United States Oil Fund (USO)

Morningstar suspects that because ETFs (by their nature) must be transparent, the market can gouge the prices on the positions that the ETFs will take when they rollover their holdings.

In fact, to some extent I feel that part of the problem for typical investors is that largest of these funds are themselves getting manipulated. Indexes by their nature have to be very transparent. You have to know where they're trading, when they're trading. And the problem is, is that that can get taken advantage of by other market participants.

In the case of futures funds, they're rolling over their entire holdings when they change between contracts. And it's a much less liquid market, so you can actually end up with other participants taking their positions, taking the index positions, before the index does, and causing them to take poor prices.

This is part of the reason I think that I think we're seeing such steep contango, which has actually hurt the returns on a lot of these funds lately.^[1]

1. ↑ Morningstar on ETFs

Crude began to rally early Thursday as U.S. commodity markets opened on positive news that 2008 Q4 GDP numbers were not as terrible as expected. Futures prices are completely ignoring the stockpiles of crude throughout developed countries, in the Arab world, and floating off-shore in tankers. While WTI crude futures were trading below $45/barrel they were argued to be cheap, since which time markets have priced the black gold commodity higher by 20%. The previous levels were optimistic that demand would increase and macro economic data would turn favorable.

To traders who profited from buying DIG or USO while crude was trading near $40/barrel, congratulations, take profits and reverse it. The "re-flation” trade, Chinese stimulus promises, and Thursday's less terrible than expected GDP report have provided enough froth for commodities to float above realistic valuations. Now is the time to take account of the meaningful forward indicators of economic activity and detach the rear view mirror.

The supply of crude grew by 3.3 million barrels compared to 2.0 million barrels the week before, according to the EIA Petroleum Status Report on Wednesday. U.S. inventories of crude are at levels above 360 million barrels and are higher than any at any point in the last three years. Refiners are operating at 82% capacity with room to scale up production over time, yet draws in gasoline supply won't have an immediate impact on the prices of crude due to supply gluts. Refiners will moreover be less inclined to scale up production given jobless claims data released Thursday, which suggests it is unlikely that U.S. consumers will increase their consumption of fuel.

The long term trend of crude oil will be to the upside, but the immediate macro and micro economic threats make the case for active traders to short the USO, while a substantial pullback of crude towards $40/barrel will offer an opportunity to get long the USO for "buy and hold" investors.