(Bloomberg) — An exchange-traded product that profits when oil prices fall had its biggest weekly outflow on record as several buffers that had helped keep rallies in check begin to fade.
Investors pulled roughly $220 million from the ProShares UltraShort Bloomberg Crude Oil ETF last week, the most on record, according to data compiled by Bloomberg. The fund returns twice the inverse of the daily performance of its underlying index, which rose 2.2% during the period. Meanwhile, several vehicles designed to profit from higher oil prices, including the United States Oil Fund and Brent Oil Fund, saw notable inflows over the same time frame.
The outflow comes as global oil reserves draw down at a record pace, while a flare-up in hostilities across the Middle East threatens to complicate negotiations. The US-Iran war has led to the near-closure of the crucial Strait of Hormuz, curtailing supplies of crude from the region to global customers and fueling a wave of retail interest in oil trading.
“The swift resolution that could have sent oil prices sharply lower has not materialized, while upside risks to oil remain in place,” said Bret Kenwell, analyst at eToro, which tracks retail investing. “For an inverse oil ETF, that backdrop makes it harder for investors to stick around too long — and in a leveraged product, volatility is the opportunity while time is the risk.”
He also notes that last week’s outflow may have been driven by a correction following a previous two-week rally, as well as a recent four-to-one reverse stock split that “served as a reminder not to overstay their welcome in a leveraged product.”
The outflow belies an otherwise bearish market backdrop, defying early forecasts made at the onset of the conflict that predicted oil could surge to $200 a barrel. West Texas Intermediate futures are down about a fifth since the US and Tehran agreed to a ceasefire in early April, pressured by record US exports, a slowdown in Chinese demand and a steady trickle of crude finding its way through the strait.
In another sign of bearish sentiment, hedge funds and other money managers boosted outright short positions in WTI in the week ended June 2 to the highest since mid-February, just before hostilities in the Middle East began. Retail investors frequently position against extreme market sentiment, known as a “buy-the-dip” strategy, to profit when prices eventually correct.
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