Direct answer: USO was the largest oil ETF and widely held by retail investors believing they were 'buying oil' as a commodity exposure. In reality, USO held near-term WTI crude oil futures and rolled them monthly, continually selling the expiring contract and buying the next month. In late April 2020, with global oil storage full from COVID-related demand collapse, the May 2020 WTI futures contract went to negative $37/barrel on April 20 as holders could not find storage and were paying to offload contracts. USO had been rolling its position but still held May contracts. The negative price event combined with ongoing contango (where front-month futures trade below later-dated futures) destroyed value through both spot exposure and structural roll costs. USO changed its mandate multiple times in days, confusing investors. The fund ultimately survived but destroyed significant capital.
United States Oil Fund (USO) April 2020 Autopsy: What Actually Went Wrong?
The investment
Category: Commodity ETP Failure
Era: 2020
Primary failure mechanism: front-month futures roll / negative oil prices / structural mismatch
What investors believed
USO provided retail investors with oil exposure when oil prices were depressed.
What broke
USO's mechanics differed fundamentally from holding physical oil. Negative futures prices were not priced into any retail investor's mental model.
Warning signals that were visible
- USO prospectus describing futures roll strategy visible for years before the event
- Oil futures market contango visible in futures curves (near-month below far-month), indicating structural roll losses for USO
- COVID-related demand collapse visible from February 2020 creating obvious storage constraint
- CFTC filing limits restricting USO's front-month holdings in weeks before April 20 foreshadowing structural stress
Transferable lessons
- Commodity ETFs that hold futures do not behave like holding physical commodities due to roll costs in contango markets
- Negative commodity prices were legally possible and had occurred in electricity markets before oil
- Retail investment products with complex mechanics can have structural features that deviate dramatically from their marketing description
- Contango in oil futures was a persistent and known cost to USO investors that compounded over time before the acute event
Frequently Asked Questions
How does USO actually work?
USO holds near-dated WTI crude oil futures contracts, typically the front-month contract. As that contract approaches expiration, USO sells it and buys the next month's contract in a process called 'rolling.' When the next month's contract trades at a higher price than the expiring contract (contango), this roll has a cost: USO receives less for the contract it sells than it pays for the contract it buys. In backwardated markets where the next month's contract is cheaper, rolls generate gains. Oil markets are frequently in contango because the market prices in storage and financing costs. This structural roll cost eroded USO's returns relative to spot oil prices over time, even ignoring the April 2020 event.
What caused oil prices to go negative?
WTI crude oil futures went to negative $37 per barrel on April 20, 2020, for a specific technical reason: buyers of the May 2020 contract who could not take physical delivery needed to sell before expiration, but all U.S. oil storage was essentially full due to COVID-related demand collapse. Rather than pay for oil storage they could not arrange, futures holders paid others to take oil off their hands. Physically settled futures can produce negative prices when the cost of delivery exceeds the commodity's value. Brent crude, settled financially rather than through physical delivery, remained positive. The negative price was confined to the front-month WTI contract and resolved when that contract expired.
Did investors using USO for 'buying the oil dip' succeed?
Investors who bought USO at extremely low prices around April 2020, expecting oil to recover, generally lost money relative to what a pure oil price exposure would have returned. WTI spot prices did recover from the negative/near-zero levels. However, USO's mandatory roll into later-dated contracts at significantly higher prices meant the fund captured little of the front-month recovery. The fund's adjusted value reflected the ongoing cost of holding contango futures curves rather than a direct oil price exposure. Investors who bought USO as a 'leveraged oil bet' typically found the return was substantially worse than the spot oil price movement they had anticipated.