What is happening to oil markets? The short of it
Short selling, geopolitics and the unsophisticated investors on free trading apps in between
United States Oil (USO) is the biggest oil Exchange Traded Fund in the world. A large contingent of its investors are millennial investors who, mistaking the ETF for a ‘spot’ rather than future contract price, piled into USO like nobody’s business. These unsophisticated investors are predominantly using free trading apps like RobinHood. As oil prices reached negative figures, hedge funds predicted the further drop in USO stock prices and began to ‘short’ USO stock on a massive scale, reaping a reward of nearly $300 million USD.
Shorting, to put it simply, is a financial term for speculation on the decline of stock prices. In Europe, shorting bans have taken effect in France, Belgium, Greece, Austria and Spain, frustrating many investors and hampering European hedge fund strategies including Man Group, Lansdowne and Legg Mason. Paul Inglis, CEO of the hedge fund trade association AIMA, is not happy about the bans, telling Reuters:
“In the current volatile market, short selling is, above all, a critical risk mitigation tool which enables hedge fund managers to protect their clients’ money.”
The bans come on top of increased reporting requirements in the EU. On 16 March, the European Securities and Markets Authority (ESMA) published its decision to lower the threshold at which persons who hold net short positions in companies, whose shares are admitted to trading on an EU regulated market. This was reduced to 0.1% of the issued share capital from a previous proportion of 0.2%. In order to respond to the regulatory change, we have seen some hedge funds stretching or building compliance staff resources to compensate for the change.
Meanwhile, oil prices have risen again due to Trump’s sabre-rattling announcement via Twitter on 22 April that he had instructed the US Navy to “shoot down [sic] and destroy any and all Iranian gunboats if they harass our ships at sea.” This is in addition to the news, on the same day, that Iran’s Revolutionary Guards Corps successfully launched their first military satellite. This is of course all in the context of the US assassinating one of IRGC’s most celebrated generals in January and the resultant Iranian ballistic missile strikes on US personnel in Iraq. Oil movement would be hampered by a conflict between the two countries, increasing the scarcity of oil. So USO stock might pick up again after all – with the possible downside of an ensuing global conflict.
If your investment fund or law firm needs back up in the current regulatory landscape, don’t hesitate to get in touch.
Felix Blumer is a Consultant at Rutherford, the Legal and Compliance executive recruitment specialists.