Expected Returns on Oil Futures Etfs

This paper develops a new methodology to estimate oil ETF returns using WTI futures prices and analysts’ forecasts. Futures prices are obtained from the New York Mercantile Exchange, and analysts’ forecasts from Bloomberg and the U.S. Energy Information Administration.We use the United States Oil Fund ETF (USO) to illustrate our methodology. We first show that the USO Net Asset Value (NAV) and ETF historical returns can be replicated when using USO´s investment strategy and account fees.We estimate USO’s expected returns using a three-factor stochastic model estimated with a Kalman Filter. Results show that expected returns and volatility are higher for shorter horizons, which is consistent with previous findings for commodity returns.We compare our results with those from using the traditional CAPM model, finding similar average expected returns but higher volatility which is consistent with the behavior of oil futures prices.Finally, we study the macroeconomic determinants of USO expected returns and find that using S&P500 returns, VIX returns, Oil Inventories variations, 5-year Treasury Bill, Default Premium and Term Premium rates, can explain 60% of the variations of USO expected returns for maturities up to 5 years and 40% of variations for the 10-year maturity