United States 12 Month Oil Fund, LP - Quarter Report: 2009 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30,
2009.
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OR
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¨
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from
to
.
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Commission
File Number: 001-33859
United
States 12 Month Oil Fund, LP
(Exact
name of registrant as specified in its charter)
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Delaware
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20-0431897
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1320
Harbor Bay Parkway, Suite 145
Alameda,
California 94502
(Address
of principal executive offices) (Zip code)
(510)
522-9600
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x
Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer x
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Smaller
reporting company ¨
|
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes x No
UNITED
STATES 12 MONTH OIL FUND, LP
Table
of Contents
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Page
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Part
I. FINANCIAL INFORMATION
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Item 1. Condensed
Financial Statements.
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1
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Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
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14
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
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32
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Item
4. Controls and Procedures.
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33
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Part
II. OTHER INFORMATION
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Item
1. Legal Proceedings.
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34
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Item
1A. Risk Factors.
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34
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
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34
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Item
3. Defaults Upon Senior Securities.
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34
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Item
4. Submission of Matters to a Vote of Security Holders.
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34
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Item
5. Other Information.
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34
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Item
6. Exhibits.
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34
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Part I. FINANCIAL
INFORMATION
Item
1. Condensed Financial Statements.
Index
to Condensed Financial Statements
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Documents
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Page
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|||
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Condensed
Statements of Financial Condition at September 30, 2009 (Unaudited) and
December 31, 2008
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2
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|||
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Condensed
Schedule of Investments (Unaudited) at September 30, 2009
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3
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|||
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Condensed
Statements of Operations (Unaudited) for the three and nine months ended
September 30, 2009 and 2008
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4
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|||
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Condensed
Statement of Changes in Partners’ Capital (Unaudited) for the nine months
ended September 30, 2009
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5
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|||
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Condensed
Statements of Cash Flows (Unaudited) for the nine months ended September
30, 2009 and 2008
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6
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|||
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Notes
to Condensed Financial Statements for the period ended September 30,
2009 (Unaudited)
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7
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|||
1
United
States 12 Month Oil Fund, LP
Condensed
Statements of Financial Condition
At
September 30, 2009 (Unaudited) and December 31, 2008
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September
30, 2009
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December
31, 2008
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|||||||
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Assets
|
||||||||
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Cash
and cash equivalents
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$ | 140,667,010 | $ | 4,012,323 | ||||
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Equity
in UBS Securities LLC trading accounts:
|
||||||||
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Cash
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— | 4,993,212 | ||||||
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Unrealized
gain (loss) on open commodity futures contracts
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21,343,800 | (2,754,630 | ) | |||||
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Receivable
for units sold
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7,355,790 | — | ||||||
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Interest
receivable
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13,127 | 2,343 | ||||||
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Receivable
from general partner
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— | 97,019 | ||||||
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Other
assets
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157,260 | — | ||||||
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Total
assets
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$ | 169,536,987 | $ | 6,350,267 | ||||
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Liabilities
and Partners' Capital
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||||||||
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General
Partner management fees payable (Note 3)
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$ | 79,019 | $ | 2,151 | ||||
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Due
to broker
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22,496 | — | ||||||
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Brokerage
commissions payable
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13,532 | 650 | ||||||
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Other
liabilities
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239,324 | 99,888 | ||||||
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Total
liabilities
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354,371 | 102,689 | ||||||
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Commitments and Contingencies
(Notes 3, 4 and 5)
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||||||||
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Partners'
Capital
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||||||||
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General
Partner
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— | — | ||||||
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Limited
Partners
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169,182,616 | 6,247,578 | ||||||
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Total
Partners' Capital
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169,182,616 | 6,247,578 | ||||||
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Total
liabilities and partners' capital
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$ | 169,536,987 | $ | 6,350,267 | ||||
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Limited
Partners' units outstanding
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4,600,000 | 200,000 | ||||||
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Net
asset value per unit
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$ | 36.78 | $ | 31.24 | ||||
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Market
value per unit
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$ | 36.60 | $ | 29.89 | ||||
See
accompanying notes to condensed financial statements.
2
United
States 12 Month Oil Fund, LP
Condensed
Schedule of Investments (Unaudited)
At
September 30, 2009
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Gain (Loss) on
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% of
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|||||||||||
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Number of
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Open Commodity
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Partners'
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||||||||||
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Contracts
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Contracts
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Capital
|
||||||||||
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Open
Futures Contracts — Long
|
||||||||||||
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United
States Contracts
|
||||||||||||
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NYMEX
Crude Oil Futures CL contracts, expire November 2009
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192 | $ | 3,350,770 | 1.98 | ||||||||
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NYMEX
Crude Oil Futures CL contracts, expire December 2009
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193 | 3,295,070 | 1.95 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire January 2010
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193 | 3,206,030 | 1.89 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire February 2010
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193 | 3,207,390 | 1.89 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire March 2010
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193 | 3,125,100 | 1.85 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire April 2010
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193 | 2,954,410 | 1.75 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire May 2010
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193 | 1,491,510 | 0.88 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire June 2010
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193 | 1,518,620 | 0.90 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire July 2010
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193 | (419,340 | ) | (0.25 | ) | |||||||
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NYMEX
Crude Oil Futures CL contracts, expire August 2010
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193 | 788,410 | 0.47 | |||||||||
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NYMEX
Crude Oil Futures CL contracts, expire September 2010
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193 | (1,068,590 | ) | (0.63 | ) | |||||||
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NYMEX
Crude Oil Futures CL contracts, expire October 2010
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193 | (105,580 | ) | (0.06 | ) | |||||||
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Total
Open Futures Contracts — Long
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2,315 | $ | 21,343,800 | 12.62 | ||||||||
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Principal
Amount
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Market Value
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|||||||||||
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Cash
Equivalents
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||||||||||||
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United
States - Money Market Funds
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||||||||||||
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Fidelity
Institutional Government Portfolio – Class I
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$ | 65,087,986 | $ | 65,087,986 | 38.47 | |||||||
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Goldman
Sachs Financial Square Funds – Government Fund – Class SL
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42,418,336 | 42,418,336 | 25.07 | |||||||||
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Total
Cash Equivalents
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$ | 107,506,322 | 63.54 | |||||||||
See
accompanying notes to condensed financial statements.
3
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United
States 12 Month Oil Fund, LP
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||||||||||||||||
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Condensed
Statements of Operations (Unaudited)
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||||||||||||||||
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For
the three and nine months ended September 30, 2009 and
2008
|
||||||||||||||||
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Three months
ended
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Three months
ended
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Nine months
ended
|
Nine months
ended
|
|||||||||||||
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September 30,
2009
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September 30,
2008
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September 30,
2009
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September 30,
2008
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|||||||||||||
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Income
|
||||||||||||||||
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Gain
(loss) on trading of commodity futures contracts:
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||||||||||||||||
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Realized
gain on closed positions
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$ | 17,518,080 | $ | 486,750 | $ | 30,743,940 | $ | 2,268,860 | ||||||||
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Change
in unrealized gain (loss) on open positions
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(21,479,560 | ) | (2,845,610 | ) | 24,098,430 | (1,740,170 | ) | |||||||||
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Interest
income
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50,707 | 28,187 | 174,296 | 141,384 | ||||||||||||
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Other
income
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4,000 | — | 27,000 | 3,000 | ||||||||||||
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Total
income(loss)
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(3,906,773 | ) | (2,330,673 | ) | 55,043,666 | 673,074 | ||||||||||
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Expenses
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||||||||||||||||
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General
Partner management fees (Note 3)
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258,799 | 10,804 | 622,542 | 42,768 | ||||||||||||
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Brokerage
commissions
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5,521 | 66 | 44,530 | 1,568 | ||||||||||||
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Other
expenses
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222,384 | 48,808 | 412,791 | 149,402 | ||||||||||||
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Total
expenses
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486,704 | 59,678 | 1,079,863 | 193,738 | ||||||||||||
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Expense
waiver
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— | (45,330 | ) | (11,227 | ) | (132,954 | ) | |||||||||
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Net
expenses
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486,704 | 14,348 | 1,068,636 | 60,784 | ||||||||||||
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Net
income (loss)
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$ | (4,393,477 | ) | $ | (2,345,021 | ) | $ | 53,975,030 | $ | 612,290 | ||||||
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Net
income (loss) per limited partnership unit
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$ | (0.97 | ) | $ | (23.45 | ) | $ | 5.54 | $ | 6.37 | ||||||
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Net
income (loss) per weighted average limited partnership
unit
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$ | (0.95 | ) | $ | (23.45 | ) | $ | 13.28 | $ | 4.06 | ||||||
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Weighted
average limited partnership units outstanding
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4,632,609 | 100,000 | 4,063,736 | 150,730 | ||||||||||||
See
accompanying notes to condensed financial statements.
4
United
States 12 Month Oil Fund, LP
Condensed
Statement of Changes in Partners’ Capital (Unaudited)
For
the nine months ended September 30, 2009
|
General
Partner
|
Limited Partners
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Total
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||||||||||
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Balances,
at December 31, 2008
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$ | — | $ | 6,247,578 | $ | 6,247,578 | ||||||
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Addition
of 6,600,000 partnership units
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— | 185,074,917 | 185,074,917 | |||||||||
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Redemption
of 2,200,000 partnership units
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— | (76,114,909 | ) | (76,114,909 | ) | |||||||
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Net
income
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— | 53,975,030 | 53,975,030 | |||||||||
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Balances,
at September 30, 2009
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$ | — | $ | 169,182,616 | $ | 169,182,616 | ||||||
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Net
Asset Value Per Unit
|
||||||||||||
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At
December 31, 2008
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$ | 31.24 | ||||||||||
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At
September 30, 2009
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$ | 36.78 | ||||||||||
See
accompanying notes to condensed financial statements.
5
United
States 12 Month Oil Fund, LP
Condensed
Statements of Cash Flows (Unaudited)
For
the nine months ended September 30, 2009 and 2008
|
Nine months ended
|
Nine months ended
|
|||||||
|
September 30, 2009
|
September 30, 2008
|
|||||||
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Cash
Flows from Operating Activities:
|
||||||||
|
Net
income
|
$ | 53,975,030 | $ | 612,290 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
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Decrease
in commodity futures trading account – cash
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5,015,708 | 493,732 | ||||||
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Unrealized
(gain) loss on futures contracts
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(24,098,430 | ) | 1,740,170 | |||||
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(Increase)
decrease in receivable from general partner
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97,019 | (132,953 | ) | |||||
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Increase
in interest receivable and other assets
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(168,044 | ) | (865 | ) | ||||
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Increase
(decrease) in management fees payable
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76,868 | (5,696 | ) | |||||
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Increase
in commission fees payable
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12,882 | 300 | ||||||
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Increase
in other liabilities
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139,436 | 131,379 | ||||||
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Net
cash provided by operating activities
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35,050,469 | 2,838,357 | ||||||
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Cash
Flows from Financing Activities:
|
||||||||
|
Subscription
of partnership units
|
177,719,127 | — | ||||||
|
Redemption
of partnership units
|
(76,114,909 | ) | (16,243,629 | ) | ||||
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Net
cash provided by (used in) financing activities
|
101,604,218 | (16,243,629 | ) | |||||
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
136,654,687 | (13,405,272 | ) | |||||
|
|
||||||||
|
Cash and Cash
Equivalents, beginning of period
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4,012,323 | 18,174,276 | ||||||
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Cash and Cash
Equivalents, end of period
|
$ | 140,667,010 | $ | 4,769,004 | ||||
See
accompanying notes to condensed financial statements.
6
United
States 12 Month Oil Fund, LP
Notes
to Condensed Financial Statements
For
the period ended September 30, 2009 (Unaudited)
NOTE 1 - ORGANIZATION AND
BUSINESS
The
United States 12 Month Oil Fund, LP (“US12OF”) was organized as a limited
partnership under the laws of the state of Delaware on June 27,
2007. US12OF is a commodity pool that issues limited partnership
units (“units”) that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE
Arca”). Prior to November 25, 2008, US12OF’s units traded on the American Stock
Exchange (the “AMEX”). US12OF will continue in perpetuity, unless terminated
sooner upon the occurrence of one or more events as described in
its Amended and Restated Agreement of Limited Partnership dated as of
December 4, 2007 (the “LP Agreement”). The investment objective of US12OF is for
the changes in percentage terms of its units’ net asset value to reflect the
changes in percentage terms of the spot price of light, sweet crude
oil delivered to Cushing, Oklahoma, as measured by the changes in the average of
the prices of the 12 futures contracts on light, sweet crude oil as
traded on the New York Mercantile Exchange (the “NYMEX”), consisting
of the near month contract to expire and the contracts for the following 11
months for a total of 12 consecutive months’ contracts, except when the near
month contract is within two weeks of expiration, in which case it will be
measured by the futures contracts that are the next month contract to expire and
the contracts for the following 11 consecutive months, less US12OF’s
expenses. US12OF accomplishes its objective through investments in futures
contracts for light, sweet crude oil, and other types of crude oil, heating oil,
gasoline, natural gas and other petroleum-based fuels that are traded on the
NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Oil
Futures Contracts”) and other oil-related investments such as cash-settled
options on Oil Futures Contracts, forward contracts for oil and over-the-counter
transactions that are based on the price of crude oil, heating oil, gasoline,
natural gas and other petroleum-based fuels, Oil Futures Contracts and indices
based on the foregoing (collectively, “Other Oil Interests”). As of
September 30, 2009, US12OF held 2,315 Oil Futures Contracts traded on the
NYMEX.
US12OF
commenced investment operations on December 6, 2007 and has a fiscal year ending
on December 31. United States Commodity Funds LLC (formerly known as Victoria
Bay Asset Management, LLC) (the “General Partner”) is responsible for the
management of US12OF. The General Partner is a member of the National Futures
Association (the “NFA”) and became a commodity pool operator registered
with the Commodity Futures Trading Commission effective December 1, 2005. The
General Partner is also the general partner of the United States Oil Fund,
LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the United States
Gasoline Fund, LP (“UGA”) and the United States Heating Oil Fund, LP (“USHO”),
which listed their limited partnership units on the AMEX under the ticker
symbols “USO” on April 10, 2006, “UNG” on April 18, 2007, “UGA” on February
26, 2008 and “UHN” on April 9, 2008, respectively. As a result of the
acquisition of the AMEX by NYSE Euronext, each of USOF’s, USNG’s, UGA’s and
USHO’s units commenced trading on the NYSE Arca on November 25,
2008. The General Partner is also the general partner of the United
States Short Oil Fund, LP (“USSO”), which listed its limited partnership units
on the NYSE Arca on September 24, 2009. The General Partner has also filed
registration statements to register units of the United States 12 Month Natural
Gas Fund, LP and the United States Brent Oil Fund, LP.
The
accompanying unaudited condensed financial statements have been prepared in
accordance with Rule 10-01 of Regulation S-X promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) and, therefore, do not include
all information and footnote disclosure required under accounting principles
generally accepted in the United States of America. The financial
information included herein is unaudited; however, such financial
information reflects all adjustments which are, in the opinion of management,
necessary for the fair presentation of the condensed financial statements
for the interim period.
US12OF issues
units to certain authorized purchasers (“Authorized Purchasers”) by offering
baskets consisting of 100,000 units (“Creation Baskets”) through ALPS
Distributors, Inc. (the “Marketing Agent”). The purchase price for a Creation
Basket is based upon the net asset value of a unit calculated shortly after
the close of the core trading session on the NYSE Arca on the day the order to
create the basket is properly received. In addition, Authorized
Purchasers pay US12OF a $1,000 fee for each order to create one
or more Creation Baskets or redeem one or more baskets consisting of 100,000
units (“Redemption Baskets”). Units may be purchased or sold on a
nationally recognized securities exchange in smaller increments than a Creation
Basket or Redemption Basket. Units purchased or sold on a nationally recognized
securities exchange are not purchased or sold at the net asset value of US12OF
but rather at market prices quoted on such exchange.
7
In
November 2007, US12OF initially registered 11,000,000 units on Form S-1 with the
SEC. On December 6, 2007, US12OF listed its units on the AMEX under the ticker
symbol “USL”. On that day, US12OF established its initial net asset value by
setting the price at $50.00 per unit and issued 300,000 units in exchange
for $15,001,000. US12OF also commenced investment operations on
December 6, 2007 by purchasing Oil Futures Contracts traded on the NYMEX based
on light, sweet crude oil. As of September 30, 2009, US12OF had registered a
total of 111,000,000 units and had 4,600,000 units
outstanding.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
Commodity
futures contracts, forward contracts, physical commodities, and related options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or losses on
open contracts are reflected in the condensed statement of financial
condition and in the difference between the original contract amount and the
market value (as determined by exchange settlement prices for futures contracts
and related options and cash dealer prices at a predetermined time for forward
contracts, physical commodities, and their related options) as of the last
business day of the year or as of the last date of the condensed financial
statements. Changes in the unrealized gains or losses between periods are
reflected in the condensed statement of operations. US12OF earns interest
on its assets denominated in U.S. dollars on deposit with the futures commission
merchant at the 90-day Treasury bill rate. In addition, US12OF earns
interest on funds held at the custodian at prevailing market rates earned
on such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Income
Taxes
US12OF is
not subject to federal income taxes; each partner reports his/her allocable
share of income, gain, loss deductions or credits on his/her own income tax
return.
Additions
and Redemptions
Authorized
Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in
blocks of 100,000 units equal to the net asset value of the units calculated
shortly after the close of the core trading session on the NYSE Arca on the day
the order is placed.
US12OF
receives or pays the proceeds from units sold or redeemed within three business
days after the trade date of the purchase or redemption. The amounts due from
Authorized Purchasers are reflected in US12OF’s condensed statement of
financial condition as receivable for units sold, and amounts payable to
Authorized Purchasers upon redemption are reflected as payable for units
redeemed.
Partnership
Capital and Allocation of Partnership Income and Losses
Profit or
loss shall be allocated among the partners of US12OF in proportion to the number
of units each partner holds as of the close of each month. The General Partner
may revise, alter or otherwise modify this method of allocation as described in
the LP Agreement.
Calculation
of Net Asset Value
US12OF’s
net asset value is calculated on each NYSE Arca trading day by taking the
current market value of its total assets, subtracting any liabilities and
dividing the amount by the total number of units issued and outstanding. US12OF
uses the closing price for the contracts on the relevant exchange on that day to
determine the value of contracts held on such exchange.
8
Net
Income (Loss) per Unit
Net
income (loss) per unit is the difference between the net asset value per
unit at the beginning of each period and at the end of each period. The
weighted average number of units outstanding was computed for purposes of
disclosing net income (loss) per weighted average unit. The weighted average
units are equal to the number of units outstanding at the end of the period,
adjusted proportionately for units redeemed based on the amount of time the
units were outstanding during such period. There were no units held by the
General Partner at September 30, 2009.
Offering
Costs
Offering
costs incurred in connection with the registration of additional units after the
initial registration of units are borne by US12OF. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated with such offerings. These costs will be
accounted for as a deferred charge and thereafter amortized to expense over
twelve months on a straight-line basis or a shorter period if
warranted.
Cash
Equivalents
Cash
equivalents include money market funds and overnight deposits or time deposits
with original maturity dates of three months or less.
Use
of Estimates
The
preparation of condensed financial statements in conformity with accounting
principles generally accepted in the United States of America requires US12OF’s
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the condensed financial statements, and the reported amounts of
the revenue and expenses during the reporting period. Actual results could
differ from those estimates and assumptions.
NOTE 3
- FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS
General
Partner Management Fee
Under
the LP Agreement, the General Partner is responsible for investing the
assets of US12OF in accordance with the objectives and policies of US12OF. In
addition, the General Partner has arranged for one or more third parties to
provide administrative, custody, accounting, transfer agency and other necessary
services to US12OF. For these services, US12OF is contractually obligated to pay
the General Partner a fee, which is paid monthly and based on average daily net
assets, that is equal to 0.60% per annum on average daily net
assets.
Ongoing
Registration Fees and Other Offering Expenses
US12OF
pays all costs and expenses associated with the
ongoing registration of its units subsequent to the initial offering.
These costs include registration or other fees paid to regulatory agencies in
connection with the offer and sale of units, and all legal, accounting, printing
and other expenses associated with such offer and sale. For the nine
months ended September 30, 2009 and 2008, US12OF incurred $96,250 and $0,
respectively, in registration fees and other offering expenses.
Directors’
Fees
US12OF is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. US12OF shares these fees with USOF, USNG, UGA, USHO and
USSO based on the relative assets of each fund, computed on a daily basis. These
fees for the calendar year 2009 are estimated to be a total of $477,000 for all
funds.
9
Licensing
Fees
As
discussed in Note 4, US12OF entered into a licensing agreement with the
NYMEX on January 16, 2008. Pursuant to the agreement, US12OF and the affiliated
funds managed by the General Partner pay a licensing fee that is equal to 0.04%
for the first $1,000,000,000 of combined assets of the funds and 0.02% for
combined assets above $1,000,000,000. During the nine months ended
September 30, 2009 and 2008, US12OF incurred $24,679 and $2,527,
respectively, under this arrangement.
Investor
Tax Reporting Cost
The fees
and expenses associated with US12OF’s audit expenses and tax accounting and
reporting requirements, with the exception of certain initial implementation
service fees and base service fees which are borne by the General Partner, are
paid by US12OF.
Other
Expenses and Fees and Expense Waivers
In
addition to the fees described above, US12OF pays all brokerage fees, taxes
and other expenses in connection with the operation of US12OF, excluding costs
and expenses paid by the General Partner as outlined in Note 4. The
General Partner, though under no obligation to do so, agreed to pay certain
expenses, to the extent that such expenses exceed 0.15% (15 basis points) of
US12OF’s NAV, on an annualized basis, through March 31, 2009 after which date
such payments were no longer necessary. The General Partner has no
obligation to make such payment into subsequent
periods.
NOTE
4 - CONTRACTS AND AGREEMENTS
US12OF is
party to a marketing agent agreement, dated as of November 13, 2007,
with the Marketing Agent and the General Partner, whereby the Marketing
Agent provides certain marketing services for US12OF as outlined in the
agreement. The fee of the Marketing Agent, which is borne by the General
Partner, is equal to 0.06% on US12OF’s assets up to $3 billion; and 0.04% on
US12OF’s assets in excess of $3 billion.
The above
fee does not include the following expenses, which are also borne by the General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.
US12OF is
also party to a custodian agreement, dated October 5, 2007, with Brown Brothers
Harriman & Co. (“BBH&Co.”) and the General Partner, whereby BBH&Co.
holds investments on behalf of US12OF. The General Partner pays the fees of
the custodian, which are determined by the parties from time to time. In
addition, US12OF is party to an administrative agency agreement, dated October
5, 2007, with the General Partner and BBH&Co., whereby BBH&Co. acts as
the administrative agent, transfer agent and registrar for US12OF. The General
Partner also pays the fees of BBH&Co. for its services under this
agreement and such fees are determined by the parties from time to
time.
Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, a minimum amount of $75,000 annually for its custody, fund
accounting and fund administration services rendered to US12OF and each of the
affiliated funds managed by the General Partner, as well as a $20,000 annual fee
for its transfer agency services. In addition, the General Partner pays
BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of
US12OF’s, USOF’s, USNG’s, UGA’s, USHO’s and USSO’s combined net assets, (b)
0.0465% for US12OF’s, USOF’s, USNG’s, UGA’s, USHO’s and USSO’s combined net
assets greater than $500 million but less than $1 billion, and (c) 0.035% once
US12OF’s, USOF’s, USNG’s, UGA’s, USHO’s and USSO’s combined net assets exceed $1
billion. The annual minimum amount will not apply if the asset-based charge for
all accounts in the aggregate exceeds $75,000. The General Partner also pays
transaction fees ranging from $7.00 to $15.00 per transaction.
US12OF
has entered into a brokerage agreement with UBS Securities LLC (“UBS
Securities”). The agreement requires UBS Securities to provide services to
US12OF in connection with the purchase and sale of Oil Futures Contracts
and Other Oil Interests that may be purchased and sold by or through UBS
Securities for US12OF’s account. The agreement provides that UBS Securities
charge US12OF commissions of approximately $7 per round-turn trade, plus
applicable exchange and NFA fees for Oil Futures Contracts and options on
Oil Futures Contracts.
On
January 16, 2008, US12OF and the NYMEX entered into a licensing agreement
whereby US12OF was granted a non-exclusive license to use certain of the NYMEX’s
settlement prices and service marks. The agreement has an effective date of
December 4, 2007. Under the licensing agreement, US12OF and the affiliated
funds managed by the General Partner pay the NYMEX an asset-based fee for the
license, the terms of which are described in Note 3.
10
US12OF
expressly disclaims any association with the NYMEX or endorsement of US12OF by
the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
US12OF engages
in the trading of futures contracts and options on futures contracts
(collectively, “derivatives”). US12OF is exposed to both market risk, which is
the risk arising from changes in the market value of the contracts, and credit
risk, which is the risk of failure by another party to perform according to the
terms of a contract.
US12OF
may enter into futures contracts and options on futures contracts to gain
exposure to changes in the value of an underlying commodity. A futures contract
obligates the seller to deliver (and the purchaser to accept) the future
delivery of a specified quantity and type of a commodity at a specified time and
place. Some futures contracts may call for physical delivery of the
asset, while others are settled in cash. The contractual obligations of a
buyer or seller may generally be satisfied by taking or making physical delivery
of the underlying commodity or by making an offsetting sale or purchase of an
identical futures contract on the same or linked exchange before the designated
date of delivery.
The
purchase and sale of futures contracts and options on futures contracts require
margin deposits with a futures commission merchant. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act requires a
futures commission merchant to segregate all customer transactions and assets
from the futures commission merchant’s proprietary activities.
Futures
contracts involve, to varying degrees, elements of market risk (specifically
commodity price risk) and exposure to loss in excess of the amount of variation
margin. The face or contract amounts reflect the extent of the total exposure
US12OF has in the particular classes of instruments. Additional risks associated
with the use of futures contracts are an imperfect correlation between movements
in the price of the futures contracts and the market value of the underlying
securities and the possibility of an illiquid market for a futures
contract.
All of
the futures contracts currently traded by US12OF are exchange-traded. The risks
associated with exchange-traded contracts are generally perceived to be less
than those associated with over-the-counter transactions since, in
over-the-counter transactions, US12OF must rely solely on the credit of its
respective individual counterparties. However, in the future, if US12OF
were to enter into non-exchange traded contracts, it would be subject to the
credit risk associated with counterparty non-performance. The credit risk from
counterparty non-performance associated with such instruments is the net
unrealized gain, if any. US12OF also has credit risk since the sole counterparty
to all domestic and foreign futures contracts is the exchange on which the
relevant contracts are traded. In addition, US12OF bears the risk of financial
failure by the clearing broker.
US12OF’s
cash and other property, such as U.S. Treasuries, deposited with a futures
commission merchant are considered commingled with all other customer funds
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’s insolvency, recovery may be limited to
a pro rata share of segregated funds available. It is possible that the
recovered amount could be less than the total of cash and other property
deposited. The insolvency of a futures commission merchant could result in the
complete loss of US12OF’s assets posted with that futures commission merchant;
however, the vast majority of US12OF’s assets are held in Treasuries, cash
and/or cash equivalents with US12OF’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency of
US12OF’s custodian could result in a substantial loss of US12OF’s
assets.
US12OF
invests a portion of its cash in money market funds that seek to maintain a
stable net asset value. US12OF is exposed to any risk of loss associated with an
investment in these money market funds. As of September 30, 2009 and December
31, 2008, US12OF had deposits in domestic and foreign financial institutions,
including cash investments in money market funds, in the amounts of $140,644,514
and $9,005,535, respectively. This amount is subject to loss should these
institutions cease operations.
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, US12OF is exposed to a market risk equal to the value
of futures contracts purchased and unlimited liability on such contracts sold
short. As both a buyer and a seller of options, US12OF pays or receives a
premium at the outset and then bears the risk of unfavorable changes in the
price of the contract underlying the option.
11
US12OF’s
policy is to continuously monitor its exposure to market and counterparty risk
through the use of a variety of financial, position and credit exposure
reporting controls and procedures. In addition, US12OF has a policy of
requiring review of the credit standing of each broker or counterparty with
which it conducts business.
The
financial instruments held by US12OF are reported in its condensed
statement of financial condition at market or fair value, or at carrying amounts
that approximate fair value, because of their highly liquid nature and
short-term maturity.
NOTE 6
– FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective
January 1, 2008, US12OF adopted Accounting Standards Codification 820 – Fair
Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurement. The
changes to past practice resulting from the application of ASC 820 relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurement. ASC 820 establishes a fair
value hierarchy that distinguishes between (1) market participant assumptions
developed based on market data obtained from sources independent of US12OF
(observable inputs) and (2) US12OF’s own assumptions about market participant
assumptions developed based on the best information available under the
circumstances (unobservable inputs). The three levels defined by the ASC 820
hierarchy are as follows:
Level I –
Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
Level II
– Inputs other than quoted prices included within Level I that are observable
for the asset or liability, either directly or indirectly. Level II
assets include the following: quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means
(market-corroborated inputs).
Level III
– Unobservable pricing input at the measurement date for the asset or
liability. Unobservable inputs shall be used to measure fair value to
the extent that observable inputs are not available.
In some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy within which
the fair value measurement in its entirety falls shall be determined based on
the lowest input level that is significant to the fair value measurement in its
entirety.
The
following table summarizes the valuation of US12OF’s securities at September 30,
2009 using the fair value hierarchy:
|
At September
30, 2009
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Short-Term
Investments
|
$ | 107,506,322 | $ | 107,506,322 | $ | — | $ | — | ||||||||
|
Exchange-Traded
Futures Contracts
|
||||||||||||||||
|
United
States Contracts
|
21,343,800 | 21,343,800 | — | — | ||||||||||||
12
NOTE 7
- FINANCIAL HIGHLIGHTS
The
following table presents per unit performance data and other supplemental
financial data for the nine months ended September 30, 2009 and 2008 for the
unitholders. This information has been derived from information presented in the
condensed financial statements.
|
For the nine months
ended
|
For the nine months
ended
|
|||||||
|
September 30, 2009
|
September 30, 2008
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
Per Unit Operating
Performance:
|
||||||||
|
Net
asset value, beginning of period
|
$ | 31.24 | $ | 54.23 | ||||
|
Total
income
|
5.80 | 6.77 | ||||||
|
Net
expenses
|
(0.26 | ) | (0.40 | ) | ||||
|
Net
increase in net asset value
|
5.54 | 6.37 | ||||||
|
Net
asset value, end of period
|
$ | 36.78 | $ | 60.60 | ||||
|
Total
Return
|
17.73 | % | 11.75 | % | ||||
|
Ratios
to Average Net Assets
|
||||||||
|
Total
income
|
39.68 | % | 7.07 | % | ||||
|
Management
fees*
|
0.60 | % | 0.60 | % | ||||
|
Total
expenses excluding management fees*
|
0.44 | % | 2.12 | % | ||||
|
Expense
waived*
|
(0.01 | ) % | (1.87 | ) % | ||||
|
Net
expenses excluding management fees*
|
0.43 | % | 0.25 | % | ||||
|
Net
income
|
38.91 | % | 6.43 | % | ||||
|
*Annualized
|
||||||||
Total
returns are calculated based on the change in value during the period. An
individual unitholder's total return and ratio may vary from the above
total returns and ratios based on the timing of contributions to and withdrawals
from US12OF.
NOTE
8 – RECENTLY ADOPTED ACCOUNTING STANDARDS
In March
2008, the Financial Accounting Standards Board released Accounting Standards
Codification 815 – Derivatives and Hedging, (“ASC 815”). ASC 815
requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of, and gains and
losses on, derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. US12OF adopted ASC 815 on
January 1, 2009.
NOTE 9 – SUBSEQUENT
EVENTS
US12OF
has performed an evaluation of subsequent events through November 16, 2009,
which is the date the financial statements were issued. This evaluation did not
result in any subsequent events that necessitated disclosures and/or
adjustments.
13
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion should be read in conjunction with the condensed financial
statements and the notes thereto of the United States 12 Month Oil Fund, LP
(“US12OF”) included elsewhere in this quarterly report on Form
10-Q.
Forward-Looking
Information
This
quarterly report on Form 10-Q, including this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements regarding the plans and objectives of management for
future operations. This information may involve known and unknown risks,
uncertainties and other factors that may cause US12OF’s actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and
describe US12OF’s future plans, strategies and expectations, are generally
identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend” or “project,” the negative of
these words, other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
US12OF cannot assure investors that the projections included in these
forward-looking statements will come to pass. US12OF’s actual results could
differ materially from those expressed or implied by the forward-looking
statements as a result of various factors.
US12OF
has based the forward-looking statements included in this quarterly report on
Form 10-Q on information available to it on the date of this quarterly
report on Form 10-Q, and US12OF assumes no obligation to update any such
forward-looking statements. Although US12OF undertakes no obligation to revise
or update any forward-looking statements, whether as a result of new
information, future events or otherwise, investors are advised to consult any
additional disclosures that US12OF may make directly to them or through
reports that US12OF in the future files with the U.S. Securities and
Exchange Commission (the “SEC”), including annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K.
Introduction
US12OF, a
Delaware limited partnership, is a commodity pool that issues units that may be
purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). The investment
objective of US12OF is to have the changes in percentage terms of its units’ net
asset value (“NAV”) reflect the changes in percentage terms of the spot price of
light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the
changes in the average of the prices of 12 Oil Futures Contracts on light, sweet
crude oil as traded on the New York Mercantile Exchange (the “NYMEX”) consisting
of the near month contract to expire and the contracts for the following 11
months for a total of 12 consecutive months’ contracts, except when the near
month contract is within two weeks of expiration, in which case it will be
measured by the futures contract that is the next month contract to expire and
the contracts for the following 11 consecutive months (the “Benchmark Futures
Contract”), less US12OF’s expenses.
US12OF
seeks to achieve its investment objective by investing in a combination of oil
futures contracts and other oil interests such that changes in its NAV, measured
in percentage terms, will closely track the changes in the Benchmark
Futures Contracts, also measured in percentage terms. US12OF’s general partner
believes the Benchmark Futures Contracts historically have exhibited a
close correlation with the spot price of light, sweet crude oil. It is not the
intent of US12OF to be operated in a fashion such that the NAV will equal, in
dollar terms, the spot price of light, sweet crude oil or any particular futures
contract based on light, sweet crude oil. Management believes that it is not
practical to manage the portfolio to achieve such an investment goal when
investing in listed crude oil futures contracts.
On any
valuation day, the Benchmark Futures Contracts are the near month futures
contract for light, sweet crude oil traded on the New York Mercantile
Exchange (the “NYMEX”) and the contracts for the following 11 months for a total
of 12 consecutive months’ contracts unless the near month contract will expire
within two weeks of the valuation day, in which case the Benchmark Futures
Contracts are the next month contract for light, sweet crude oil traded on the
NYMEX and the contracts for the following 11 consecutive months. “Near month
contract” means the next contract traded on the NYMEX due to expire. “Next month
contract” means the first contract traded on the NYMEX due to expire after the
near month contract.
14
US12OF
invests in futures contracts for light, sweet crude oil, other types of
crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels
that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges
(collectively, “Oil Futures Contracts”) and other oil interests such as
cash-settled options on Oil Futures Contracts, forward contracts for oil and
over-the-counter transactions that are based on the price of crude oil, other
petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing
(collectively, “Other Oil Interests”). For convenience and unless otherwise
specified, Oil Futures Contracts and Other Oil Interests collectively are
referred to as “Crude Oil Interests” in this quarterly report on Form
10-Q.
The
regulation of Crude Oil Interests in the United States is a rapidly changing
area of law and is subject to ongoing modification by governmental and judicial
action. As stated in the section “What are the Risk Factors Involved
with an Investment in US12OF?” of US12OF’s prospectus as filed with the
SEC, regulation of the commodity interests and energy markets is extensive and
constantly changing; future regulatory developments in the commodity interests
and energy markets are impossible to predict but may significantly and adversely
affect US12OF.
Currently,
a number of proposals to alter the regulation of Crude Oil Interests are being
considered by federal regulators and legislators. These proposals include the
imposition of hard position limits on energy-based commodity futures contracts,
the extension of position and accountability limits to futures contracts on
non-U.S. exchanges previously exempt from such limits, and the forced use of
clearinghouse mechanisms for all over-the-counter transactions. An
additional proposal would aggregate and limit all positions in energy futures
held by a single entity, whether such positions exist on U.S. futures exchanges,
non-U.S. futures exchanges, or in over-the-counter contracts. If any
of the aforementioned proposals is implemented, US12OF’s ability to meet
its investment objective may be negatively impacted.
The
general partner of US12OF, United States Commodity Funds LLC (formerly, Victoria
Bay Asset Management, LLC) (the “General Partner”), which is registered as
a commodity pool operator (“CPO”) with the U.S. Commodity Futures Trading
Commission (the “CFTC”), is authorized by the Amended and Restated
Agreement of Limited Partnership of US12OF (the “LP Agreement”) to manage
US12OF. The General Partner is authorized by US12OF in its sole judgment to
employ and establish the terms of employment for, and termination of, commodity
trading advisors or futures commission merchants.
Average
crude oil futures prices were volatile during the nine months ended September
30, 2009 and exhibited wide daily swings along with an uneven upward trend from
late February to late March 2009. The average price of the Benchmark Futures
Contracts started the period at $54.01 per barrel. The low of the period was on
February 18, 2009 when prices reached $44.24 per barrel. Average prices rose
over the course of the period and hit a peak on August 5, 2009 of $75.58 per
barrel. The period ended with the average price of the Benchmark Futures
Contracts at $73.00 per barrel, up approximately 35.16% over the period.
Similarly, US12OF’s NAV rose during the period from a starting level of $31.24
per unit to a high on August 5, 2009 of $39.73 per unit. US12OF’s NAV reached
its low for the period on February 18, 2009 at $24.34 per unit. The NAV on
September 30, 2009 was $36.78, up approximately 17.73% over the
period.
For the
first half of 2008, the crude oil futures market remained in a state of
backwardation, meaning that the price of the near month crude oil futures
contract was typically higher than the price of the next month crude oil futures
contract, or contracts further away from expiration. For much of the third
quarter of 2008, the crude oil futures market moved back and forth between a
mild backwardation market and a mild contango market. A contango market is one
in which the price of the near month crude oil futures contract is less than the
price of the next month crude oil futures contract, or contracts further away
from expiration. From late November 2008 to the end of 2008, the market moved
into a much steeper contango market. During the first two quarters of 2009, the
crude oil market remained in contango. During parts of January 2009 and February
2009, the level of contango was unusually steep reflecting that the cost of oil
futures contracts further from expiration were significantly higher than the
near month oil futures contract. Crude oil inventories, which reached historic
levels in January 2009 and February 2009 and which appear to be the primary
cause of the steep level of contango, began to drop in March 2009 and for the
balance of the first half of 2009. The crude oil futures market remained in
contango through the quarter ended September 30, 2009. For a discussion of the
impact of backwardation and contango on total returns, see “Term Structure of
Crude Oil Prices and the Impact on Total Returns”.
15
Valuation
of Futures Contracts and the Computation of the NAV
The NAV
of US12OF units is calculated once each NYSE Arca trading day. The NAV for a
particular trading day is released after 4:00 p.m. New York time. Trading
during the core trading session on the NYSE Arca typically closes at
4:00 p.m. New York time. US12OF’s administrator uses the NYMEX closing
price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New
York time) for the contracts held on the NYMEX, but calculates or determines the
value of all other US12OF investments, including ICE Futures contracts or other
futures contracts, as of the earlier of the close of the New York
Stock Exchange or 4:00 p.m. New York time.
Results
of Operations and the Crude Oil Market
Results of
Operations. On December 6, 2007, US12OF listed its units on the
American Stock Exchange (the “AMEX”) under the ticker symbol “USL.” On that day,
US12OF established its initial offering price at $50.00 per unit and issued
300,000 units to the initial authorized purchaser, Merrill Lynch Professional
Clearing Corp., in exchange for $15,001,000 in cash. As a result of the
acquisition of the AMEX by NYSE Euronext, US12OF’s units no longer trade on the
AMEX and commenced trading on the NYSE Arca on November 25, 2008.
Since its
initial offering of 11,000,000 units, US12OF has made one subsequent offering of
its units: 100,000,000 units which were registered with the SEC on March
31, 2009. As of September 30, 2009, US12OF had issued 6,900,000 units and had
4,600,000 units outstanding. As of September 30, 2009, there were 104,100,000
units registered but not yet issued.
More
units may have been issued by US12OF than are outstanding due to the redemption
of units. Unlike funds that are registered under the Investment
Company Act of 1940, as amended, units that have been redeemed by US12OF cannot
be resold by US12OF. As a result, US12OF contemplates that additional offerings
of its units will be registered with the SEC in the future in anticipation
of additional issuances and redemptions.
For the Nine Months Ended
September 30, 2009 Compared to the Nine Months Ended September 30,
2008
As of
September 30, 2009, the total unrealized gain on Futures Contracts owned or
held on that day was $21,343,800 and US12OF established cash deposits,
including cash investments in money market funds, that were equal to
$140,644,514. US12OF held 100.02% of its cash assets in overnight deposits and
money market funds at its custodian bank, while -0.02% of the cash balance was
held with the futures commission merchant as margin deposits for the Futures
Contracts purchased. Margin requirements at this time were satisfied by
unrealized appreciation on investments held at the futures commission merchant,
including a forward funding excess of $8,690,704 in open equity over the
required margin deposit amount. The ending per unit NAV on September 30, 2009
was $36.78.
By
comparison, as of September 30, 2008, the total unrealized loss on Futures
Contracts owned or held on that day was $214,800 and US12OF established cash
deposits, including cash investments in money market funds, that were equal to
$6,274,380. US12OF held 76.01% of its cash assets in overnight deposits and
money market funds at its custodian bank, while 23.99% of the cash balance was
held with the futures commission merchant as margin deposits for the Futures
Contracts purchased. The ending per unit NAV on September 30, 2008 was $60.60.
The decrease in the per unit NAV from September 30, 2008 to September 30, 2009
was primarily a result of sharply lower prices for crude oil and the related
decline in the value of the Oil Futures Contracts that US12OF had invested in
between the period ended September 30, 2008 and the period ended September 30,
2009.
Portfolio Expenses. US12OF’s
expenses consist of investment management fees, brokerage
fees and commissions, certain offering costs, licensing fees and the fees
and expenses of the independent directors of the General Partner. The
management fee that US12OF pays to the General Partner is calculated as a
percentage of the total net assets of US12OF. US12OF pays the
General Partner a management fee of 0.60% of net assets. The fee is accrued
daily.
During
the nine months ended September 30, 2009, the daily average total net assets
of US12OF were $138,722,810. During the nine months ended September 30,
2009, the management fee paid by US12OF amounted to $622,542, and was accrued
daily. By comparison, during the nine months ended September 30, 2008, the daily
average total net assets of US12OF were $9,521,254. During the nine
months ended September 30, 2008, the management fee paid by US12OF amounted to
$42,768, and was accrued daily.
16
In
addition to the management fee, US12OF pays all brokerage fees, taxes and
other expenses, including certain tax reporting costs, licensing fees for the
use of intellectual property, ongoing registration or other fees paid to the
SEC, the Financial Industry Regulatory Authority (“FINRA”) and any
other regulatory agency in connection with offers and sales of its units
subsequent to the initial offering and all legal, accounting, printing and other
expenses associated therewith. The total of these fees, taxes and expenses for
the nine months ended September 30, 2009 was $457,321, as compared to $150,970
for the nine months ended September 30, 2008. The increase in expenses from the
nine months ended September 30, 2008 to the nine months ended September 30, 2009
was primarily due to the relative size of US12OF and activity that resulted from
its increased size, including the registration and the offering of additional
units, increased brokerage fees, increased licensing fees and increased tax
reporting costs due to the greater number of unitholders during the period. For
the nine months ended September 30, 2009, US12OF incurred $96,250 in
ongoing registration fees and other expenses relating to the registration and
offering of additional units. By comparison, for the nine months ended
September 30, 2008, US12OF did not incur any ongoing registration fees or other
expenses relating to the registration and offering of additional units. Expenses
incurred in connection with organizing US12OF and the costs of the initial
offering of units were borne by the General Partner, and are not
subject to reimbursement by US12OF.
US12OF is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. US12OF shares these fees with the United States Oil
Fund, LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the
United States Gasoline Fund, LP (“UGA”), the United States Heating Oil Fund, LP
(“USHO”) and the United States Short Oil Fund, LP (“USSO”) based on the relative
assets of each fund computed on a daily basis. These fees for calendar year 2009
are estimated to be a total of $477,000 for all funds. By comparison, for the
year ended December 31, 2008, these fees amounted to a total of $282,000 for all
funds, and US12OF’s portion of such fees was $1,762. Directors’ expenses are
expected to increase in 2009 due to payment for directors’ and officers’
liability insurance and an increase in the compensation awarded to the
independent directors of the General Partner. Effective as of March 3, 2009, the
General Partner has obtained directors’ and officers’ liability insurance
covering all of the directors and officers of the General Partner. Previously,
the General Partner did not have liability insurance for its directors and
officers; instead, the independent directors received a payment in lieu of
directors’ and officers’ liability insurance coverage.
US12OF
also incurs commissions to brokers for the purchase and sale of Oil Futures
Contracts, Other Oil Interests or short-term obligations of the United
States of two years or less (“Treasuries”). During the nine months ended
September 30, 2009, total commissions paid to brokers amounted to $44,530. By
comparison, during the nine months ended September 30, 2008, total commissions
paid to brokers amounted to $1,568. The increase in the total commissions paid
to brokers from the nine months ended September 30, 2008 to the nine months
ended September 30, 2009 was primarily a function of the increase in US12OF’s
average total net assets and the increase in redemptions and creations of units
during the nine months ended September 30, 2009. The increase in assets required
US12OF to purchase a greater number of futures contracts and incur a larger
amount of commissions. As an annualized percentage of total net assets,
the figure for the nine months ended September 30, 2009 represents
approximately 0.04% of total net assets. By comparison, the figure for the nine
months ended September 30, 2008 represented approximately 0.02% of total net
assets. However, there can be no assurance that commission costs and portfolio
turnover will not cause commission expenses to rise in future
quarters.
Interest
Income. US12OF seeks to invest its assets such that it
holds Oil Futures Contracts and Other Oil Interests in an amount equal to
the total net assets of its portfolio. Typically, such investments do not
require US12OF to pay the full amount of the contract value at the time of
purchase, but rather require US12OF to post an amount as a margin deposit
against the eventual settlement of the contract. As a result, US12OF retains an
amount that is approximately equal to its total net assets, which US12OF invests
in Treasuries, cash and/or cash equivalents. This includes both the amount
on deposit with the futures commission merchant as margin, as well as
unrestricted cash and cash equivalents held with US12OF’s custodian bank. The
Treasuries, cash and/or cash equivalents earn interest that accrues on a daily
basis. For the nine months ended September 30, 2009, US12OF earned $174,296 in
interest income on such cash holdings. Based on US12OF’s average daily total net
assets, this is equivalent to an annualized yield of 0.17%. US12OF did not
purchase Treasuries during the nine months ended September 30, 2009 and
held all of its funds in cash and/or cash equivalents during this time period.
By comparison, for the nine months ended September 30, 2008, US12OF earned
$141,384 in interest income on such cash holdings. Based on US12OF’s
average daily total net assets, this was equivalent to an annualized yield of
1.98%. US12OF did not purchase Treasuries during the nine months ended
September 30, 2008 and held all of its funds in cash and/or cash equivalents
during this time period. Interest rates on short-term investments in the United
States, including cash, cash equivalents, and short-term Treasuries, were
sharply lower during the nine months ended September 30, 2009 compared to the
same time period in 2008. As a result, the amount of interest earned by US12OF
as a percentage of total net assets was lower during the nine months ended
September 30, 2009 compared to the nine months ended September 30,
2008.
17
For the Three Months Ended
September 30, 2009 Compared to the Three Months Ended September 30,
2008
During
the three months ended September 30, 2009, the daily average total net assets of
US12OF were $171,126,467. During the three months ended September 30, 2009, the
management fee paid by US12OF amounted to $258,799, and was accrued daily. By
comparison, during the three months ended September 30, 2008, the daily average
total net assets of US12OF were $7,163,236. During the three months
ended September 30, 2008, the management fee paid by US12OF amounted to $10,804,
and was accrued daily.
In
addition to the management fee, US12OF pays all brokerage fees, taxes and
other expenses, including certain tax reporting costs, licensing fees for the
use of intellectual property, ongoing registration or other fees paid to the
SEC, FINRA and any other regulatory agency in connection
with offers and sales of its units subsequent to the initial offering and
all legal, accounting, printing and other expenses associated therewith. The
total of these fees, taxes and expenses for the three months ended September 30,
2009 was $227,905, as compared to $48,874 for the three months ended September
30, 2008. The increase in expenses from the three months ended September 30,
2008 to the three months ended September 30, 2009 was primarily due to the
relative size of US12OF and activity that resulted from its increased size,
including the registration and the offering of additional units, increased
brokerage fees, increased licensing fees and increased tax reporting costs due
to the greater number of unitholders during the period. For the three
months ended September 30, 2009, US12OF incurred $29,750 in ongoing
registration fees and other expenses relating to the registration and offering
of additional units. By comparison, for the three months ended September
30, 2008, US12OF did not incur any fees and other expenses relating to the
registration and offering of additional units. Expenses incurred in connection
with organizing US12OF and the costs of the initial offering of units
were borne by the General Partner, and are not subject to reimbursement by
US12OF.
US12OF is
responsible for paying its portion of the directors’ and officers’ liability
insurance of the General Partner and the fees and expenses of the independent
directors of the General Partner who are also the General Partner’s audit
committee members. US12OF shares these fees with USOF, USNG, UGA,
USHO and USSO based on the relative assets of each fund computed on a daily
basis. These fees for the three months ended September 30, 2009 amounted to a
total of $80,648 for all funds, and US12OF’s portion of such fees was $2,204. By
comparison, for the three months ended September 30, 2008, these fees amounted
to a total of $72,126 for all funds, and US12OF’s portion of such fees was $248.
Directors’ expenses
increased from the three months ended September 30, 2008 to the three
months ended September 30, 2009 due to payment for
directors’ and officers’ liability insurance and an increase in the compensation
awarded to the independent directors of the General Partner. Effective as of
March 3, 2009, the General Partner has obtained directors’ and officers’
liability insurance covering all of the directors and officers of the General
Partner. Previously, the General Partner did not have liability insurance for
its directors and officers; instead, the independent directors received a
payment in lieu of directors’ and officers’ liability insurance
coverage.
US12OF
also incurs commissions to brokers for the purchase and sale of Oil Futures
Contracts, Other Oil Interests or Treasuries. During the three months ended
September 30, 2009, total commissions paid to brokers amounted to $5,521. By
comparison, during the three months ended September 30, 2008, total commissions
paid to brokers amounted to $66. The increase in the total commissions paid to
brokers from the three months ended September 30, 2008 to the three months ended
September 30, 2009 was primarily a function of the increase in US12OF’s average
total net assets and the increase in redemptions and creations of units during
the three months ended September 30, 2009. The increase in assets required
US12OF to purchase a greater number of futures contracts and incur a larger
amount of commissions. As an annualized percentage of total net assets,
the figure for the three months ended September 30, 2009 represents
approximately 0.01% of total net assets. By comparison, the figure for the three
months ended September 30, 2008 represented approximately 0.00% of total net
assets. However, there can be no assurance that commission costs and portfolio
turnover will not cause commission expenses to rise in future
quarters.
18
Interest
Income. US12OF seeks to invest its assets such that it
holds Oil Futures Contracts and Other Oil Interests in an amount equal to
the total net assets of its portfolio. Typically, such investments do not
require US12OF to pay the full amount of the contract value at the time of
purchase, but rather require US12OF to post an amount as a margin deposit
against the eventual settlement of the contract. As a result, US12OF retains an
amount that is approximately equal to its total net assets, which US12OF invests
in Treasuries, cash and/or cash equivalents. This includes both the amount
on deposit with the futures commission merchant as margin, as well as
unrestricted cash and cash equivalents held with US12OF’s custodian bank. The
Treasuries, cash and/or cash equivalents earn interest that accrues on a daily
basis. For the three months ended September 30, 2009, US12OF earned $50,707 in
interest income on such cash holdings. Based on US12OF’s average daily total net
assets, this is equivalent to an annualized yield of 0.12%. US12OF did not
purchase Treasuries during the three months ended September 30, 2009 and
held all of its funds in cash and/or cash equivalents during this time period.
By comparison, for the three months ended September 30, 2008, US12OF earned
$28,187 in interest income on such cash holdings. Based on US12OF’s average
daily total net assets, this was equivalent to an annualized yield of 1.57%.
US12OF did not purchase Treasuries during the three months ended September
30, 2008 and held all of its funds in cash and/or cash equivalents during this
time period. Interest rates on short-term investments in the United States,
including cash, cash equivalents, and short-term Treasuries, were sharply lower
during the three months ended September 30, 2009 compared to the same time
period in 2008. As a result, the amount of interest earned by US12OF as a
percentage of total net assets was lower during the three months ended September
30, 2009 compared to the three months ended September 30, 2008.
Tracking
US12OF’s Benchmark
US12OF
seeks to manage its portfolio such that changes in its average daily NAV, on a
percentage basis, closely track the changes in the average of the daily prices
of the Benchmark Futures Contracts, also on a percentage basis. Specifically,
US12OF seeks to manage the portfolio such that over any rolling period of 30
valuation days, the average daily change in the NAV is within a range of 90% to
110% (0.9 to 1.1) of the average daily change in the price of the
Benchmark Futures Contracts. As an example, if the average daily movement
of the average of the prices of the Benchmark Futures Contracts for a
particular 30-day time period was 0.5% per day, US12OF management would attempt
to manage the portfolio such that the average daily movement of the NAV during
that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of
the benchmark’s results). US12OF’s portfolio management goals do not include
trying to make the nominal price of US12OF’s NAV equal to the average of the
nominal prices of the current Benchmark Futures Contracts or the spot price
for light, sweet crude oil. Management believes that it is not practical to
manage the portfolio to achieve such an investment goal when investing in listed
Oil Futures Contracts.
For the
30 valuation days ended September 30, 2009, the simple average daily change in
the Benchmark Futures Contracts was -0.098%, while the simple average daily
change in the NAV of US12OF over the same time period was -0.101%. The average
daily difference was -0.003% (or -0.3 basis points, where 1 basis point equals
1/100 of 1%). As a percentage of the daily movement of the Benchmark Futures
Contracts, the average error in daily tracking by the NAV was -1.713%, meaning
that over this time period US12OF’s tracking error was within the plus or minus
10% range established as its benchmark tracking goal. The first chart below
shows the daily movement of US12OF’s NAV versus the daily movement of the
Benchmark Futures Contracts for the 30-day period ended September 30,
2009.
19
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
20
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
21
Since the offering of US12OF units to
the public on December 6, 2007 to September 30, 2009, the simple average
daily change in the Benchmark Futures Contracts was -0.027%, while the
simple average daily change in the NAV of US12OF over the same time period was
-0.025%. The average daily difference was -0.002% (or -0.2 basis points, where 1
basis point equals 1/100 of 1%). As a percentage of the daily movement of the
Benchmark Futures Contracts, the average error in daily tracking by the NAV
was -0.044%, meaning that over this time period US12OF’s tracking error was
within the plus or minus 10% range established as its benchmark tracking
goal.
An
alternative tracking measurement of the return performance of US12OF versus the
return of its Benchmark Futures Contracts can be calculated by comparing
the actual return of US12OF, measured by changes in its NAV, versus the
expected changes in its
NAV under the assumption that US12OF’s returns had been exactly the same as the
daily changes in its Benchmark Futures Contracts.
For the
nine months ended September 30, 2009, the actual total return of US12OF as
measured by changes in its NAV was 17.73%. This is based on an initial
NAV of $31.24 on December 31, 2008 and an ending NAV as of September
30, 2009 of $36.78. During this time period, US12OF made no distributions to its
unitholders. However, if US12OF’s daily changes in its NAV had instead exactly
tracked the changes in the daily return of the Benchmark Futures Contracts,
US12OF would have ended the third quarter of 2009 with an estimated NAV of
$36.95, for a total return over the relevant time period of 18.28%. The
difference between the actual NAV total return of US12OF of 17.73% and the
expected total return based on the Benchmark Futures Contracts of 18.28% was an
error over the time period of 0.55%, which is to say that US12OF’s actual total
return trailed the benchmark result by that percentage. Management believes that
a portion of the difference between the actual return and the expected benchmark
return can be attributed to the net impact of the expenses and the interest that
US12OF collects on its cash and cash equivalent holdings. During the nine months
ended September 30, 2009, US12OF received interest income of $174,296, which is
equivalent to a weighted average interest rate of 0.17% for the nine months
ended September 30, 2009. In addition, during the nine months ended September
30, 2009, US12OF also collected $27,000 from its authorized purchasers
(“Authorized Purchasers”) creating or redeeming baskets of units. This income
also contributed to US12OF’s actual return. However, if the total assets of
US12OF continue to increase, management believes that the impact on total
returns of these fees from creations and redemptions will diminish as a
percentage of the total return. During the nine months ended September 30, 2009,
US12OF incurred net expenses of $1,068,636. Income from interest and Authorized
Purchaser collections net of expenses was $(867,340), which is equivalent to a
weighted average net interest rate of -0.84% for the nine months ended September
30, 2009.
By
comparison, for the nine months ended September 30, 2008, the actual total
return of US12OF as measured by changes in its NAV was 11.75%. This was based on
an initial NAV of $54.23 on December 31, 2007 and an ending NAV as of
September 30, 2008 of $60.60. During this time period, US12OF made no
distributions to its unitholders. However, if US12OF’s daily changes in its NAV
had instead exactly tracked the changes in the daily return of the Benchmark
Futures Contracts, US12OF would have ended the third quarter of 2008 with
an estimated NAV of $60.04, for a total return over the relevant time period of
10.74%. The difference between the actual NAV total return of US12OF of 11.75%
and the expected total return based on the Benchmark Futures Contracts of 10.74%
was an error over the time period of 1.01%, which is to say that US12OF’s actual
total return exceeded the benchmark result by that percentage. Management
believes that a portion of the difference between the actual return and the
expected benchmark return can be attributed to the impact of the interest that
US12OF collected on its cash and cash equivalent holdings. During the nine
months ended September 30, 2008, US12OF received interest income of $141,384,
which is equivalent to a weighted average interest rate of 1.98% for the nine
months ended September 30, 2008. In addition, during the nine months ended
September 30, 2008, US12OF also collected $3,000 from Authorized Purchasers
creating or redeeming baskets of units. During the nine months ended September
30, 2008, US12OF incurred net expenses of $60,784. Income from interest and
Authorized Purchaser collections net of expenses was $83,600, which is
equivalent to a weighted average net interest rate of 1.17% for the nine months
ended September 30, 2008. This income also contributed to US12OF’s actual return
exceeding the benchmark results.
There are
currently three factors that have impacted or are most likely to impact
US12OF’s ability to accurately track its Benchmark Futures
Contracts.
First,
US12OF may buy or sell its holdings in the then current Benchmark Futures
Contracts at a price other than the closing settlement price of that contract on
the day during which US12OF executes the trade. In that case, US12OF may pay a
price that is higher, or lower, than that of the Benchmark Futures
Contracts, which could cause the changes in the daily NAV of US12OF to
either be too high or too low relative to the changes in the Benchmark Futures
Contracts. During the nine months ended September 30, 2009, management attempted
to minimize the effect of these transactions by seeking to execute its purchase
or sale of the Benchmark Futures Contracts at, or as close as possible to,
the end of the day settlement price. However, it may not always be possible for
US12OF to obtain the closing settlement price and there is no assurance that
failure to obtain the closing settlement price in the future will not adversely
impact US12OF’s attempt to track its Benchmark Futures Contracts over
time.
22
Second,
US12OF earns interest on its cash, cash equivalents and Treasury
holdings. US12OF is not required to distribute any portion of its income to its
unitholders and did not make any distributions to unitholders during the nine
months ended September 30, 2009. Interest payments, and any other income, were
retained within the portfolio and added to US12OF’s NAV. When this income
exceeds the level of US12OF’s expenses for its management fee, brokerage
commissions and other expenses (including ongoing registration fees, licensing
fees and the fees and expenses of the independent directors of the General
Partner), US12OF will realize a net yield that will tend to cause daily
changes in the NAV of US12OF to track slightly higher than daily changes in the
average of the prices of the Benchmark Futures Contract. During the nine
months ended September 30, 2009, US12OF earned, on an annualized basis,
approximately 0.17% on its cash holdings. It also incurred cash expenses on an
annualized basis of 0.60% for management fees and approximately 0.04% in
brokerage commission costs related to the purchase and sale of futures
contracts, and 0.39% for other expenses. The foregoing fees and expenses
resulted in a net yield on an annualized basis of approximately -0.86% and
affected US12OF’s ability to track its benchmark. If short-term interest rates
rise above the current levels, the level of deviation created by the yield would
decrease. Conversely, if short-term interest rates were to decline, the amount
of error created by the yield would increase. When short-term yields drop to a
level lower than the combined expenses of the management fee and the brokerage
commissions, then the tracking error becomes a negative number and would tend to
cause the daily returns of the NAV to underperform the daily returns of the
Benchmark Futures Contracts.
Third,
US12OF may hold Other Oil Interests in its portfolio that may fail to
closely track the Benchmark Futures Contracts’ total return movements. In
that case, the error in tracking the benchmark could result in daily changes in
the NAV of US12OF that are either too high, or too low, relative to the daily
changes in the Benchmark Futures Contracts. During the nine months ended
September 30, 2009, US12OF did not hold any Other Oil Interests. However, there
can be no assurance that in the future US12OF will not invest in such Other Oil
Interests, which may have the effect of increasing transaction related expenses
and result in increased tracking error.
Term Structure of Crude Oil Futures
Prices and the Impact on Total Returns. Several factors determine the
total return from investing in a futures contract position. One factor that
impacts the total return that will result from investing in near month
crude oil futures contracts and “rolling” those contracts forward each month is
the price relationship between the current near month contract and the next
month contract. For example, if the price of the near month contract is higher
than the next month contract (a situation referred to as “backwardation” in the
futures market), then absent any other change there is a tendency for the price
of a next month contract to rise in value as it becomes the near month contract
and approaches expiration. Conversely, if the price of a near month contract is
lower than the next month contract (a situation referred to as “contango” in the
futures market), then absent any other change there is a tendency for the price
of a next month contract to decline in value as it becomes the near month
contract and approaches expiration.
As an
example, assume that the price of crude oil for immediate delivery (the “spot”
price), was $50 per barrel, and the value of a position in the near month
futures contract was also $50. Over time, the price of the barrel of crude oil
will fluctuate based on a number of market factors, including demand for
oil relative to its supply. The value of the near month contract will likewise
fluctuate in reaction to a number of market factors. If investors seek to
maintain their position in a near month contract and not take delivery of the
oil, every month they must sell their current near month contract as it
approaches expiration and invest in the next month contract.
If the
futures market is in backwardation, e.g., when the expected price
of crude oil in the future would be less, the investor would be buying a next
month contract for a lower price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing crude oil
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on Treasuries, cash and/or cash equivalents), the value of the
next month contract would rise as it approaches expiration and becomes the new
near month contract. In this example, the value of the $50 investment would tend
to rise faster than the spot price of crude oil, or fall slower. As a result, it
would be possible in this hypothetical example for the price of spot crude oil
to have risen to $60 after some period of time, while the value of the
investment in the futures contract would have risen to $65, assuming
backwardation is large enough or enough time has elapsed. Similarly, the spot
price of crude oil could have fallen to $40 while the value of an investment in
the futures contract could have fallen to only $45. Over time, if backwardation
remained constant, the difference would continue to increase.
23
If the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing crude oil
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and the
interest earned on cash), the value of the next month contract would fall as it
approaches expiration and becomes the new near month contract. In this example,
it would mean that the value of the $50 investment would tend to rise slower
than the spot price of crude oil, or fall faster. As a result, it would be
possible in this hypothetical example for the spot price of crude oil to
have risen to $60 after some period of time, while the value of the investment
in the futures contract will have risen to only $55, assuming contango is large
enough or enough time has elapsed. Similarly, the spot price of crude oil could
have fallen to $45 while the value of an investment in the futures contract
could have fallen to $40. Over time, if contango remained constant, the
difference would continue to increase.
The chart
below compares the price of the near month contract to the average price of the
near 12 months over the last 10 years (1999-2008) for light, sweet crude oil.
When the price of the near month contract is higher than the average price of
the near 12 month contracts, the market would be described as being in
backwardation. When the price of the near month contract is lower than the
average price of the near 12 month contracts, the market would be described as
being in contango. Although the prices of the near month contract and the
average price of the near 12 month contracts do tend to move up or down
together, it can be seen that at times the near month prices are clearly higher
than the average price of the near 12 month contracts (backwardation), and other
times they are below the average price of the near 12 month contracts
(contango).
Near Month Price
(“NG1”)
vs Average Price of the Near 12 Months (“12M
Strip”)
*
(10 years ending
12/31/08)
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
24
An
alternative way to view the same data is to subtract the average dollar price of
the near 12 month contracts for light, sweet crude oil. from the dollar price of
the near month contract for light, sweet crude oil. If the resulting number is a
positive number, then the near month price is higher than the average price of
the near 12 months and the market could be described as being in backwardation.
If the resulting number is a negative number, then the near month price is lower
than the average price of the near 12 months and the market could be described
as being in contango. The chart below shows the results from subtracting the
average dollar price of the near 12 month contracts from the near month price
for the 10 year period between 1999 and 2008.
Near Month Price
minus Average Price of the Near 12 Months *
(10 years ending
12/31/08)
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An
investment in a portfolio that involved owning only the near month contract
would likely produce a different result than an investment in a portfolio that
owned an equal number of each of the near 12 months’ worth of contracts.
Generally speaking, when the crude oil futures market is in backwardation, the
near month only portfolio would tend to have a higher total return than the 12
month portfolio. Conversely, if the crude oil futures market was in contango,
the portfolio containing 12 months’ worth of contracts would tend to outperform
the near month only portfolio. The chart below shows the annual results of
owning a portfolio consisting of the near month contract and a portfolio
containing the near 12 months’ worth of contracts for light, sweet crude oil. In
addition, the chart shows the annual change in the spot price of light, sweet
crude oil. In this example, each month, the near month only portfolio would sell
the near month contract at expiration and buy the next month contract. The
portfolio holding an equal number of the near 12 months’ worth of contracts
would sell the near month contract at expiration and replace it with the
contract that becomes the new twelfth month contract.
25
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
As seen
in the chart above, there have been periods of both positive and negative annual
total returns for both hypothetical portfolios over the last 10 years. In
addition, there have been periods during which the near month only approach had
higher returns, and periods where the 12 month approach had higher total
returns. The above chart does not represent the performance history of US12OF or
any affiliated funds.
Historically,
the crude oil futures markets have experienced periods of contango and
backwardation, with backwardation being in place more often than contango.
During 2006 and the first half of 2007, these markets have experienced contango.
However, starting early in the third quarter of 2007, the crude oil futures
market moved into backwardation. The crude oil markets remained in backwardation
until late in the second quarter of 2008 when they moved into contango. The
crude oil markets remained in contango until late in the third quarter of 2008,
when the markets moved into backwardation. Early in the fourth quarter of 2008,
the crude oil market moved back into contango and remained in contango for the
balance of 2008. Throughout the first nine months of 2009, the crude oil
market remained in contango. During parts of January and February
2009, the level of contango was unusually steep. Crude oil inventories, which
reached historic levels in January and February and which appear to be the
primary cause of the steep level of contango, began to drop in March and for the
balance of the first nine months of 2009. Crude oil remained in contango
through September 30, 2009.
The
General Partner believes that holding futures contracts whose expiration dates
are spread out over a 12 month period of time will cause the total return of
such a portfolio to vary compared to a portfolio that holds only a single
month’s contract (such as the near month contract). In particular,
the General Partner believes that the total return of a portfolio holding
contracts with a range of expiration months will be impacted differently by the
price relationship between different contract months of the same commodity
future compared to the total return of a portfolio consisting of the near month
contract. The General Partner believes that based on historical evidence a
portfolio that held futures contracts with a range of expiration dates spread
out over a 12 month period of time would typically be impacted less by the
positive effect of backwardation, and less by the negative effect of contango,
compared to a portfolio that held contracts of a single near month. As a result,
absent the impact of any other factors, a portfolio of 12 different monthly
contracts would tend to have a lower total return than a near month only
portfolio in a backwardation market and a higher total return in a contango
market. However there can be no assurance that such historical
relationships would provide the same or similar results in the
future.
26
Periods
of contango or backwardation do not materially impact US12OF’s investment
objective of having the percentage changes in its per unit NAV track the
percentage changes in the average of the prices of the Benchmark Futures
Contracts since the impact of backwardation and contango tended to equally
impact the percentage changes in price of both US12OF’s units and the
Benchmark Futures Contracts. It is impossible to predict with any degree of
certainty whether backwardation or contango will occur in the future. It is
likely that both conditions will occur during different periods.
Crude Oil Market. During the
nine months ended September 30, 2009, crude oil prices were impacted by several
factors. On the consumption side, demand remained weak inside and outside the
United States as continued global economic growth, including emerging economies
such as China and India, remained weak to negative for the first quarter of the
year. On the supply side, efforts to reduce production by the Organization of
the Petroleum Exporting Countries to more closely match global consumption were
only partially successful. This divergence between production and consumption
has led to large build-ups in crude oil inventories and contributed to weak oil
prices. However, crude oil prices did finish the third quarter of 2009
approximately 58.32% higher than at the beginning of the nine month period.
Management
believes, however, that should the global economic situation remain weak, there
is a meaningful possibility that crude oil prices could retreat from their
current levels.
Crude Oil Price Movements in
Comparison to other Energy Commodities and Investment Categories. The
General Partner believes that investors frequently measure the degree to which
prices or total returns of one investment or asset class move up or down in
value in concert with another investment or asset class. Statistically, such a
measure is usually done by measuring the correlation of the price movements of
the two different investments or asset classes over some period of time. The
correlation is scaled between 1 and -1, where 1 indicates that the two
investment options move up or down in price or value together, known as
“positive correlation,” and -1 indicating that they move in completely opposite
directions, known as “negative correlation.” A correlation of 0 would mean that
the movements of the two are neither positively or negatively correlated, known
as “non-correlation.” That is, the investment options sometimes move up and down
together and other times move in opposite directions.
For the
ten year time period between 1998 and 2008, the chart below compares the monthly
movements of crude oil prices versus the monthly movements of the prices of
several other energy commodities, such as natural gas, heating oil, and unleaded
gasoline, as well as several major non-commodity investment asset classes, such
as large cap U.S. equities, U.S. government bonds and global equities. It can be
seen that over this particular time period, the movement of crude oil on a
monthly basis was not strongly correlated, positively or negatively, with the
movements of large cap U.S. equities, U.S. government bonds or global equities.
However, movements in crude oil had a strong positive correlation to movements
in heating oil and unleaded gasoline. Finally, crude oil had a positive, but
weaker, correlation with natural gas.
|
10 Year Correlation
Matrix 1998-2008
|
Large
Cap
U.S.
Equities
(S&P
500)
|
U.S. Govt.
Bonds
(EFFAS
U.S.
Government
Bond Index)
|
Global
Equities
(FTSE
World
Index)
|
Unleaded
Gasoline
|
Natural
Gas
|
Heating
Oil
|
Crude
Oil
|
|||||||||||||||||||||
|
Large
Cap U.S. Equities (S&P 500)
|
1.000 | -0.223 | 0.936 | 0.266 | 0.045 | 0.003 | 0.063 | |||||||||||||||||||||
|
U.S.
Govt. Bonds (EFFAS U.S. Government Bond Index)
|
1.000 | -0.214 | -0.134 | 0.054 | 0.037 | -0.29 | ||||||||||||||||||||||
|
Global
Equities (FTSE World Index)
|
1.000 | 0.384 | 0.072 | 0.084 | 0.155 | |||||||||||||||||||||||
|
Unleaded
Gasoline
|
1.000 | 0.254 | 0.787 | 0.747 | ||||||||||||||||||||||||
|
Natural
Gas
|
1.000 | 0.394 | 0.292 | |||||||||||||||||||||||||
|
Heating
Oil
|
1.000 | 0.738 | ||||||||||||||||||||||||||
|
Crude
Oil
|
1.000 | |||||||||||||||||||||||||||
|
source:
Bloomberg, NYMEX
|
||||||||||||||||||||||||||||
27
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
The chart
below covers a more recent, but much shorter, range of dates than the above
chart. Over the one year period ended September 30, 2009, crude oil continued to
have a strong positive correlation with heating oil and unleaded gasoline.
During this period, it also had a slightly
weaker correlation
with the movements of natural gas than it had displayed over the ten year period
ended December 31, 2008. Notably, the correlation between crude oil and both
large cap U.S. equities and global equities, which had been essentially
non-correlated over the ten year period ended December 31, 2008, displayed
results that indicated that they had a mildly positive correlation over this
shorter time period, particularly due to the recent downturn in the U.S.
economy. Finally, the results showed that crude oil and U.S. government bonds,
which had essentially been non-correlated for the ten year period ended December
31, 2008, were weakly negatively correlated over this more recent time
period.
|
Correlation Matrix
12 months ended September 30,
2009
|
Large
Cap
US
Equities
(S&P
500)
|
US Gov't
Bonds
(EFFAS
US
Govt
Bond Index)
|
Global
Equities
(FTSE
World
Index)
|
Unleaded
Gasoline
|
Heating
Oil
|
Natural
Gas
|
Crude
Oil
|
|||||||||||||||||||||
|
Large
Cap US Equities (S&P 500)
|
1.000 | 0.088 | 0.988 | 0.522 | 0.694 | 0.205 | 0.706 | |||||||||||||||||||||
|
US
Gov't Bonds (EFFAS US Govt Bond Index)
|
1.000 | 0.102 | -0.423 | -0.303 | 0.082 | -0.313 | ||||||||||||||||||||||
|
Global
Equities (FTSE World Index)
|
1.000 | 0.552 | 0.697 | 0.205 | 0.705 | |||||||||||||||||||||||
|
Unleaded
Gasoline
|
1.000 | 0.865 | -0.089 | 0.768 | ||||||||||||||||||||||||
|
Heating
Oil
|
1.000 | 0.252 | 0.810 | |||||||||||||||||||||||||
|
Natural
Gas
|
1.000 | 0.193 | ||||||||||||||||||||||||||
|
Crude
Oil
|
1.000 | |||||||||||||||||||||||||||
|
Source:
Bloomberg, NYMEX
|
||||||||||||||||||||||||||||
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE
RESULTS
Investors
are cautioned that the historical price relationships between crude oil and
various other energy commodities, as well as other investment asset classes, as
measured by correlation may not be reliable predictors of future price movements
and correlation results. The results pictured above would have been different if
a different range of dates had been selected. The General Partner believes that
crude oil has historically not demonstrated a strong correlation with equities
or bonds over long periods of time. However, the General Partner also believes
that in the future it is possible that crude oil could have long term
correlation results that indicate prices of crude oil more closely track the
movements of equities or bonds. In addition, the General Partner believes that,
when measured over time periods shorter than ten years, there will always be
some periods where the correlation of crude oil to equities and bonds will be
either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.
28
The
correlations between crude oil, natural gas, heating oil and gasoline are
relevant because the General Partner endeavors to invest US12OF’s assets in Oil
Futures Contracts and Crude Oil Interests so that daily changes in percentage
terms in US12OF’s NAV correlate as closely as possible with daily changes in
percentage terms in the price of the Benchmark Futures Contracts. If certain
other fuel-based commodity futures contracts do not closely correlate with
the crude oil Futures Contracts, then their use could lead to greater tracking
error. As noted, the General Partner also believes that the changes in
percentage terms in the price of the Benchmark Oil Futures Contracts will
closely correlate with changes in percentage terms in the spot price of light,
sweet crude oil.
Critical
Accounting Policies
Preparation
of the condensed financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well
as the use of estimates. US12OF’s application of these policies involves
judgments and actual results may differ from the estimates used.
The
General Partner has evaluated the nature and types of estimates that
it makes in preparing US12OF’s condensed financial statements and related
disclosures and has determined that the valuation of its investments which
are not traded on a United States or internationally recognized futures exchange
(such as forward contracts and over-the-counter contracts) involves a critical
accounting policy. The values which are used by US12OF for its forward contracts
are provided by its commodity broker who uses market prices when available,
while over-the-counter contracts are valued based on the present value of
estimated future cash flows that would be received from or paid to a third party
in settlement of these derivative contracts prior to their delivery date and
valued on a daily basis. In addition, US12OF estimates interest income on a
daily basis using prevailing interest rates earned on its cash and cash
equivalents. These estimates are adjusted to the actual amount received on a
monthly basis and the difference, if any, is not considered
material.
Liquidity
and Capital Resources
US12OF
has not made, and does not anticipate making, use of borrowings or other lines
of credit to meet its obligations. US12OF has met, and it is anticipated that
US12OF will continue to meet, its liquidity needs in the normal course of
business from the proceeds of the sale of its investments, or from the
Treasuries, cash and/or cash equivalents that it intends to hold at all times.
US12OF’s liquidity needs include: redeeming units, providing margin deposits for
its existing Oil Futures Contracts or the purchase of additional Oil Futures
Contracts and posting collateral for its over-the-counter contracts and, except
as noted below, payment of its expenses, summarized below under “Contractual
Obligations.”
US12OF
currently generates cash primarily from (i) the sale of baskets consisting of
100,000 units (“Creation Baskets”) and (ii) interest earned on Treasuries,
cash and/or cash equivalents. US12OF has allocated substantially all of its net
assets to trading in Crude Oil Interests. US12OF invests in Crude Oil Interests
to the fullest extent possible without being leveraged or unable to satisfy its
current or potential margin or collateral obligations with respect to its
investments in Oil Futures Contracts and Other Oil Interests. A significant
portion of the NAV is held in cash and cash equivalents that are used as
margin and as collateral for US12OF’s trading in Crude Oil Interests. The
balance of the net assets is held in US12OF’s account at its custodian bank.
Interest earned on US12OF’s interest-bearing funds is paid to US12OF. In prior
periods, the amount of cash earned by US12OF from the sale of Creation Baskets
and from interest earned has exceeded the amount of cash required to pay US12OF
expenses. However, during the nine months ended September 30, 2009, expenses
exceeded the income US12OF earned and the cash earned by the sale of Creation
Baskets. To the extent expenses have exceeded interest income, US12OF's NAV will
be negatively impacted.
US12OF’s
investment in Crude Oil Interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons. For
example, most commodity exchanges limit the fluctuations in futures
contracts prices during a single day by regulations referred to as “daily
limits.” During a single day, no trades may be executed at prices beyond the
daily limit. Once the price of a futures contract has increased or decreased by
an amount equal to the daily limit, positions in the contracts can neither be
taken nor liquidated unless the traders are willing to effect trades at or
within the specified daily limit. Such market conditions could prevent US12OF
from promptly liquidating its positions in futures
contracts. During the nine months ended September 30, 2009, US12OF
was not forced to purchase or liquidate any of its positions while daily limits
were in effect; however, US12OF cannot predict whether such an event may occur
in the future.
29
Prior to
the initial offering of US12OF, all payments with respect to US12OF’s expenses
were paid by the General Partner. US12OF does not have an obligation
or intention to refund such payments by the General Partner. The
General Partner is under no obligation to pay US12OF’s current or future
expenses. Since the initial offering of units, US12OF has been
responsible for expenses relating to (i) management fees, (ii) brokerage
fees and commissions, (iii) licensing fees for the use of intellectual
property, (iv) ongoing registration expenses in connection with offers and
sales of its units subsequent to the initial offering, (v) taxes and other
expenses, including certain tax reporting costs, (vi) fees and expenses of the
independent directors of the General Partner and (vii) other extraordinary
expenses not in the ordinary course of business, while the General Partner has
been responsible for expenses relating to the fees of US12OF’s marketing agent,
administrator and custodian and registration expenses relating to the initial
offering of units. If the General Partner and US12OF are unsuccessful in
raising sufficient funds to cover these respective expenses or in locating any
other source of funding, US12OF will terminate and investors may lose all or
part of their investment.
Market
Risk
Trading
in Oil Futures Contracts and Other Oil Interests, such as
forwards, involves US12OF entering into contractual commitments to purchase
or sell oil at a specified date in the future. The aggregate market value of
the contracts will significantly exceed US12OF’s future cash requirements
since US12OF intends to close out its open positions prior to settlement. As a
result, US12OF is generally only subject to the risk of loss
arising from the change in value of the contracts. US12OF considers the “fair
value” of its derivative instruments to be the unrealized gain or loss on the
contracts. The market risk associated with US12OF’s commitments to purchase oil
is limited to the aggregate market value of the contracts held. However, should
US12OF enter into a contractual commitment to sell oil, it would be required to
make delivery of the oil at the contract price, repurchase the contract at
prevailing prices or settle in cash. Since there are no limits on the future
price of oil, the market risk to US12OF could be unlimited.
US12OF’s
exposure to market risk depends on a number of factors, including the
markets for oil, the volatility of interest rates and foreign exchange rates,
the liquidity of the Oil Futures Contracts and Other Oil Interests markets
and the relationships among the contracts held by US12OF. Drastic
market occurrences could ultimately lead to the loss of all or substantially all
of an investor’s capital.
Credit
Risk
When
US12OF enters into Oil Futures Contracts and Other Oil Interests, it is
exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Oil Futures Contracts traded on the
NYMEX and on most other futures exchanges is the clearinghouse associated
with the particular exchange. In general, clearinghouses are backed by their
members who may be required to share in the financial burden resulting from the
nonperformance of one of their members and, therefore, this additional member
support should significantly reduce credit risk. Some foreign exchanges are not
backed by their clearinghouse members but may be backed by a consortium of banks
or other financial institutions. There can be no assurance that any
counterparty, clearinghouse, or their members or their financial backers will
satisfy their obligations to US12OF in such circumstances.
The
General Partner attempts to manage the credit risk of US12OF by following
various trading limitations and policies. In particular, US12OF generally posts
margin and/or holds liquid assets that are approximately equal to the market
value of its obligations to counterparties under the Oil Futures Contracts
and Other Oil Interests it holds. The General Partner has implemented procedures
that include, but are not limited to, executing and clearing trades only with
creditworthy parties and/or requiring the posting of collateral or margin by
such parties for the benefit of US12OF to limit its credit exposure. UBS
Securities LLC, US12OF’s commodity broker, or any other broker that may be
retained by US12OF in the future, when acting as US12OF’s futures commission
merchant in accepting orders to purchase or sell Oil Futures Contracts on United
States exchanges, is required by CFTC regulations to separately
account for and segregate as belonging to US12OF, all assets of US12OF relating
to domestic Oil Futures Contracts trading. These futures commission merchants
are not allowed to commingle US12OF’s assets with its other assets. In addition,
the CFTC requires commodity brokers to hold in a secure account US12OF’s assets
related to foreign Oil Futures Contracts trading.
30
In the
future, US12OF may purchase over-the-counter contracts. See “Item 3.
Quantitative and Qualitative Disclosures About Market Risk” of this quarterly
report on Form 10-Q for a discussion of over-the-counter contracts.
As of
September 30, 2009, US12OF had deposits in domestic and foreign financial
institutions, including cash investments in money market funds, in the amount of
$140,644,514. This amount is subject to loss should these institutions cease
operations.
Off
Balance Sheet Financing
As of
September 30, 2009, US12OF has no loan guarantee, credit support or other
off-balance sheet arrangements of any kind other than agreements entered into in
the normal course of business, which may include indemnification provisions
relating to certain risks that service providers undertake in performing
services which are in the best interests of US12OF. While US12OF’s exposure
under these indemnification provisions cannot be estimated, they are not
expected to have a material impact on US12OF’s financial position.
Redemption
Basket Obligation
In order
to meet its investment objective and pay its contractual obligations described
below, US12OF requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called “Redemption Baskets.” US12OF has to date
satisfied this obligation by paying from the cash or cash equivalents it holds
or through the sale of its Treasuries in an amount proportionate to the number
of units being redeemed.
Contractual
Obligations
US12OF’s
primary contractual obligations are with the General Partner. In return for its
services, the General Partner is entitled to a management fee calculated monthly
as a fixed percentage of US12OF’s NAV, currently 0.60% of US12OF’s NAV on its
average daily net assets.
The
General Partner agreed to pay the start-up costs associated with the
formation of US12OF, primarily its legal, accounting and other costs in
connection with the General Partner’s registration with the CFTC as a CPO and
the registration and listing of US12OF and its units with the SEC, FINRA
and the AMEX, respectively. However, offering costs incurred in connection with
registering and listing additional units of US12OF have been directly borne on
an ongoing basis by US12OF, and not by the General Partner.
The
General Partner pays the fees of US12OF’s marketing agent, ALPS
Distributors, Inc., and the fees of the custodian and transfer agent, Brown
Brothers Harriman & Co. (“BBH&Co.”), as well as BBH&Co.’s fees for
performing administrative services, including those in connection with the
preparation of US12OF’s condensed financial statements and its SEC and CFTC
reports. The General Partner and US12OF have also entered into a
licensing agreement with the NYMEX pursuant to which US12OF and the affiliated
funds managed by the General Partner pay a licensing fee to the NYMEX. US12OF
also pays the fees and expenses associated with its tax accounting and reporting
requirements with the exception of certain initial implementation service fees
and base service fees which are paid by the General Partner.
In
addition to the General Partner’s management fee, US12OF pays its brokerage fees
(including fees to a futures commission merchant), over-the-counter dealer
spreads, any licensing fees for the use of intellectual property, and,
subsequent to the initial offering, registration and other fees paid to the SEC,
FINRA, or other regulatory agencies in connection with the offer and sale of
units, as well as legal, printing, accounting and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not incurred in
the ordinary course of US12OF’s business, including expenses relating to the
indemnification of any person against liabilities and obligations to the extent
permitted by law and under the LP Agreement, the bringing or defending of
actions in law or in equity or otherwise conducting litigation and incurring
legal expenses and the settlement of claims and litigation. Commission payments
to a futures commission merchant are on a contract-by-contract, or round turn,
basis. US12OF also pays a portion of the fees and expenses of the independent
directors of the General Partner. See Note 3 to the Notes to Condensed
Financial Statements (Unaudited).
31
The
parties cannot anticipate the amount of payments that will be required under
these arrangements for future periods, as US12OF’s NAVs and trading levels to
meet its investment objectives will not be known until a future date. These
agreements are effective for a specific term agreed upon by the parties with an
option to renew, or, in some cases, are in effect for the duration of US12OF’s
existence. Either party may terminate these agreements earlier for certain
reasons described in the agreements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
Over-the-Counter
Derivatives
In the
future, US12OF may purchase over-the-counter contracts. Unlike most of the
exchange-traded Oil Futures Contracts or exchange-traded options on such
futures, each party to an over-the-counter contract bears the credit risk that
the other party may not be able to perform its obligations under its
contract.
Some
crude oil-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other crude
oil-based derivatives have highly customized terms and conditions and are not as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of crude oil- or petroleum-based fuels that
have terms similar to the Oil Futures Contracts. Others take the form of “swaps”
in which the two parties exchange cash flows based on pre-determined formulas
tied to the spot price of crude oil, forward crude oil prices or crude oil
futures prices. For example, US12OF may enter into over-the-counter derivative
contracts whose value will be tied to changes in the difference between
the spot price of light, sweet crude oil, the price of Oil Futures
Contracts traded on the NYMEX and the prices of other Oil Futures Contracts
in which US12OF may invest.
To
protect itself from the credit risk that arises in connection with such
contracts, US12OF may enter into agreements with each counterparty that provide
for the netting of its overall exposure to such counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. US12OF also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address US12OF’s exposure to the
counterparty. In addition, it is also possible for US12OF and its counterparty
to agree to clear their agreement through an established futures clearinghouse
such as those connected to the NYMEX or the ICE Futures. In that event, US12OF
would no longer have credit risk of its original counterparty, as the
clearinghouse would now be US12OF’s counterparty. US12OF would still retain any
price risk associated with its transaction.
The
creditworthiness of each potential counterparty is assessed by the General
Partner. The General Partner assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the General
Partner's board of directors (the “Board”). Furthermore, the General Partner on
behalf of US12OF only enters into over-the-counter contracts with counterparties
who are, or are affiliates of, (a) banks regulated by a United States federal
bank regulator, (b) broker-dealers regulated by the SEC, (c) insurance companies
domiciled in the United States, and (d) producers, users or traders of energy,
whether or not regulated by the CFTC. Any entity acting as a counterparty shall
be regulated in either the United States or the United Kingdom unless otherwise
approved by the Board after consultation with its legal counsel. Existing
counterparties are also reviewed periodically by the General
Partner.
US12OF
anticipates that the use of Other Oil Interests together with its investments in
Oil Futures Contracts will produce price and total return results that closely
track the investment goals of US12OF.
32
US12OF
may employ spreads or straddles in its trading to mitigate the differences in
its investment portfolio and its goal of tracking the price of the
Benchmark Futures Contracts. US12OF would use a spread when it chooses to
take simultaneous long and short positions in futures written on the same
underlying asset, but with different delivery months. The effect of holding such
combined positions is to adjust the sensitivity of US12OF to changes in the
price relationship between futures contracts which will expire sooner and those
that will expire later. US12OF would use such a spread if the General Partner
felt that taking such long and short positions, when combined with the rest of
its holdings, would more closely track the investment goals of US12OF, or if the
General Partner felt it would lead to an overall lower cost of trading to
achieve a given level of economic exposure to movements in oil prices. US12OF
would enter into a straddle when it chooses to take an option position
consisting of a long (or short) position in both a call option and put option.
The economic effect of holding certain combinations of put options and call
options can be very similar to that of owning the underlying futures contracts.
US12OF would make use of such a straddle approach if, in the opinion of the
General Partner, the resulting combination would more closely track the
investment goals of US12OF or if it would lead to an overall lower cost of
trading to achieve a given level of economic exposure to movements in oil
prices.
During
the nine months ended September 30, 2009, US12OF did not employ any hedging
methods such as those described above since all of its investments were made
over an exchange. Therefore, during the nine months ended September 30, 2009,
US12OF was not exposed to counterparty risk.
Item 4. Controls and
Procedures.
Disclosure
Controls and Procedures
US12OF
maintains disclosure controls and procedures that are designed to ensure that
material information required to be disclosed in US12OF’s periodic reports
filed or submitted under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms.
The duly
appointed officers of the General Partner, including its chief executive
officer and chief financial officer, who perform functions equivalent
to those of a principal executive officer and principal financial officer of
US12OF if US12OF had any officers, have evaluated the effectiveness of US12OF’s
disclosure controls and procedures and have concluded that the disclosure
controls and procedures of US12OF have been effective as of the end of the
period covered by this quarterly report on Form
10-Q.
Change
in Internal Control Over Financial Reporting
There
were no changes in US12OF’s internal control over financial reporting during
US12OF’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, US12OF’s internal control over financial
reporting.
33
Part II. OTHER INFORMATION
Item
1. Legal Proceedings.
Not
applicable.
Item
1A. Risk Factors.
Except as
noted below, there has not been a material change from the risk factors
previously disclosed in US12OF's Annual Report on Form 10-K for the fiscal year
ended December 31, 2008.
Regulation
of the commodity interests and energy markets is extensive and constantly
changing; future regulatory developments are impossible to predict but may
significantly and adversely affect US12OF.
The
futures markets are subject to comprehensive statutes, regulations, and margin
requirements. In addition, the CFTC and the exchanges are authorized to take
extraordinary actions in the event of a market emergency, including, for
example, the retroactive implementation of speculative position limits or higher
margin requirements, the establishment of daily price limits and the suspension
of trading. The regulation of futures transactions in the United States is a
rapidly changing area of law and is subject to modification by government and
judicial action.
The
regulation of commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by governmental and
judicial action. Considerable regulatory attention has been focused on
non-traditional investment pools which are publicly distributed in the United
States. There is a possibility of future regulatory changes altering, perhaps to
a material extent, the nature of an investment in US12OF or the ability of
US12OF to continue to implement its investment strategy. In addition, various
national governments have expressed concern regarding the disruptive effects of
speculative trading in the energy markets and the need to regulate the
derivatives markets in general. The effect of any future regulatory change on
US12OF is impossible to predict, but could be substantial and
adverse.
In the
wake of the economic crisis last year, the Administration, federal regulators
and Congress are revisiting the regulation of the financial sector, including
securities and commodities markets. These efforts are likely to result in
significant changes in the regulation of these markets.
Currently,
a number of proposals that would alter the regulation of Oil Interests are being
considered by federal regulators and Congress. These proposals include the
imposition of fixed position limits on energy-based commodity futures contracts,
extension of position and accountability limits to futures contracts on non-U.S.
exchanges previously exempt from such limits, and the forced use of
clearinghouse mechanisms for all over-the-counter transactions. Certain
proposals would aggregate and limit all positions in energy futures held by a
single entity, whether such positions exist on U.S. futures exchanges, non-U.S.
futures exchanges, or in over-the-counter contracts. While it cannot be
predicted at this time what reforms will eventually be made or how they will
impact US12OF, if any of the aforementioned proposals are implemented, US12OF’s
ability to meet its investment objective may be negatively impacted and
investors could be adversely affected
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Not applicable.
Item
3. Defaults Upon Senior Securities.
Not applicable.
Item
4. Submission of Matters to a Vote of Security
Holders.
Not
applicable.
Item 5. Other
Information.
Monthly
Account Statements
Pursuant
to the requirement under Rule 4.22 under the Commodity Exchange Act, each month
US12OF publishes an account statement for its unitholders, which includes a
Statement of Income (Loss) and a Statement of Changes in NAV. The account
statement is furnished to the SEC on a current report on Form 8-K pursuant to
Section 13 or 15(d) of the Exchange Act and posted each month on US12OF’s
website at www.unitedstates12monthoilfund.com.
Item 6. Exhibits.
Listed
below are the exhibits which are filed as part of this quarterly report on Form
10-Q (according to the number assigned to them in Item 601 of Regulation
S-K):
|
Exhibit
|
||
|
Number
|
Description of Document
|
|
|
3.1*
|
Amended
and Restated Agreement of Limited Partnership.
|
|
|
3.3**
|
Fourth
Amended and Restated Limited Liability Company Agreement of the General
Partner.
|
|
|
10.2*
|
Marketing
Agent Agreement.
|
|
|
10.4*
|
Custodian
Agreement.
|
|
|
10.6*
|
Administrative
Agency Agreement.
|
|
|
10.8*
|
Amendment
Agreement to the Marketing Agent Agreement.
|
|
|
31.1*
|
Certification
by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Certification
by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1*
|
Certification
by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2*
|
Certification
by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
*
|
Filed
herewith
|
|
**
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the United States
Oil Fund, LP for the quarter ended September 30, 2009, filed on November
9, 2009.
|
34
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
By:
United States Commodity Funds LLC, its general partner
|
|
|
By:
|
/s/ Nicholas D. Gerber |
|
Nicholas
D. Gerber
|
|
|
Chief
Executive Officer
|
|
|
Date: November
16, 2009
|
|
|
By:
|
/s/ Howard Mah |
|
Howard
Mah
|
|
|
Chief
Financial Officer
|
|
|
Date: November
16, 2009
|
|
35