USO’s Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to

Oil pumping jacks, also known as "nodding donkeys", operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020.Andrey Rudakov | Bloomberg | Getty Images

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Trading in the United States Oil Fund, a popular exchange-traded security known for its 'USO' ticker which is supposed to track the price of oil, was briefly halted Tuesday before the opening bell. It resumed trading and plunged 20%.

The halt came after USCF, the manager of the fund, said that it was temporarily suspending the issuance of so-called creation baskets. Creation baskets are how an ETF creates new shares to meet demand. The baskets hold the underlying securities which in this case are plummeting oil futures. With the halting of these creation baskets, the ETF will essentially trade with a fixed number of shares like a closed-end mutual fund now.

On Friday USCF changed the structure of the USO fund so that it can hold longer-dated contracts. Per a regulatory filing, around 80% of the fund will be in the front-month contract, with 20% in the second-month contract.

USCF did not provide a comment.

On Monday, the May contract for oil fell to a negative price, an unprecedented event wreaking havoc on the oil markets. The contract expires today. USO likely had already sold that contract, but owns futures for the June month which began to crater on Tuesday.

June futures expiring in a month dropped 30% to under $15 on Tuesday.

"USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire," USO's website states.

USO could run into trouble if those contracts also fall to a negative value as they near expiration a month from now.

Negative futures value is an unprecedented event and it is unclear how products like exchange-traded funds built for the retail investor to participate in the market will handle such events.

Hayman Capital Management CIO Kyle Bass has been warning investors about the danger of exchange traded funds that track oil prices.

"Retail has been plowing into these oil contracts thinking they're buying spot crude oil when they're buying the next front month. So they're paying $22 a barrel when the spot market's negative $38. Retail investors are going to get fleeced if they continue to fly into these oil ETFs," he said Monday on CNBC's "Closing Bell."

Following Monday's price action, Bass, who said he holds short positions against some energy-focused ETFs, tweeted that he would demand 100% collateral.

Warren Pies, energy strategist at Ned Davis Research, sounded a similarly cautious tone.

"At best, they are expensive ways to gain programmatic futures exposure," he said of commodity-based ETFs on Monday. "At worst, they are designed to implode. Still, money continues to flow into the USO ETF. As of last week, USO's assets reached an all-time high of more than $5 billion. To reiterate: In this environment, USO is a train wreck. Stay away," he said.

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Source: cnbc.com