Oil prices have surged about 50% in the past month due to the war in Iran, and some investors have cashed in on the bullish move. But there’s also a growing trade in the other direction.
Short interest in the United States Oil Fund, an exchange-traded fund known as USO that allows traders to bet on the direction of oil prices, has risen by around 3 million shares, or 50%, in the past month, according to data and analytics firm S3.
The oil fund holds West Texas Intermediate crude oil futures contracts along with swaps and cash instruments. West Texas Intermediate crude traded 5.3% lower on Monday to $93.50 a barrel after Trump administration officials said they were working on solutions to high oil prices.
Banks have lately been raising their oil price expectations because of the war. Few expect oil to rise above $100 a barrel for a prolonged period, but that could change if the Strait of Hormuz from the Persian Gulf to the Gulf of Oman stays closed for the next few weeks.
S3 says that the increase in short interest doesn’t mean oil is about to fall—but it could mean there’s more volatility ahead.
“The build in short exposure during a strong price advance suggests traders are positioning against the momentum, a setup that often increases volatility as positioning becomes more crowded,” the S3 report says. It may also mean that traders are hedging their risk—offsetting long positions with short ones to ensure they don’t incur big losses if oil reverses.
There has already been extreme volatility. On March 9, oil traded in its widest range since the depths of the pandemic, fluctuating $38 in a single day.
