Oil investors are hastening their exit from exchange-traded funds, a move that some analysts argue is a form of protection in light of weak market fundamentals ahead.
Four of the largest oil-specific exchange traded funds, including the U.S. Oil Fund (USO), had outflows of $478 million in the three weeks to May 6, according to data from ThomsonReuters Lipper, marking the biggest withdrawal since the start of 2014.
Oil's value, which plummeted some 60 percent during a slump that started in June, has made a quick recovery recently. Just this week, it traded above $62 a barrel, its highest level in five months.
Still, analysts and traders warn that the unravelling of ETF investments, which amassed nearly $6 billion, may be a warning sign of things to come. While market experts are increasingly mixed over how much ETF outflows effect the futures market directly, they say the outflows indicate a less rosy investor sentiment.
The problem ahead is that as oil prices recover, U.S. drillers may increase production. Meanwhile, there are few signs that OPEC and Saudi Arabia will cut record drilling rates.
"The outflows we're seeing is people trying to take money off the table," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.
"Things got too overextended, and some of the smarter guys are saying they should take some profits off and protect themselves," he added.
Last week, Citibank analysts said in a note it was unclear whether the recent outflows will trigger a sell-off in crude.
Their market outlook, however, was clear: "The cold fundamentals are somewhat in contrast to the large inflows of hot money," they said.
Traders say discussions among drillers like Pioneer Natural Resources and EOG Resources about adding rigs or increasing production is concerning and could lead to another price slump.
ETF exits come as the "roll" - the price difference between two months - is narrowing. In a contango market, where futures contracts months ahead are more expensive the near-term ones, investors have to pay an extra cost to "roll" positions into the next month.
Four weeks ago, investors holding oil ETFs had to pay a roll cost of $1.70 a barrel, which is also the spread between the front to second month on WTI. Since then, it's recovered some 45% of its value, trading around 90 cents last Friday.
Reporting by Catherine Ngai, editing by Jessica Resnick-Ault and Diane Craft, via WealthManagemen.com