The collapse in the global oil markets has caused carnage not just in traders' pocketbooks but in the oil ETF & ETN markets as well.

Tuesday has been an incredibly eventful day. Before the market open, the ProShares Ultra Bloomberg Crude Oil Fund (UCO) completed a 1:25 reverse split in order to try to avoid the regulatory risk of having its share price dive below $1 (and, in truth, the fund may still be forced to close yet).

Then, then the news hit that the iPath S & P GSCI Crude Oil Total Return Index ETN (OIL) would be liquidated and closed altogether when extreme losses of 80%+ triggered a mandatory liquidation event. Sales and issuance of new notes have already been halted and the ETN will be redeemed in its entirety on April 30th.

But, the day wasn't done yet!

The $3 billion United States Oil ETF (USO) ran into its own problems. There's a lot to unpack here, so I'll try to take it step by step.

For starters, USO, which invests in forward oil futures contracts, is down 78% year-to-date. While the fund's price has been cratering, investors and speculators have moved in adding $3 billion to the fund's total asset base in about a month and a half. USO was recently at just $1 billion, so the fund has quadrupled in size. This has put a lot of strain on the fund to operate effectively.

USO only has a fixed number of shares available to buyers. That wasn't a problem before, but now that money has poured in, all of those shares got snapped up. The fund hit its max earlier today and was forced to announce that it is halting all new share creations until the SEC is able to step in and approve a new issuance.

The ETF industry's share creation/destruction mechanism helps ensure that the fund almost always trades at or very near its underlying NAV. Now that this mechanism effectively no longer exists, USO essentially has begun trading like a closed-end fund, a portfolio that only has a fixed number of shares and trades based on supply and demand. Like CEFs, USO has begun disconnecting from its underlying NAV and now trades at a massive 20%+ premium.

As a result of its huge exposure to the near-term crude oil futures contracts (it was lucky enough to begin rolling its May contracts into June contracts before this week's collapse began), USO changed its mandate to give it more flexibility. Instead of investing solely in the closest expirations, it can now invest in contracts several months into the future in order to spread out risk (read: not get caught with its pants down again). USO now holds contracts with expirations in June, July and August.

And let's not forget that most investors have sustained big losses while jumping in over the past few days.

Notice that volume along the bottom of the chart. Nearly 1 billion shares have traded over the past couple of days.

Who knows if the changes to the fund will be enough to prevent it from shutting down. USO could easily be headed towards the $1-2 range if the oil market continues to max out its capacity with little demand to speak of.

USO is in a very dangerous place right now. Trade with caution.

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