The United States Oil Fund LP (USO US) is down -80% for the year, matching WTI Crude Oil’s -79% drop for the year. After a lull in early April, short sellers have been much more active as WTO Crude Oil futures fell below the $20/barrel level.
For the year, USO shares shorted has increased by 35.78 million shares, an increase of 118%, but there is a decidedly different trend in the first two months of the year versus the last two. From January 1st to February 27th short sellers were steadily covering their exposure, buying to cover -13.68 million shares or 45.29% of their total shares shorted. Shorts were covering into a weakening oil market and realizing some of mark-to-market profits. Shorts were up +$61.66 million, +23.63%, in less than two months.
From February 27th to April 21st USO short sellers went into overdrive, tripling their shares shorted with an additional +49.46 million shares shorted. Their bearish trading paid off with shorts earning +$286.07 million in mark-to-market profits, a +110% return on an average short interest of $261 million.
Over the last month, shares shorted increased by +15.04 million shares, +29.52%, and over the last week an increase of +6.50 million shares, +10.93%. USO short interest is now $213 million, 75.82 million shares shorted, 15.47% short interest % of float.
The cost to borrow USO shares has been increasing over the last few days, but there are still ample shares to borrow due to almost $6.5 billion worth of inflows into the ETN this year. Cost to borrow has jumped from less than 1.00% fee in the beginning of April to 3.80% on existing short positions today. Rates look to spike in the short term as short selling demand and the ETN’s overall volatility is driving rates up. We’ve seen active stock borrowing today with daily rates reaching the 30% fee range, and with one-off odd-lot stock borrows topping 70% fee. Shorts can expect stock borrow rates on their existing short positions to trade around the 5% to 10% fee range in the short term. While demand is pushing stock borrow fees up, USO’s $3.7 billion market cap will tamper the borrow side rate pressure as lender’s begin to undercut each other to get their shares out the door in order to earn lending fees.
By using our Black App and Blacklight SaaS platform to see weekly moves in shares shorted, investors can see trends on the short side starting and ending. This provides traders\investors with new trading ideas as well as helping them pick entry and exit points for trading activity. This is especially important in ETNs like USO where there are potential settlement and stock loan based risks in addition to market risk. If stock lenders find their lendable availability in USO suddenly reduced due to long shareholders selling out of their positions or contractually unable to lend shares below certain stock price points, there may be a sharp and sudden increase in stock borrow rates and recalls. While a short squeeze is not directly on the horizon, it may happen just as quickly, and abruptly as crude futures traded below $0.00.
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Managing Director Predictive Analytics, S3 Partners, LLC
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