Why oil futures can drop below zero while your ETF stays afloat

When West Texas Intermediate oil futures turned negative, retail investors were caught off guard. This video explains why oil futures can trade at negative prices and why the structure of exchange-traded funds like USO creates a mismatch for investors when markets behave in unprecedented ways.

The historic dip into negative pricing for front-month West Texas Intermediate oil futures occurred because financial buyers were desperate to exit their positions before May expiry, while refiners lacked the capacity to accept delivery. Traders were forced to pay others to take the oil, a situation exacerbated by the mechanics of financial markets.

While futures markets are designed to handle negative pricing through clearinghouses and margin requirements, retail products like the USO ETF were built on the assumption that prices would never fall below zero. Because an ETF share price cannot go negative, these products face structural challenges when underlying futures contracts deviate from traditional market expectations.

Source: Can The Price of USO go negative? | The US Oil ETF | Negative Oil Prices