The Commodities Futures Trading Commission has confirmed with a variety of news sources that it is has launched an investigation into the trading activity of the United States Oil Fund LP (NYSEArca: USO).

Specifically, the CFTC is looking at USO's trading activity on February 6, when it rolled its entire portfolio of oil futures contracts from the March contract to the April contact. 

It should be noted that the concerns about USO are actually just one facet of a wider investigation into the oil market and trading practices. 

At the time of the trade, USO's management strategy called on it to roll its entire portfolio of West Texas Intermediate contracts from front-month contracts to the following month's contracts on a single, prespecified day; in this case, February 6. Considering that USO held more than $3 billion in assets at the time, that was a pretty sizable trade.

A recent Wall Street Journal article on the subject noted that USO's holdings accounted for 20% and 30% of the April crude contracts on the New York Mercantile Exchange and the ICE Futures Europe exchange, respectively.

One obvious concern is that such a large trade taking place each month all at once could artificially move the market. According to reports from MarketWatch and Bloomberg, the price of the March crude contract fell more than 2% on February 6.

The Financial Times pointed out in an article posted online that the CFTC could force USO to reduce its holdings to just 10,000 contracts. Anonymous sources said that the commission also did not want the fund to invest its assets on foreign futures exchanges over which it does not have jurisdiction.

In the end, the issue may be irrelevant. USO's managers have said the fund will be changing its roll policy. Rather than rolling its portfolio in a single day, the fund will break up the roll over four days, which should mitigate its impact on the market.

USO's managers said that they had not been notified of any CFTC investigation into the fund as late as Friday morning, according to the MarketWatch article.

The November/December 2008 issue of the Journal of Indexes featured the testimony of Michael Masters of Masters Capital Management LLC, as presented before the U.S. Senate Committee on Homeland Security & Governmental Affairs on May 20, 2008; it focused on some of the issues surrounding the CFTC's investigation of USO. You can read it here, and you can read Brad Zigler's rebuttal here.