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Biggest oil ETF USO’s woes have been real slick for short sellers

Gains of at least 110% for some shorts, this analysis finds

Oil... black gold... Texas tea... for some investors

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The United States Oil Fund LP, the biggest oil-related exchange-traded fund, has taken a shellacking amid a historical collapse in the oil prices.

But USO’s woes have been a bonanza for short sellers, who have reaped gains of at least 110%, according to an analysis from S3 Partners’ Ihor Dusaniwsky.

Short sellers borrow shares of a security they think is likely to decrease in value. If they’re right, and the share price declines, they can buy shares at the new, lower price, return the original shares, and pocket the difference.

Amid a worsening oil glut — set off by a price war between big oil producers Russia and Saudi Arabia, but deepened by the decline in economic activity after the COVID-19 outbreak — the price of oil has fallen to the lowest prices seen in about 20 years.

See:Why oil prices just crashed into negative territory — 4 things investors need to know

Starting in late February, short sellers saw an opportunity, Dusaniwsky wrote.

“Short sellers went into overdrive, tripling their shares shorted with an additional 49.46 million shares.” That bet earned them $286.07 million in mark-to-market profits, more than doubling the average short stake of $261 million, he added.

Exchange-traded products like ETFs are often used to express investing views — for or against — themes, sectors, or asset classes that are bigger than a single company.

Read:SPY versus SPY? The world’s biggest ETF clones itself

As previously reported, USO has attracted billions of dollars in recent weeks from retail investors who likely thought the oil price had nowhere to go but up but the fund has lost over a third of its value in April even as the stock market SPX, -1.98% is up sharply.

That’s led the ETF’s management to shake up its strategy, including by distributing its exposure to oil futures contracts across varying delivery months, and announcing a reverse stock split.

Shorts are still circling the wagons, Dusaniwsky said in an analysis published Thursday. Over the past week, an additional 6.50 million shares, or 10.9% of shares outstanding, have been shorted, even as it’s starting to cost those traders more to borrow shares. “While demand is pushing stock borrowing fees up, USO’s $3.7 billion market cap will tamper the borrow side rate pressure as lenders begin to undercut each other to get their shares out the door in order to earn lending fees,” he added.

Earlier coverage:Retail investors are getting ‘hosed’ with the biggest oil ETF down more than 30% this week

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