USO’s Front Month Oil Strategy Has Lagged Crude Oil Itself by Half Since 2014, And the Roll Cost Is the Reason

If you bought the United States Oil Fund (NYSEARCA:USO) to bet on rising crude prices, the fund is living up to its reputation. USO is up 114% year to date as WTI rallies. The problem emerges when you hold it across a full oil cycle. Over the last decade, USO has returned roughly 57% while spot WTI roughly doubled off its 2016 trough. The gap has a name: roll cost.

What USO Actually Owns

USO is a commodity pool that holds oil futures rather than physical barrels. It holds NYMEX WTI crude futures, historically the front-month contract, and rolls those contracts forward as they approach expiration. With an expense ratio of 0.83% and roughly $2.2 billion in assets, it is the most accessible oil-price proxy retail investors can buy in a brokerage account.

Most holders assume the fund tracks the barrel. It tracks the futures curve, and those are different animals.

How the Roll Eats Your Return

When oil futures are in contango, later-dated contracts trade above near-dated ones. USO must sell its expiring contract and buy the next month, repeatedly. In contango, that is a forced “sell low, buy high” transaction every month. The fund’s NAV bleeds even when spot prices are flat.

WTI has spent the majority of the past decade in contango. Spot WTI bottomed at $30.32 in February 2016 and trades near $101.56 today. That is more than a triple off the lows. USO captured roughly half. The missing return went into the spread between successive futures contracts, month after month.

The April 2020 Scar Tissue

The contango trap worsened on April 20, 2020, when the front-month WTI contract settled at $16.55 on its way to a brief negative print. USO was forced to restructure, spreading its holdings across multiple contract months rather than concentrating in the front month. That change reduced the risk of another negative-price blowup and locked in a permanent structural shift: the fund now sits further out the curve, where contango costs can be smaller but the fund is even less responsive to near-term spot moves.

Holders who rode through 2020 absorbed a real, non-recoverable loss of unit value. Reverse splits made the chart look cleaner. The underlying drag remains.

BNO: Same Bet, Different Curve

The United States Brent Oil Fund (NYSEARCA:BNO) runs the same playbook on Brent crude. Brent’s curve has historically spent more time in backwardation than WTI’s, where later contracts trade below near ones and the roll generates yield rather than burning it. BNO has returned 281% over the past 10 years versus USO’s 55%. Same commodity exposure conceptually. Very different outcome.

For investors who want pure oil-price exposure without picking equity-specific risk, BNO is the structurally cleaner instrument. For investors comfortable owning energy companies, the Energy Select Sector SPDR (NYSEARCA:XLE | XLE Price Prediction) sidesteps the futures problem entirely and returned 169% over the same window.

How to Watch the Drag in Real Time

The single most useful number is the spread between the front-month and second-month WTI contracts on the CME WTI futures curve, published daily on CME Group’s site. When the second month trades above the first, the curve is in contango and USO is paying to roll. A spread wider than about $1 per barrel translates to meaningful monthly drag. Backwardation, where the second month trades below the first, means the fund is collecting roll yield instead. Check it monthly if you hold USO for more than a few weeks.

The USCF fact sheet on uscfinvestments.com also publishes the fund’s current contract-month allocation, which determines how much of the curve USO is exposed to at any given time.

The Bottom Line for USO Holders

USO does what it says on the tin for short tactical trades measured in days or weeks. Held across a full cycle, the math works against you whenever WTI futures are in contango, which has been most of the past decade. If your thesis is “oil goes up over the next several years,” the structural design of USO will quietly take roughly half of that thesis away from you. The fund is doing precisely what a front-of-the-curve futures roller does, and that is the risk.