. Correct. Yeah. Yeah. So that, that gets us out, you know, roughly about two weeks before. Yeah. Can you talk to you a little bit about interest in the fund? And I think I'm assuming you guys have had pretty dramatic inflows over the past month or so. Can you talk about the interest from both institutional and retail traders or kind of investors in this space and and how and how the Iran war and the kind of what we're hearing in many ways is the largest. And as I have said myself repeatedly, the largest energy supply crisis in the history of the industry. How, how is that affected kind of interest in USO? How is that, how does that compare say to 2022? Yeah. Interest is definitely up. We've had flows in both directions. We had some inflows, you know, really, I'd say we probably had some decent interest in the first couple of months of the year. There was this war premium building. Oil has been positive. You've had backwardation in the markets. So, you know, but a lot of that I tend to think is probably institutional. And when you get these big flows that happen on a dime, I mean, historically, we, you know, just based on anecdotal info we've tended to believe that's largely institutional. But we have had strong flows. I think USO was under a billion dollars. It was kind of at the low end of its historic size prior to this and it got to about 2.5 billion. We had a flow last week, 600 million out in one day. So we've seen both. We've seen it up and down. You know, I think people definitely look at this as a way to play the markets and their views on, especially their views on what's what's going to happen next. And so that's kind of, you know, what we see. And yeah, the interest is definitely picked up for sure. And are those those days that you'd see like a big outflow as an example? Would that be more likely on a day when oil is down sharply on, let's say, one of these taco trade headlines? Or is that more when prices are really, really high? And there's kind of this perception that they can't possibly go higher, you know, my as well trim profits here. Like, talk to me a little bit about the character of those kind of big move days. You know, we have so probably so many people with so many different strategies that it's hard to say. But historically, I would say we probably had more flows when the price has gone down. And I think that is, you know, kind of, you know, there's a view, maybe this is the low it can go. It could be hedges for option trades. You know, again, hard hard to say. But in this crisis, we have seen the flows accompanying the price up. And I think that's, and that probably were greater flows at the start of this. Now we're, you know, we haven't seen anything that significant come in. And, you know, the last, you know, since that big redemption last week. So, you know, I don't know if that's the market thinking this has to wind down at some point or exactly what it is. I also think that people were expecting that taco trade. You mentioned the second Monday, they're that Monday. And that was the day. The Monday. Yeah. I mean, I was expecting, I was telling, I mean, my talking point was risk is to the upside and tell us not until Trump says, we've obliterated everything we want to obliterate. And then the price is going to drop. And it, you know, it had touched that 120 level. And then it dropped entry day when he made his comments. But then it never went back down. Now the Iranian and Trump's like, yeah, we're winding up in the rain. He's like, we're not. And so, you know, I think he's tried a couple of times. So I, you know, I think the market has definitely been surprised in both directions. And so it's interesting. So I, I, you know, the bottom line is I don't think anybody knows what's going to happen. There's no way to know. And now that we've seen the lack of pure efficacy of Trump's ability to taco, like, you know, he's had with tariffs that was all 100% in his control. Yeah. Other things have been in his control. This is not. And you've got Iran, which is the big one, but you even have Israel. Yep. Pressure from the rest of the world and all of that. So, um, so yeah, I think it's, it's just been interesting. The flows, you know, I'd love to know, you know, whatever, you know, the reason for everything coming in is in is and actually have a database. But it's, I think it's just as many views as there are on a world. There's just as many reasons for
or inflows and outflows. - Yeah, the cliches become, it takes three to talk, all right? But, so I think you and your position likely think, I think about Termfix all the time, you probably think about Termfixer even more than I do, in terms of how important it is to the performance of the fund, and the kind of way you manage the positions. Given, as you said, and I think you're right, that this crisis has manifested as both this, the largest ever supply loss in spot markets. So, there is clearly this yawning gap, this kind of massive bid in backwardation, to fill that prompt. And this is, you know, sparked all manner. And I think there's been so many people talking about, you know, the dislocation between physical and paper barrels, which in many, some cases was a legitimate concern, but I think in most cases, it was mostly just a reflection of extraordinary backwardation that your prompt barrels were trading at, you know, like dated Brent with 141 or whatever. I think it was at Thursday and then, you know, the Brent prompt futures at 110, like a $30 spread is unheard of. And I think part of that is what that kind of acute supply loss, but also to your point, this kind of inherent belief that this is about to wrap up at any moment. And I think it's always hard to say, and I think you may disagree with me, but I've always pushed back hard against this belief that the futures curve is a forecast, that futures curves reflect present realities, not market anticipation. - Hardware sense. - Hardware sense. But I think it's also hard. I think again, and that's, you know, these are rules that there are always exceptions to. And I think in moments of crazy kind of volatility and acute market dislocations of queues here right now, it feels hard to say that there's not some kind of anticipation that from the market that's helping kind of keep that backwardation at double digit levels. How long can you stay at double digit WTI prompt deaths or time spreads? Because like, there's one of these things like, how long can we keep going along this current structure or does the broad shape of the curve eventually begin to normalize around spot reality? - I think, well, let's assume the crisis is not resolved and this goes on. I think. - Yeah, yeah. Well, let's see for the scenario. Let's just say, let's say the straightforward move remains closed for another month. Let's just use a nice round middle ground here. - Yeah, in that case then, well, one, I mean, clearly, I think the price is gonna keep increasing. You're gonna see most of that in the front months. - Agreed. - And so, or, well, I say most of that, I mean, I'm not sure, you know, what percentage versus the rest of the curve, the whole curve will shift up, but you should see most, you know, the front, the front, and what will rise up the most. So, you know, how long can that persist until we get demand destruction, I think, until people, because if the physical oil is not there, then that front month is gonna chase the physical price and tell the physical price, there's some kind of relief there, then, you know, that could continue to expand. So, that's gonna definitely be challenging. And I definitely agree with you that the curve is not a forecast. There may be some expectation. - Yeah. - Yeah. - And that might be a component of it, but it's generally the fundamentals, the, I mean, I even, people get confused on the terms normal, contango, normal backwardation, but I, but putting that aside and trying to think of a synonym for, synonym for normal, but I kind of, the contango is the norm in a way, because you have that, the cost of storage, you have the cost of, you know, all the things that go into that, and it's only when the market says, I'm worried about supply, that convenience yield increases and you get the shift in the curve. So, I mean, after 2020, I mean, I'm not making any, any guesses on anything, but, you know, it could, if this goes on, it'll get worse and worse until it hits the global economy. And you've already seen some demand destruction. That's probably another thing, by the way, keeping things from truly catastrophic. You might call this catastrophic already, but I mean, some people have been forecasting, you're gonna see brand futures, WTI futures, 150 and goes on longer to June, maybe 200. I've seen extreme 250 forecasts as you probably have, but I mean, I think if we kind of look at 150, I think that's definitely in the cards for the front of the curve. How much does the curve continue shifting? I think if you have that, I mean, you are gonna have the other months chasing it up too. So, you know, I don't know how far it gets beyond that. This could be the extreme, but I think this continues on. You'll see some of that until you get that demand destruction. I have definitely myself thrown at least $1,200 barrel call out if this continues through June, because I think again, it's just, it has to. And I think to your point that, you know, demand destruction is gonna be driven by spot or prompt fuel. That's actually, that's the price that people are actually paying. That's the way it's gonna be. That's the way it's the market's gonna clear. And I think also, even demand destruction is an interesting concept right now, because there's, you know, demand destruction is we typically think about it, which is price-induced reductions in consumption. And then there's what we're seeing across much of the world already, which is kind of more of a, almost COVID era government mobility policies to say like, "Force work from home." Or, you know, I think yesterday I saw headlines that Italy was basically beginning to forcibly ration jet fuel to say longer flights or preserving it for air ambulances or kind of emergency travel. I think this is another way that it's gonna manifest that you have left even before you might have that high price physical demand destruction or kind of price-induced demand destruction. The anticipatory kind of attempt to shield electorates from it can almost front run to a degree that like I think in some ways Europe hasn't seen the worst of the physical shortages yet. It's still coming. But you're trying to see governments get ahead of this in a weird way that's gonna really be kind of fascinating and disperting, I think, to watch, play out. - I think we-- - That's a really good way to-- - I think that's a really good way to put it. And I think, you know, not only demand destruction because of the price, but they actually can't get it. I mean, so it's like, we want the oil, but, you know, we can't get it. So that is, that's gonna be challenging too. And to your point, I think like there's-- actually, it's funny, I was gonna say that my first podcast, my first time, I took over as host partway through this podcast and my first episode was with a good friend Adi and he-- we had a debate actually about whether or not the normal state of the market was backwardation or contango. 'Cause there's-- it's a really theoretically-- when you get into like the finance kind of, kind of theory of it, whether or not it's normal, like is it-- is it-- what determines it is, is it carry an inventory cost, is it-- is it, you know, different waiting of, you know, hedging activity, all these things. But I think one of the interesting questions, and one of the questions that I've never personally been able to get a really good answer to from anyone, is I think we can all agree that the front of the curve is driven by this need to clear spot markets in all moments. Backwardation and scarcity, contango to pay for storage and kind of a cute oversupply. But the back of the curve, where the curve, where that tail actually levels out, is itself a bit of an open debate. And I've written a lot about it. I've debate a lot of people around it. Is it the market's anticipation? And this is-- I'm just going to put you on the spot here, because I'm curious to hear your thoughts. How do you think about it? Is that just a natural decaying consequence of spot market realities? Or is there at the back of the curve some attempt to say? 'Cause I mean, most of these curves now, you know, go back WTI's tails around 50-ish. Is that just the markets baked in assumption around long-term incentive prices? Or is that just entirely a consequence of the front of the curve? And again, I'm not expecting perfection, because I don't know if anyone knows this, but I'm curious to hear your thoughts. Yeah, I think you're right. I mean, there are-- I've seen many, many different views on this, and it's funny. I tend to look at the front of the curve and not really think about way out. And what does that mean? I-- that might be where you get expectations a little bit, because, you know, the market isn't sure. But I mean, my sort of belief theory is, you're right, you know, the front of the curve, you know, there's-- that's where you're gonna see the convenience yield positive or negative impacting things, essentially supply demand. And as you go from there, I mean, to me, if all things are-- if supply demand is perfectly aligned, and it's forecast to be perfectly aligned, then to me, Contango's normal, and you're gonna see that. But maybe, I mean, as you get further out, maybe there's uncertainty-- there's uncertainty about, you know, what is storage gonna cost? What is all of those kind of things? So maybe you do get-- I think the way to look at it would be, well, if the price is this today, this is what we think it should be five years from now, without anybody actually saying, this is what I think the price is gonna be five years from now. It's more like this is fair value with today's economics. So that's kind of how I look at it. As you get further out though, it is-- it does get way more theoretical unless, you know, you're less able to say, well, it's around, or it's COVID, or whatever. So yeah, it's a fascinating debate, for sure. We like to dwell on all of the fascinating, but inherently unanswerable theoretical questions here on oil ground. Yeah.
The last question I'm going to ask you is about specifically the benchmark, about WTI. Because I think one of the things that we've seen also kind of happen through this crisis is what one, you've seen this kind of constant, almost monthly kind of news cycle now of, oh my goodness, WTI is trading at a premium to Brent. Well, no, that's the backwardation talking, that's that kind of, you know, may versus June contractors looking at, you know, apples to oranges. But also, we have actually seen, you know, WTI after trading relatively tight to Brent for a very long time over the past couple of years, really is blown out to $10, $11 a barrel on a kind of a June to June basis or you're kind of aligned delivery months. Could you talk a little bit about how you guys are looking at that? I can, you know, there's a lot of theories is this, is this freight? Is this, again, is this some kind of time factor that you're, you're baking in the kind of transit time from, let's say the US Gulf to the North Sea or heck to Asia? Like, is that part of it? Or is the other thing we hear about a lot is that at least some of this is likely some kind of participants trying to bake in assumptions around the prospect, however slim that you could see trade restrictions from the White House that you could see a reimposition of some kind of product or crude oil export band that would obviously have kind of a distortionary impact on WTI say relative to Brent. So kind of, talked me a little bit about how you guys are seeing that that again over over the last so while particularly once you figured out and fixed pipeline ball next between cushing in the Gulf coast, which had been historically the main driver. This is actually one of the more acute blowouts and I'm curious to kind of see how you guys, how you guys think of that as primarily WTI market participants. Well, you're absolutely right that I mean the transit and the, you know, anything baked into the cost is something that's causing that differential. But you know, in terms of trying to think of the best way to phrase this here in, yeah, I guess the way I'd look at it, there's a couple things I'm just trying to respond to a couple things at once. You know, with trade restrictions from the White House, I mean right now we're getting the opposite. You've present a Trump saying come by or oil. Yep. And the reality is, well, we only have so much infrastructure to export it. So, but if they if they do, you know, and we are seeing that we are seeing WTI go up WTI, you know, it has been, like you said, it's trail Brent also and it was ahead of it yesterday. You know, I think there is some view in the market that, yeah, WTI should be more in demand. At the same time, it's not the grade of oil that everyone necessarily needs. So, you know, one barrel raises, you know, everything, but at the same time, especially when you talk about the prompt barrels like the oil I need, well, if you're not selling the grade I need at my refinery, then it's, you know, it's not, you know, that useful to me, especially, you know, conversion takes a long time and a lot of money and all of that kind of thing. But I think you are seeing the market maybe on the margins saying, yeah, there's going to be additional demand for WTI. There's been a lot of talking in the news with the last couple of days about the U.S. raising production and, you know, I think that that's also limited. I mean, the industry, even as, you know, we saw in January, it was resistant to, you know, Trump's, you know, pushed to go into Venezuela. They've been resistant to drill, baby drill. That sounds great until, you know, they're like, well, we've, we've been through, you know, the boom bus cycle a couple of times. We want to be smart with our, you know, CapEx and all of this and that. So, I don't think I'm quite answering your question. But, you know, I think, I think the bottom line is, yes, there's, there's definitely more global demand for WTI on the margins. That is likely to increase and keep increasing the longer this, this goes on. And it may be long-term beneficial to, to the WTI, the U.S. do U.S. crude. I don't think in a massive way, because again, you know, world needs heavy sour crude. That the world needs, you know, different, different kind of things. But, you know, I think it does, maybe add some, some premium to WTI that wasn't there before. And, and even to your point around the drill, baby drill and kind of U.S. Shale patch responsiveness to this, I think the backwardation also plays against that as well. That, you know, if any of these producers are trying to lock in that profitability, you're not able to lock in, you know, $110, $120 T.I. You're locking in, you know, for next year 80. Right. In many cases, like, so you know, they're definitely, I would say I would be bullish U.S. production at 80, right, at 80 T.I. But I think it's not 120. I would be much more bullish if they could lock in 120. Before we let you go, and again, thank you for joining us, John. This has been a really interesting conversation. Before we let you go, let our audience know where they should look out for you, where they should go for some of your work, or what they should be thinking about, you know, some of your other commodity funds heading into this, you know, heading into the second month of this crisis. Sure. Our website is USCFInvestments.com. We have a substack, you can find it on there, all of our social media stuff. We publish things from time to time, quick pieces, and also sometimes some longer stuff. We just did one on the Iran crisis we can have to go, so you can find that on our website. Everything about the funds is there, and we've got a pretty broad swath of commodity ETFs and MLP fund. So, Mystery and Energy Fund. So, definitely encourage people to go check it out. John love, thank you so much for joining us on Oil Ground Up. Thank you very much Roy. Great to be here. The information presented should not be considered investment advice. The ClearCamard Network and its affiliates are not responsible for any loss arising from any investment decision in connection with material presented herein. Please do your own research and speak with a licensed financial representative before making any investment decisions.
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