United States Oil Fund, LP - Quarter Report: 2006 June (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 June 30, 2006.
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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: 001-32824
United
States Oil Fund, LP
(Exact
name of registrant as specified in its charter)
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Delaware
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20-2830691
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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)
(510)
522-3336
(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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one.)
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x
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 OIL FUND, LP
Table
of Contents
FINANCIAL
INFORMATION
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Part
I. Financial Information
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Page
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1
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11
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18
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18
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Part
II. Other Information
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18
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18
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19
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19
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19
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19
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19
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Financial
Statements
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Statements
of Financial Condition
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||||||
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|||||
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June 30, 2006 (unaudited)
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December
31, 2005
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|||||
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Assets
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||||||
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Cash
and cash equivalents
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$
225,662,061
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$
1,000
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Deposits
with
broker as collateral for futures contracts
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31,860,575
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-
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Receivable
for
units sold
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13,886,048
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-
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Unrealized
appreciation on futures contracts
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7,457,480
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-
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Interest
receivable
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138,636
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-
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Other
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5,000
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-
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Total
assets
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$ 279,009,800
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$
1,000
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Liabilities
and partnership capital
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Payable
for units redeemed
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$ 13,580,866
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$ -
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Investment
management fee
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98,023
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-
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Total
liabilities
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13,678,889
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-
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Partnership
Capital
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||||||
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General
Partner
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-
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20
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Limited
Partner
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265,330,911
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980
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Total
partnership capital
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265,330,911
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1,000
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Total
liabilities and partnership capital
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$
279,009,800
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$ 1,000
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Limited
partnership units outstanding
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3,800,000
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Net
asset value per unit
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$
69.82
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Market
value per unit
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$
69.77
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See
accompanying notes to condensed financial statements.
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1
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United
States Oil Fund, LP
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Schedule
of Investments
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As
of June 30, 2006 (unaudited)
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Open
Futures Contracts as of June 30, 2006
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Number
of
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Unrealized
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contracts
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appreciation
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United
States
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||
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Crude
Oil Future contracts, due August 2006
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3,586
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$
7,457,480
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See
accompanying notes to condensed financial statements.
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2
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United
States Oil Fund, LP
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Statement
of Operations,
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Period
From April 10, 2006 (commencement of
operations)
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to
June 30, 2006 (unaudited)
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Net
Realized and Unrealized Gain (Loss) from
Investments
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Net
realized loss on futures transactions
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$
(11,408,150)
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Net
unrealized appreciation on futures transactions
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7,457,480
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Net
realized and unrealized loss from futures transactions
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(3,950,670)
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Investment
Income
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Interest
income
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1,883,807
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Other
income
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41,000
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Total
income
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1,924,807
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Expenses
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Management
fee
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219,023
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Commission
expense
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70,300
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Total
expenses
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289,323
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Net
investment income
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1,635,484
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Net
loss
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$
(2,315,186)
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Net
loss per weighted average limited partnership
unit
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$ (0.79)
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Weighted
average limited partnership units outstanding
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2,928,049
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See
accompanying notes to condensed financial statements.
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3
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United
States Oil Fund, LP
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Statement
of Changes in Partnership Capital,
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Period
From April 1, 2006
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to
June 30, 2006 (unaudited)
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General
Partner
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Limited
Partners
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Total
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Balance
at April 1, 2006
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$
20
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$
980
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$
1,000
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Capital
contributions (6,400,000 limited units
issued)
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-
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446,045,676
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446,045,676
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Capital
withdrawals (2,600,000 limited units
redeemed)
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(20)
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(178,400,559)
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(178,400,579)
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Net
loss for the period
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-
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(2,315,186)
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(2,315,186)
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Balance
at June 30, 2006
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$
-
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$
265,330,911
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$
265,330,911
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See
accompanying notes to condensed financial statements.
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4
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United
States Oil Fund, LP
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Statement
of Cash Flows,
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Period
From April 1, 2006
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to
June 30, 2006 (unaudited)
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Cash
Flows from Operating Activities
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Net
Loss
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$
(2,315,186)
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Unrealized
appreciation on futures contracts
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(7,457,480)
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Adjustments
to reconcile net loss to net cash
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used
in operating and investing activities
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Changes
in:
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Deposits
with broker
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(31,860,575)
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Interest
receivable and other assets
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(143,636)
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Investment
advisory fee payable and other liabilities
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98,023
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Net
cash used in operating
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and
investing activities
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(41,678,854)
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Cash
Flows from Financing Activities
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Capital
contributions by limited partners
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432,159,628
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Capital
withdrawals
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(164,819,713)
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Net
cash provided by financing activities
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267,339,915
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Net
change in cash and cash equivalents
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225,661,061
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Cash
beginning of period
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1,000
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Cash
end of period
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$ 225,662,061
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Supplemental
Disclosure of Non Cash Activities
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Receivable
for units sold
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$
13,886,048
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Payable
for units redeemed
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$ (13,580,866)
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See
accompanying notes to condensed financial statements.
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5
UNITED
STATES OIL FUND, LP
Notes
to
Condensed Financial Statements
June
30,
2006 (unaudited)
Financial
information included herein is unaudited, however, such information reflects
all
adjustments which are, in the opinion of management, necessary for the fair
presentation of the financial statements for the interim period. The results
for
the interim period are not necessarily indicative of the results to be expected
for a full year. The accompanying unaudited financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the
Securities and Exchange Commission and therefore does not include all
information and footnote disclosure required under accounting principles
generally accepted in the United States of America. The June 30, 2006 financial
statements should be read in conjunction with the financial statements and
notes
included in the Fund’s audited financial statements in the Pre-Effective
Amendment No. 7 to Form S-1, declared effective April 10, 2006, for the period
ended December 31, 2005.
United
States Oil Fund, LP (formerly New York Oil ETF, LP) (the “Fund”), was organized
as a limited partnership under the laws of the state of Delaware on May 12,
2005
and changed its name on September 30, 2005. The Fund is a commodity pool
that
issues units that may be purchased and sold on the American Stock Exchange.
The
Fund will continue in perpetuity, unless terminated sooner upon the occurrence
of one or more events as described in its First Amended and Restated Limited
Partnership Agreement (the “Limited Partnership Agreement”). The investment
objective of the Fund is for its net asset value to reflect the performance
of
the price of light sweet crude oil, less the Fund’s expenses. The Fund will
accomplish its objectives through investments in futures contracts for light,
sweet crude oil, other types of crude oil, heating oil, gasoline, national
gas
and other petroleum-based fuels that are traded on the New York Mercantile
Exchange and other U.S. and foreign exchanges (“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 oil. Victoria Bay Asset Management, LLC is the general partner
of
the Fund (the “General Partner”) and is also responsible for the management of
the Fund. The
Fund
commenced operations on April 10, 2006.
For the
period ended June 30, 2006, all of the Fund’s organizational expenses have been
funded by an affiliate of the General Partner. The Fund does not have any
obligation or intention to reimburse such payments. The General Partner is
a
member of the National Futures Association and is a commodity pool operator
effective December 1, 2005. The
Fund
has a fiscal year ending on December 31.
The
Fund
issues limited partnership interests (“Units”) to authorized purchasers by
offering creation baskets consisting of 100,000 Units (“Creation Baskets”)
through a marketing agent. The purchase price for a Creation Basket is based
upon the net asset value of a Fund Unit. In addition, authorized purchasers
pay
the Fund a $1,000 fee for the creation of each Creation Basket. The initial
offering price of the initial creation basket was based on the closing price
of
the near month oil futures contracts as traded and reported on the New York
Mercantile Exchange on the last business day prior to the effective date.
Additionally, subsequent to the sale of the initial Creation Basket, Units
can
be purchased or sold on a nationally recognized securities exchange in smaller
increments. Units purchased or sold on a nationally recognized securities
exchange are not made at the net asset value of the Fund but rather at market
prices quoted on the stock exchange.
As
of
June 30, 2006, the Fund owned 3,586 light, sweet crude oil futures contracts,
which have a market value as of the close of trading of $265,112,980. The
Fund
has cash deposits at the Fund’s custodian bank and margin with the Fund’s
futures commission merchant in an aggregate amount of $257,522,636 as of
June
30, 2006.
6
Note
C - Summary of Significant Accounting Policies
(1)
Securities valuation:
Securities
listed on a national securities exchange are valued at their last reported
sales
price on the final day of trading as of the date of the statement of financial
condition. Any other securities not traded as described above are valued
at
their fair value as determined in good faith by the Board of Directors of
the
General Partner. The resulting unrealized gains and losses are included in
the
statement of operations.
(2)
Cash equivalents
Cash
equivalents are highly liquid investments with original maturity of three
months
or less.
(3)
Securities transactions and investment income:
Securities
transactions are recorded on a trade date basis. Realized gains and losses
on
sales of securities are determined using the first-in, first-out method and
are
included in the statement of operations.
(4)
Futures contracts:
During
the period in which the futures contract is open, changes in the contract
value
are recorded as an unrealized gain or loss by marking the contract to market
to
reflect the value of the contract at the end of trading on the reporting
date.
Futures contracts are valued at the settlement price established by the board
of
trade or exchange on which they are traded. The resulting unrealized gains
or
losses are included in the statement of financial condition and the statement
of
operations.
(5)
Options:
Premiums
paid for options contracts purchased are included in the statement of financial
condition. Option contracts are valued at their last reported sales price
on the
final day of trading as of the date of the statement of financial condition.
If
the sales price is outside the range of the bid/ask price, the average of
the
bid/ask price is used. If no sale is reported then the average of the bid/ask
price is used. When option contracts expire or are closed, realized gains
or
losses are recognized without regard to any unrealized gains or losses on
the
underlying securities.
(6)
Swaps:
The
Fund
may enter into swap agreements. The swaps are marked-to-market on a daily
basis.
The Fund recognizes in the statement of financial condition the swap agreements
at fair value and changes in fair values are reflected as gain or loss in
the
statement of operations. When a contract is closed, the Fund records in the
statement of operations a realized gain or loss equal to the cash
exchanged.
(7)
Forward contracts:
The
Fund
may enter into forward contracts. Forward transactions are contracts or
agreements for delayed delivery of specific currencies or commodities in
which
the seller agrees to make delivery at a specified future date of specified
currencies or commodities. Risks associated with forward contracts include
the
inability of counterparties to meet the terms of their contracts and movements
in fair values. Gains and losses on forward transactions are recorded based
on
changes in fair values and are included with net gain (loss) in the statement
of
operations.
(8)
Use of estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires 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 financial statement, and the reported amounts of the revenue and expenses
for the period ended June 30, 2006. Actual results could differ from those
estimates.
7
(9)
Deposits with brokers
Upon
entering into a futures contract, the Fund is required to make a deposit
of
initial margin with its broker in a segregated account. Margin requirements
are
satisfied by the deposit of U.S. Treasury bills and/or cash with such brokers.
The Fund earns interest income on its assets deposited with the
brokers.
Costs
incurred in connection with organizing the Fund and the initial offering
costs
of the Units were borne by an affiliate of the General Partner, and are not
subject to reimbursement by the Fund. Such costs incurred through the completion
of the offering by an affiliate of the General Partner amounted to approximately
$1,571,318
and are
not reflected in the accompanying statement of financial condition.
Under
the
Limited Partnership Agreement, the General Partner is responsible for investing
the assets of the Fund in accordance with the objectives and policies of
the
Fund. In addition, the General Partner will arrange for one of more third
parties to provide administrative, custody, accounting, transfer agency and
other necessary services to the Fund. For these services, the Fund is
contractually obligated to pay the General Partner a fee, which is paid monthly,
based on average daily net assets that is equal to 0.50% per annum on average
net assets of $1,000,000,000 or less and 0.20% of average daily net assets
that
are greater than $1,000,000,000. The Fund will pay for all brokerage fees,
taxes
and other expenses.
The
Fund
is not taxed on its income. Instead the individual investors’ respective shares
of the Fund’s taxable income are reported on the individual investors’ income
tax returns.
Authorized
persons may redeem Units from the Fund only in blocks of 100,000 Units called
“Redemption Baskets”. The amount of the redemption proceeds for a Redemption
Basket will be equal to the net asset value of the Fund Units in the Redemption
Basket.
Profit
or
loss shall be allocated among the partners of the Fund in proportion to the
number of Units each partner holds as of the close of each business day.
The
General Partner may revise, alter or otherwise modify this method of allocation
as described in the Limited Partnership Agreement.
The
Fund
calculates net asset value on each 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. The Fund uses the New
York
Mercantile Exchange closing price on that day for contracts held on the New
York
Mercantile Exchange, and calculates the value of all other Fund investments
as
of the close of the New York Stock Exchange on that day.
The
Fund
is party to a marketing agent agreement dated March 13, 2006 with ALPS
Distributors Inc., a Colorado corporation (“ALPS”), whereby ALPS provides
certain marketing services for the Fund as outlined in the agreement. The
fees
of the marketing agent, which are borne by the General Partner, include a
marketing fee of $425,000 per annum plus the following incentive fee: zero
basis
points on Fund assets from $0 - $500 million; 4 basis
points on Fund assets from $500 million - $4 billion; and 3 basis points
on Fund
assets in excess of $4 billion.
The
above
fees do not include the following expenses, which are also borne by the General
Partner: cost of placing advertisements in various periodicals; web construction
and development; or the printing and production of various marketing
materials.
The
Fund
is also party to a custodian agreement dated March 13, 2006 with Brown Brothers
Harriman & Co. (“Brown Brothers”), whereby Brown Brothers holds investments
on behalf of the Fund. The General Partner of the Fund pays the fees of the
custodian, which shall be agreed to from time to time between the parties.
In
addition, the Fund is party to an administrative agency agreement dated March
13, 2006, also with Brown Brothers, whereby Brown Brothers acts as the
administrative agent, transfer agent and registrar for the Fund. The General
Partner also pays the fees of Brown Brothers for its services under this
agreement and such fees will be determined by the parties from time to time.
Currently, the General Partner pays Brown Brothers for its services in the
foregoing capacity a minimum amount of $300,000 annually and, once the Fund’s
net assets are above $500 million, an asset charge, which is not reflected
in
either agreement, ranging between 0.035% and 0.06%, plus a $50,000 transfer
agency fee, and in either case transaction charges of $7.00 to $15.00 per
transaction.
The
Fund
invested primarily in oil futures contracts traded on the New York Mercantile
Exchange (the “Exchange”) during the period. The Fund and the Exchange are
discussing entering into and in the process of finalizing a License Agreement
whereby the Fund will be granted a non-exclusive license to use certain of
the
Exchange’s settlement prices and service marks. Under the proposed License
Agreement, the Exchange will receive an asset-based fee for the license,
which
will be paid by the General Partner.
The
Fund
expressly disclaims any association with the Exchange or endorsement of the
Fund
by the Exchange and acknowledges that “NYMEX” and “New York Mercantile Exchange”
are registered trademarks of such Exchange.
The
Fund
received a letter from Goldman, Sachs & Co. (“Goldman Sachs”) on March 17,
2006, providing the Fund notice under 35 U.S.C. Section 154(d) of two pending
United States patent applications, Publication Nos. 2004/0225593A1 and
2006/0036533A1. The Fund currently is reviewing the Goldman Sachs published
patent applications, and has engaged in discussions with Goldman Sachs regarding
their pending applications and the Fund’s own pending patent application. At
this time, due in part to the fact that the Goldman Sachs patent applications
are pending and have not been issued as U.S. Patents, the Fund is unable
to
determine what the outcome of this matter will be.
Note
K - Loss per Limited Partnership Unit
The
weighted average number of limited partnership Units outstanding was computed
for purposes of disclosing net loss per weighted average limited partnership
Unit. The weighted average limited partnership Units are equal to the number
of
units outstanding at period end, adjusted proportionately for Units
redeemed based on their respective time outstanding during such period. There
were no general partnership Units outstanding at June 30, 2006.
The
following table presents per unit performance data and other supplemental
financial data for the period from April 10, 2006 (commencement of operations)
to June 30, 2006 for the limited partners. This information has been derived
from information presented in the financial statements.
Per
Unit Performance
|
Net Asset Value, at April 10, 2006 (commencement of
operations)
|
$ 67.39
|
|
|
Net investment income
|
0.56
|
|
|
Net realized and unrealized gain from investments (net of aggregate
losses
for the period attributable to redeemed limited partner
units)
|
1.87
|
|
|
Net increase
|
2.43
|
|
|
Net asset value, at June 30, 2006
|
$ 69.82
|
|
|
Total
Return (not annualized)
|
3.61%
|
|
|
Ratios
to average net assets
|
||
|
Total
expenses (a)
|
0.66%
|
|
|
Net
investment income (a)
|
3.73%
|
|
| (a) |
Annualized
|
Total
returns are calculated based on the change in value during the period. An
individual limited partner’s total return and ratio may vary from the above
total returns and ratios based on the timing of contributions and
withdrawals.
10
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion and analysis should be read in conjunction with the
financial statements and accompanying notes filed as part of this
report.
Forward-Looking
Information
Except
for historical information contained herein, the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” contains
forward-looking statements within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995, as amended. These statements involve known
and
unknown risks and uncertainties that may cause our actual results or outcome
to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that might
cause such differences include, but are not limited to the risk factors set
forth under the caption “Risk Factors” in our Registration Statement of the
Pre-Effective Amendment No. 7 to Form S-1 for the year ended December 31,
2005,
as filed with the Securities and Exchange Commission. In addition to statements
that explicitly describe such risks and uncertainties, investors are urged
to
consider statements labeled with the terms “believes,” “belief,” “expects,”
“intends,” “plans” or “anticipates” to be uncertain and
forward-looking.
Introduction
United
States Oil Fund, LP, a Delaware limited partnership (“USOF”), is a commodity
pool that issues limited partnership units (“Units”) that may be purchased and
sold on the American Stock Exchange. The investment objective of USOF is
for
changes in the Units’ net asset value (“NAV”) to reflect changes in the
spot price of West Texas Intermediate (“WTI”) light, sweet crude oil delivered
to Cushing, Oklahoma (“WTI light, sweet crude oil”), less USOF’s
expenses.
USOF
seeks to achieve its investment objective by investing in a combination of
oil
futures contracts and other oil interests such that changes in USOF’s NAV,
measured in percentage terms, will closely track the changes in the price
of a
specified oil futures contract (“Benchmark Oil Futures Contract”), also measured
in percentage terms. USOF’s General Partner believes the Benchmark Oil Futures
Contract historically exhibited a close correlation with the spot price of
WTI
light, sweet crude oil.
At
present, on any valuation day the Benchmark Oil Futures Contract is the near
month futures contract for WTI light, sweet crude oil traded on the New York
Mercantile Exchange unless the Near Month Contract will expire within two
weeks
of the valuation day, in which case the Benchmark Oil Futures Contract is
the
Second to Nearest Out Month Contract for WTI light, sweet crude oil traded
on
the New York Mercantile Exchange. “Near Month Contract” means the next contract
traded on the New York Mercantile Exchange due to expire; “Second to Nearest Out
Month Contract” means the first contract traded on the New York Mercantile
Exchange due to expire after the Near Month Contract.
USOF
also
invests in futures contracts for other types of crude oil, heating oil,
gasoline, natural gas, and other petroleum-based fuels that are traded on
the
New York Mercantile Exchange 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 oil, other petroleum-based fuels,
Oil Futures Contracts and indices based on the foregoing (collectively, “Other
Oil Interests”). The General Partner of USOF, Victoria Bay Asset Management,
LLC, the (“General Partner”), which is registered as a commodity pool operator,
is authorized by the First Amended and Restated Agreement of Limited Partnership
(“LP Agreement”) to manage USOF. The General Partner is authorized by USOF in
its sole judgment to employ, establish the terms of employment for, and
terminate commodities trading advisors or futures commission
merchants.
Valuation
of Crude Oil Futures Contracts and the Computation of the Net Asset
Value
The
NAV
of USOF units is calculated once each trading day. The NAV for a particular
trading day is released after 4:15 p.m. New York time. NAV is calculated as
of the earlier of the close of the New York Stock Exchange or
11
4:00 p.m.
New York time. Trading on the American Stock Exchange typically closes at
4:15 p.m. New York time. USOF uses the New York Mercantile Exchange closing
price (determined at the earlier of the close of that exchange or 2:30 p.m.
New York time) for the contracts held on the New York Mercantile Exchange,
but
calculates or determines the value of all other USOF investments as of the
earlier of the close of the New York Stock Exchange or 4:00 p.m. New York
time.
Management’s
Discussion of Results of Operation and the Crude Oil
Market
Results
of operations.
On
April
10, 2006, USOF listed its units on the American Stock Exchange under the
ticker
symbol “USO”. On that day USOF established its initial NAV by setting the price
at $67.39 per unit and issued 200,000 Units to the Initial Authorized Purchaser,
KV Execution Services LLC, in exchange for $13,478,000 in cash. USOF also
commenced investment operations on that day by purchasing oil futures contracts
traded on the New York Mercantile Exchange that are based on WTI light, sweet
crude oil. The total market value of the crude oil futures contracts purchased
on that day was $13,418,501 at the time of purchase. USOF established cash
deposits equal to $13,478,000 at the time of the initial sale of units. The
majority of those cash assets were held at USOF’s custodian bank while less than
10% of the cash balance was held as margin deposits with USOF’s futures
commission merchant relating to the Oil Futures Contracts
purchased.
Portfolio
Expenses.
USOF’s
expenses consist of investment management fees and commissions. The investment
advisory fee that USOF pays to the General Partner is calculated as a percentage
of the total net assets of USOF. For total net assets of up to $1 billion,
the
investment advisory fee is 0.5%. For assets over $1 billion, the investment
advisory fee is 0.2% on the incremental amount of assets. During the period
from
April 10, 2006 to June 30, 2006, the daily average total net assets of the
USOF
were approximately $194,984,049. At no time during the period from April
10,
2006 to June 30, 2006, did the total net assets of USOF exceed $1 billion.
The
investment advisory fee paid by USOF amounted to $219,023, which was calculated
at the 0.50% rate and accrued daily.
USOF
also
incurs commissions to brokers for the purchase and sale of futures contracts,
other oil interests, or U.S. Treasury bills and notes. During the period
from
April 10, 2006 to June 30, 2006, total commissions paid amounted to $70,300.
Prior to the initial offering, USOF had estimated that the annual level of
such
commissions for USOF was expected to be 0.35% of total net assets. As an
annualized percentage of total net assets, the second quarter figure represents
approximately 0.16% 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.
Expenses
incurred from inception through June 30, 2006 in connection with organizing
USOF
and the initial offering costs of the units were borne by the General Partner,
and are not subject to reimbursement by USOF.
Interest
Income.
USOF
seeks to invest its assets such that it holds crude oil futures contracts
and
other oil interests in an amount equal to the total net assets of the portfolio.
Typically, such investments do not require USOF to pay the full amount of
the
contract value at the time of purchase, but rather require USOF to post an
amount as a margin deposit against the eventual settlement of the contract.
As a
result, USOF retains an amount that is approximately equal to its total net
assets, which USOF invests in cash deposits or in U.S. Treasuries. This includes
both the amount on deposit with the futures brokerage firms as margin as
well as
unrestricted cash held with USOF’s custodian bank. The cash or U.S. Treasuries
earn interest that accrues on a daily basis. For the period from April 10,
2006
through June 30, 2006, USOF earned $1,883,807
in interest income in such cash holdings. Based on USOF’s average daily total
net assets, this is equivalent to an annualized yield of 4.3%. USOF did not
purchase U.S. Treasury bills or notes during the period from April 10, 2006
through June 30, 2006.
Tracking
USOF’s Benchmark.
USOF
seeks to manage its portfolio such that changes in its average daily NAV,
on a
percentage basis, closely track changes in the average daily price of the
benchmark crude oil futures contract, also on a percentage basis. Specifically,
USOF seeks to manage the portfolio such that over any rolling 30-day period,
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 of the benchmark crude oil futures contract.
As an
example, if the average daily movement of the crude oil benchmark
12
for
a
particular 30-day time period was 0.5% per day, USOF 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). USOF’s portfolio management
goals do not include trying to make the nominal price of USOF’s NAV equal to the
nominal price of the current benchmark crude oil futures contract. 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.
For
the
30 valuation days ending June 30, 2006, the simple average daily change in
the
benchmark contract was 0.1573%, while the simple average daily change in
the NAV
of USOF over the same time period was 0.1728 %. The average daily difference
was
0.00154% (or 1.5 basis points, where 1 basis point equals 1/100 of 1%). As
a
percentage of the daily movement of the benchmark contract, the average error
in
daily tracking by the NAV was 4.5%, meaning that over this time period USOF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.
Since
the
inception date of USOF, April 10, 2006, the simple average daily change
in the
benchmark contract was 0.0677%, while the simple average daily change in
the NAV
of USOF over the same time period was 0.0738 %. The average daily difference
was
0.008% (or 0.8 of 1 basis point, where 1 basis point equals 1/100 of 1%).
As a
percentage of the daily movement of the benchmark contract, the average
error in
daily tracking by the NAV was 1.019%, meaning that over this time period
USOF’s
tracking error was within the plus or minus 10% range established as its
benchmark tracking goal.
13
An
alternative tracking measurement of the return performance of USOF versus
the
return of its benchmark can be calculated by comparing the actual return
of
USOF, measured by changes in its Net Asset Value (NAV), versus the expected
changes in its NAV under the assumption that USOF’s returns had been exactly the
same as the daily changes in its benchmark.
As
a
point of reference, during that relevant time period the starting benchmark
contract for USOF as of April 10th, 2006 was the June 2006 light, sweet crude
oil contract. The benchmark contract than became the July 2006 contract.
The 2nd
quarter ended with the August 2006 contract as the benchmark
contract.
For
the
period April 10th through June 30th, the actual total return of USOF as measured
by changes in its NAV was 3.61%. This is based on an initial offering price
of
$67.39 and an ending NAV as of June 30th of $69.84 (During this time period
USOF
made no distributions to its unit holders). However, if USOF’s daily changes in
its NAV had instead exactly tracked the changes in the daily return of the
benchmark contracts, USOF would have ended the 2nd Quarter with an estimated
NAV
of $69.50, for a total return over the relevant time period of 3.13%. The
difference between the actual NAV total return of USOF of 3.61% and the expected
total return based on the benchmark contracts of 3.13% was an error over
the
time period of +0.48%, which is to say that USOF’s actual total return exceeded
the benchmark result by that percentage. Management believes that the majority
of the difference between the actual return and the expected benchmark return
can be attributed to the impact of the interest that USOF collects on its
cash
and U.S. Treasury holdings. In addition, during the period USOF also collected
fees from brokerage firms creating or redeeming baskets of units. This income
also contributed to USOF’s actual return exceeding the benchmark results.
However, if the total assets of USOF 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.
14
Although
USOF’s NAV was higher at the end of the period compared to its initial offering
price, the NAV had fluctuated during the period and was higher than the ending
price at various times. The flow of new cash into USOF by the creation of
new
units at that day’s NAV also occurred at various times during the time period
and at various NAV levels. A large number of USOF’s units were created at prices
that were higher than the ending NAV price of $69.84. As a result although
USOF
showed a total return gain for the time period measured by the beginning
NAV
compared to the ending NAV, on a cash flow basis USOF showed a loss of
$2,315,186, or $0.79 per unit, because of the timing of these cash flows
during
the time period.
Of
the
various factors that could impact USOF’s ability to accurately track its
benchmark, there are currently three factors that have during the latest
period,
or are most likely to impact in the future, these tracking results.
The
first
major factor that could affect tracking results is if USOF buys or sells
its
holdings in the then current benchmark crude oil futures contract at a price
other than the closing settlement price of that contract on the day in which
USOF executes the trade. In that case, USOF may get a price that is higher,
or
lower, than that of the benchmark contract, which, if such transactions did
occur, could cause the changes in the daily NAV of USOF to either be too
high or
too low relative to the changes in the daily benchmark. In the second quarter
of
2006, management attempted to minimize the effect of these transactions by
seeking to execute its purchase or sales of the benchmark futures contracts
at,
or as close as possible to, the end of the day settlement price. However,
it is
not always possible for USOF to obtain the closing settlement price and there
is
no assurance that failure to obtain in the future will not adversely impact
USOF’s attempt to track its benchmark over time.
The
second major factor that could affect tracking results is if the interest
that
USOF earns on its cash and U.S. Treasury holdings. USOF is not required to
distribute any portion of its income to its unit holders and did not make
any
distribution to unit holders in the second quarter of 2006. Interest payments,
and any other income, were retained within the portfolio and added to USOF’s
NAV. When this income exceeds the level of USOF’s expenses for its investment
advisory fee and its brokerage commissions, USOF will realize a net yield
that
will tend to cause daily changes in the NAV of USOF to track slightly higher
than daily changes in the benchmark crude oil futures contracts. During the
second quarter of 2006, USOF earned on an annualized basis approximately
4.3% on
its cash holdings. It also incurred cash expenses on an annualized basis
of .5%
for investment advisory fees and approximately .16% in brokerage commission
costs related to the purchase and sale of futures contracts. During the latest
period, the foregoing resulted in a net yield on an annualized basis of
approximately 3.6% affected USOF’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 increase. Conversely, if short-term interest rates were to
decline, the amount of error created by the yield would decrease. If short
term
yields drop to a level lower than the combined expenses of the investment
advisory fee and the brokerage commissions, than their tracking error would
become a negative number and would tend to cause the daily returns of the
NAV to
underperform the daily returns of the benchmark crude oil futures
contracts.
The
third
major factor affecting tracking results is if USOF holds oil related investments
in its portfolios other than the current benchmark crude oil futures contract
that fail to closely track the benchmark contract’s total return movements. In
that case the error in tracking the benchmark can result in daily changes
in the
NAV of USOF that are either too high or too low relative to the daily changes
in
the benchmark. During the second quarter of 2006, since USOF did not hold
any
oil related investments other than the then current benchmark crude oil futures
contract. However, there can be no assurance that in future quarters USOF
will
not make use of such non-benchmark oil related investments.
Crude
oil market.
During
the period from April 10, 2006 to June 30, 2006, crude oil prices were impacted
by several factors. On the consumption side, demand remained strong as continued
global economic growth, especially in emerging economies such as China and
India, remained brisk. On the supply side, production increases remained
muted
since the lingering effects of Hurricane Katrina continued to impact U.S.
production and violence impacted production in Iraq and Nigeria. In addition,
geo-political concerns regarding other key crude oil producing countries,
such
as Iran and Venezuela, added to supply concerns. As a result, crude oil prices
trended higher over the course of the second quarter of 2006 and showed periods
of greater than usual volatility.
15
The
closing price on March 31, 2006 of the then near month WTI light, sweet crude
oil futures contract traded on the New York Mercantile Exchange was $62.70.
During the period from April 10, 2006 to June 30, 2006, the highest price
of the
USOF’s benchmark crude oil future was $75.17, which occurred in mid April of
2006. As of June 30, 2006, the closing price of the then near month WTI light,
sweet crude oil futures contract traded on the New York Mercantile Exchange
was
$73.93.
Critical
Accounting Policies
Preparation
of the 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. USOF'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 will make in preparing
USOF's financial statements and related disclosures once USOF commences trading
operations 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. While not currently applicable given the fact that during
the
time period covered by this report, USOF was not involved in trading activities,
the values used by USOF for its forward contracts will be provided by its
commodity broker who uses market prices when available, while over-the-counter
contracts will be 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.
Liquidity
and Capital Resources
USOF
does
not anticipate making use of borrowings or other lines of credit to meet
its
obligations. USOF has met, and it is anticipated that USOF will meet, its
liquidity needs in the normal course of business from the proceeds of the
sale
of its investments or from cash and/or short-term U.S. Treasuries that it
intends to hold at all times. USOF’s liquidity needs include redeeming units,
providing margin deposits for its existing oil futures contracts on the purchase
of additional crude oil futures contracts and posting collateral for its
over-the-counter contracts and payment of its expenses, summarized below
under
“Contractual Obligations.”
USOF
generates cash primarily from (i) the sale of Creation Baskets and (ii) interest
earned on cash. USOF allocated its nets assets to trading in oil interests.
A
significant portion of the NAV was held in cash that was used as margin for
USOF's trading in oil interests. The percentage that cash or U.S. Treasuries
will bear to the total net assets will vary from period to period as the
market
values of the oil interests change. The balance of the net assets is held
in
USOF's Oil Futures Contracts and Other Oil Interests trading account. Interest
earned on USOF's interest bearing-funds is paid to USOF.
USOF's
investment in oil interests will be subject to periods of illiquidity because
of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit the fluctuations in Oil 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 an Oil Futures Contract has increased or decreased by an amount
equal
to the daily limit, positions in the contracts can neither be taken or
liquidated unless the traders are willing to effect trades at or within the
limit. Such market conditions could prevent USOF from promptly liquidating
its
positions in Oil Futures Contracts. To date, all of USOF's and the General
Partner's expenses have been funded by their affiliates. Neither USOF nor
the
General Partner have any obligation or intention to refund such payments
by
their affiliates. These affiliates are under no obligation to continue payment
of USOF's or the General Partner's expenses. If such affiliates were to
discontinue the payment of these expenses and the General Partner and USOF
are
unsuccessful in raising sufficient funds to cover USOF's expenses or in locating
any other source of funding, USOF 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 will involve
USOF entering into contractual commitments to purchase or sell oil at a
specified date in the future. The gross or face amount of the
16
contracts
will significantly exceed USOF's future cash requirements since USOF intends
to
close out its open positions prior to settlement. As a result, USOF should
only
be subject to the risk of loss arising from the change in value of the
contracts. USOF considers the "fair value'' of its derivative instruments
to be
the unrealized gain or loss on the contracts. The market risk associated
with
USOF's commitments to purchase oil will be limited to the gross face amount
of
the contacts held. However, should USOF 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 USOF could
be
unlimited. USOF's exposure to market risk will depend 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 USOF.
The
limited experience that USOF has had in utilizing its model to trade in oil
interests in a manner intended to track the spot price of oil, as well as
drastic market occurrences, could ultimately lead to the loss of all or
substantially all of an investor’s capital.
Credit
Risk
When
USOF
enters into Oil Futures Contracts and Other Oil Interests, it will be 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 New York Mercantile
Exchange and on most other foreign 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 financial backers will satisfy
their obligations to USOF. The General Partner will attempt to manage the
credit
risk of USOF by following various trading limitations and policies. In
particular, USOF intends to post margin and/or hold liquid assets that will
be
approximately equal to the face amount of its obligations to counterparties
under the Oil Futures Contracts and Other Oil Interests it holds. The General
Partner will implement procedures that will include, but will not be 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 USOF
to
limit its credit exposure. ABN Amro, USOF's commodity broker, or any other
broker that may be retained by USOF in the future, when acting as USOF's
futures
commission merchant in accepting orders to purchase or sell Oil Futures
Contracts on United States exchanges, will be required by the U.S. Commodities
Futures Trading Commission (“CFTC”) regulations to separately account for and
segregate as belonging to USOF, all assets of USOF relating to domestic Oil
Futures Contracts trading. These commodity brokers are not allowed to commingle
USOF's assets with their other assets. In addition, the CFTC requires commodity
brokers to hold in a secure account the USOF assets related to foreign Oil
Futures Contracts trading.
Off
Balance Sheet Financing
As
of
June
30,
2006,
USOF 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 that are in
the
best interests of USOF. While USOF's exposure under these indemnification
provisions cannot be estimated, they are not expected to have a material
impact
on USOF's financial position.
Redemption
Basket Obligation
Other
than the liquidity necessary to meet its investment objective and pay its
contractual obligations described below, USOF will require liquidity to redeem
Redemption Baskets. USOF intends to satisfy this obligation through the sale
of
its U.S. Treasuries or cash in an amount proportionate to the number of units
being redeemed, as described above under "Determination of Redemption
Distribution.''
17
Contractual
Obligations
USOF's
primary contractual obligations will be with the General Partner. In return
for
its services, the General Partner will be entitled to a management fee
calculated as a fixed percentage of USOF's NAV, currently .50% for an NAV
of $1
billion or less, and thereafter .20% of the NAV above $1 billion. The General
Partner or its affiliate has agreed to pay the start-up costs associated
with
the formation of USOF, primarily its legal, accounting and other costs in
connection with its registration with the CFTC as a commodity pool operator
and
the registration and listing of USOF with the U.S. Securities and Exchange
Commission (“SEC”) and the American Stock Exchange, respectively. The General
Partner has agreed to pay the fees of the custodian and transfer agent, Brown
Brothers Harriman & Co., as well as Brown Brothers Harriman & Co.'s fees
for performing administrative services, including in connection with USOF's
preparation of its financial statements and its SEC and CFTC reports. The
General Partner will also pay the fees of USOF's accountants and a separate
firm
for providing tax related services, as well as those of its marketing agent,
ALPS Distributors, Inc. The General Partner is also in the process of
negotiating a licensing agreement with the New York Mercantile Exchange under
which certain licensing fees will be paid to the exchange by the General
Partner.
In
addition to the General Partner's management fee, USOF pays its brokerage
fees,
over-the-counter dealer spreads, fees to ABN Amro, and extraordinary expenses.
The latter are expenses not in the ordinary course of its business, including
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 ABN Amro are on a contract-by-contract, or round turn, basis.
The
parties cannot anticipate the amount of payments that will be required under
these arrangements for future periods as USOF's net asset values 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
USOF's existence. Either party may terminate these agreements earlier for
certain reasons listed in the agreements.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
None.
|
Controls
and Procedures
|
The
duly
authorized officers of Victoria Bay Asset Management, LLC, USOF’s General
Partner, who perform functions equivalent to those a principal executive
officer
and principal financial officer of USOF would perform if the USOF had any
officers, have evaluated the effectiveness of USOF’s disclosure controls and
procedures, and have concluded that the disclosure controls and procedures
of
USOF have been effective as of the end of the period covered by this quarterly
report.
There
were no changes in USOF’s internal control over financial reporting during
USOF’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect USOF’s internal control over financial
reporting.
|
Legal
Proceedings
|
None.
|
Risk
Factors
|
There
has
been not a material change from the risk factors previously disclosed in
the
registrant’s Form S-1, effective April 10, 2006.
18
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
|
Defaults
Upon Senior Securities
|
None.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
|
Other
Information
|
Monthly
Account Statements
Pursuant
to the requirement under part 4.22 of the Commodities Exchange Act, each
month
USOF publishes an account statement for its unitholders, which includes a
statement of income (loss) and a statement of changes in net asset value.
The
account statement is posted on USOF’s website at www.usoilfund.com and is
generally available on the tenth (10th) business day following
month-end.
|
Exhibits
|
Exhibits
|
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.
|
19
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.
|
United
States Oil Fund, LP (Registrant)
By:
Victoria Bay Asset Management, LLC, its general partner
|
|
By:
/s/ Nicholas D. Gerber
|
|
Nicholas
D. Gerber
|
|
Chief
Executive Officer
(Principal
executive officer)
|
|
Date:
August 8, 2006
|
|
By:
/s/ Howard Mah
|
|
Howard
Mah
|
|
Chief
Financial Officer
(Principal
financial officer)
|
|
Date:
August 8, 2006
|