US watchdog probes ETF’s oil contract stake

US federal regulators are investigating an investment vehicle that has amassed a 20 per cent stake in a crude oil contract traded in New York and London amid fears that its activities could be distorting the market.

The Commodity Futures Trade Commission is investigating the United States Oil Fund, an exchange-traded fund listed in New York, after its size surged in the past three months to 95,000 lots on the West Texas Intermediate contract for immediate delivery.

The probe is part of a continuing national investigation into crude oil trading practices.

It is unclear what action the regulator will take, if any, and officials familiar with the matter said the investigation was in the preliminary stages. The CFTC has emergency powers to force the fund to reduce sharply its position at Nymex to 10,000 contracts.

The CFTC is hesitant to take such drastic action amid worries that it would drive the fund into foreign exchanges outside its control, according to people familiar with the matter.

The USO fund has shifted a proportion of its oil futures from Nymex into ICE Europe in London, which is regulated by the UK’s Financial Services Authority. The CFTC, which is in talks with the FSA, is considering asking the UK regulator for its support in any move related to the size of the fund’s positions, people familiar with the matter told the Financial Times.

The fund’s trading patterns, which involve selling each month in a single day the expiring front month contract and buying the following futures contracts – a trade known in the industry as the roll – has already affected prices, according to oil analysts and traders.

Stephen Obie, acting director of the CFTC enforcement division, said that the regulator was closely monitoring the oil market. “CFTC enforcement staff are investigating the trading activity of multiple market participants, including the US Oil Fund, in crude oil markets concerning the February 6, 2009, roll.”

The USO fund could not immediately be reached for comment.