Paulo Macro — Follow-up to Oil & Retail
"Three Quick Points." An erratum, the UCO counterpart to SCO, why these short-gamma levered ETFs may be "banging the close" and sitting on the illiquid back of the strip, and a thin WTI expiry that echoes a 2022 natgas tell.
One-line take: a same-day follow-up to
"Oil & Retail". (1) Erratum: 4mmbpd × $150 = $600mn (not $750mn) — point holds. (2)
UCO — the 2× levered
long oil ETF (opposite of SCO) — has bled ~half its assets to $440mn (under half SCO's size) and costs 8.3% to short (only 200k shares). Both SCO and UCO are inherently
short-gamma: their inflows exacerbate the daily move into the 2:30pm NYMEX settlement (a timing mismatch vs the 4:00pm NAV) — likely the "someone banging the close" (rhymes with "Shmessent") subscribers noticed. Because they hold not just the front month but Dec26/Jun27, their footprint on the increasingly illiquid back-of-the-strip is outsized — "why shale can't hedge farther out: a giant short ETF is sitting on the curve." (3)
Molecules vs paper: on WTI May26 (K26/CLK26) last trading day only ~7.5k contracts traded vs 33k on the prior (J26) expiry against similar ~18-20k open interest — a thin, potentially unstable expiry echoing the Henry Hub Feb-2022 (NGG22) last-day tell that preceded a wild move. "If it prints there, it trades there… probably nothing but vibes."
UCO is tabled as a new positioning-tell reference; SCO recurs as the short-gamma counterpart. Crude/natgas futures contracts are not tickers.
1. Stocks & names mentioned
| Ticker | Name | Research | View | What's said | Source |
|---|
| UCO | ProShares Ultra Bloomberg Crude Oil (+2× WTI) | QT · SA · STK | Neutral | The 2× levered long oil ETF (opposite of SCO): assets fell ~half to $440mn — less than half the size of the 2× short SCO — and it costs 8.3% to short (only 200k shares). Cited as evidence, not a stance: another vol-drag-plagued levered product and, with SCO, an inherently short-gamma "shooter" whose inflows exacerbate moves into the 2:30pm NYMEX settle. | read ↗ |
| SCO | ProShares UltraShort Bloomberg Crude Oil (-2× WTI) | QT · SA · STK | Negative | Recurs as the larger (>$1bn) short-gamma counterpart to UCO: short front-month plus Dec26/Jun27, so its outsized footprint on the illiquid back of the strip helps explain why shale "can't hedge farther out" — a giant short ETF is sitting on the curve. Still the broken -2× product to fade, not own. | read ↗ |
One new positioning-tell (UCO, the 2× long) is tabled; SCO recurs as its short-gamma counterpart. The WTI May26 (K26/CLK26) and April (J26) futures and the Henry Hub Feb-2022 (NGG22) / March (NGH22) natgas contracts are futures, not tickers. Research: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis.
2. Talking points
Erratum
- In the earlier note, 4mmbpd × $150 = $600mn (not $750mn). The point still holds — exporting less oil at a far higher price beats exporting more at a low price. "Not a hard decision."
UCO — the bleeding 2× long counterpart
- UCO (2× levered long oil) is the mirror of SCO. Its assets have fallen nearly half to $440mn — under half the size of the 2× short SCO — and it's expensive/scarce to short (8.3%, 200k shares). Another vol-drag victim; the flows are "stunning."
Short gamma and "banging the close"
- Subscribers noticed oil selling off right at the 2:30pm NYMEX daily settlement, suspecting "someone" (rhymes with "Shmessent") banging the close. The likelier culprit: SCO and UCO are inherently short gamma, so their inflows exacerbate the move into settlement, worsened by the timing mismatch between the 2:30pm crude settle and the 4:00pm NAV calc — like 2×/3× single-stock ETFs affecting the equity 4pm close, but with an added timing gap.
Sitting on the illiquid back of the strip
- Over the past decade, longer-dated crude contracts have grown illiquid as airlines/shale stopped hedging fuel/production far out the strip. These ETFs hold not just the front month but Dec26 and Jun27, so their share of open interest is outsized. "Now we know why shale is not producing more — they can't hedge farther out because a giant short ETF is sitting on the curve."
Molecules vs paper — a thin expiry tell
- On the WTI May26 (K26) last trading day, ~20k open interest went in (vs 18.5k for April's J26) but only ~7.5k contracts traded — vs 33k on J26's last day, which had given late longs a chance to get flat. A thin, illiquid expiry.
- He's seen this before: the Henry Hub Feb-2022 (NGG22) natgas contract behaved similarly on its last day while attention was on the already-rolled active contract — a "tell" that Henry Hub was "about to do something crazy" (it did, over the following weeks). "If it prints there, it trades there. Probably nothing… but still… vibes."
3. In plain English
Jargon-free note on the newly-named ETF. (Plain-language companion; renders on the ticker's consolidated page.)
UCO — ProShares Ultra Bloomberg Crude Oil Neutral
UCO is the mirror image of SCO: it's built to move about twice as much as oil in the same direction each day, so it's a leveraged bet that oil goes up. Paulo isn't recommending it — he's pointing out how these products distort the market. Retail has been fleeing UCO (its pot of money roughly halved to $440mn), and both UCO and SCO share a hidden flaw: they must trade in the same direction as the day's move right before the afternoon oil "settlement" price is struck, which can shove the price around near the close (what some traders mistook for a government official "banging the close"). Worse, these funds hold longer-dated oil contracts that barely anyone trades anymore, so a big fund parked there can distort prices far out into the future — which, Paulo argues, is part of why oil producers can't lock in prices to justify drilling more.
Key points extracted from the paid Substack post (in transcript.txt) for personal study. Not investment advice. © Paulo Macro for source material.