United States Oil Fund, LP - Quarter Report: 2007 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2007.
|
¨
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from
to .
|
Commission
file number: 001-32824
United
States Oil Fund, LP
(Exact
name of registrant as specified in its charter)
Delaware
|
|
20-2830691
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
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
FINANCIAL
INFORMATION
|
Condensed
Financial Statements
|
Index
to Condensed Financial Statements
1
United
States Oil Fund, LP
|
|||||||
Condensed
Statements of Financial Condition
|
|||||||
At
September 30, 2007 (Unaudited) and December 31,
2006
|
|||||||
|
|||||||
September
30, 2007
|
December
31, 2006
|
||||||
Assets
|
|||||||
Cash
and cash equivalents
|
$
|
400,503,336
|
$
|
712,883,812
|
|||
Equity
in UBS Securities LLC trading accounts:
|
|||||||
Cash
|
51,318,619
|
87,123,636
|
|||||
Unrealized
gain (loss) on open commodity futures contracts
|
12,811,880
|
|
(34,383,000
|
)
|
|||
Receivable
for units sold
|
55,896,558
|
36,080,896
|
|||||
Interest
receivable
|
1,170,413
|
2,626,230
|
|||||
Other
assets
|
82,586
|
17,000
|
|||||
Total
assets
|
$
|
521,783,392
|
$
|
804,348,574
|
|||
Liabilities
and Partners' Capital
|
|||||||
Payable
for units redeemed
|
$
|
89,006,134
|
$
|
-
|
|||
General
Partner management fees (Note 3)
|
194,850 |
332,736
|
|||||
Brokerage
commissions payable
|
22,886
|
44,386
|
|||||
Other
liabilities
|
177,872
|
22,198
|
|||||
Total
liabilities
|
89,401,742
|
399,320
|
|||||
Commitments
and Contingencies (Notes 3,
4 and 5)
|
|||||||
Partners'
Capital
|
|||||||
General
Partner
|
-
|
-
|
|||||
Limited
Partners
|
432,381,650
|
803,949,254
|
|||||
Total
Partners' Capital
|
432,381,650
|
803,949,254
|
|||||
Total
liabilities and partners' capital
|
$
|
521,783,392
|
$
|
804,348,574
|
|||
Limited
Partners' units outstanding
|
6,900,000
|
15,500,000
|
|||||
Net
asset value per unit
|
$
|
62.66
|
$
|
51.87
|
|||
Market
value per unit
|
$
|
62.55
|
$
|
51.60
|
|||
See
accompanying notes to condensed financial statements.
|
2
United
States Oil Fund, LP
|
||||||||||
Condensed
Schedule of Investments (Unaudited)
|
||||||||||
At
September 30, 2007
|
||||||||||
Open
Futures Contracts
|
||||||||||
Gain
on Open
|
||||||||||
Number
of
|
Commodity
|
%
of Partners'
|
||||||||
|
Contracts
|
Contracts
|
Capital
|
|||||||
Foreign
Contracts
|
||||||||||
Crude
Oil Futures contracts, expires November 2007
|
300 | $ | 1,905,000 | 0.44 | ||||||
United
States Contracts
|
||||||||||
Crude
Oil Futures contracts, expires November 2007
|
4,992
|
$
|
10,906,880
|
|
2.52
|
|
||||
5,292 | $ | 12,811,880 | 2.96 | |||||||
Cash
Equivalents
|
||||||||||
|
Cost
|
Market
Value
|
||||||||
United
States - Money Market Funds
|
||||||||||
AIM
STIT- Liquid Assets Portfolio
|
$
|
42,914,004
|
$
|
42,914,004
|
9.93
|
|||||
AIM
STIT- STIC Prime Portfolio
|
42,801,570
|
42,801,570
|
9.90
|
|||||||
Goldman
Sachs Financial Square Funds - Government Fund
|
20,065,046 | 20,065,046 | 4.64 | |||||||
Goldman
Sachs Financial Square Funds - Prime Obligations Fund
|
42,468,375 | 42,468,375 | 9.82 | |||||||
Goldman
Sachs Financial Square Funds - Treasury Instruments Fund
|
10,000,000
|
10,000,000
|
2.31
|
|||||||
$
|
158,248,995
|
|
158,248,995
|
36.60
|
Cash |
242,254,341
|
56.03
|
|||||
Total cash and cash equivalents |
400,503,336
|
92.63
|
|||||
Cash
on deposit with broker
|
|
51,318,619
|
11.87
|
||||
Liabilities,
less receivables and other assets
|
(32,252,185
|
) |
(7.46
|
) | |||
Total
Partners' Capital
|
$
|
432,381,650
|
100.00
|
||||
See
accompanying notes to condensed financial statements.
|
3
Condensed
Statements of Operations (Unaudited)
|
||||||||||||||||
For
the three months ended September 30, 2007 and 2006, the nine
months
ended September 30, 2007
|
||||||||||||||||
and
the period from April 10, 2006 (commencement of
operations) to September
30, 2006
|
||||||||||||||||
Period
from
|
||||||||||||||||
Three
months ended
|
Three
months ended
|
Nine
months ended
|
April
10, 2006 to
|
|||||||||||||
September
30, 2007
|
September
30, 2006
|
September
30, 2007
|
September
30, 2006
|
|||||||||||||
Income
|
||||||||||||||||
Gains
(losses) on trading of commodity futures contracts:
|
||||||||||||||||
Realized
gains (losses) on closed positions
|
$ |
109,757,730
|
$ |
(54,453,070
|
) | $ | 111,008,840 | $ | (65,861,220 | ) | ||||||
Change
in unrealized gains (losses) on open positions
|
(22,790,310
|
) |
(31,568,760
|
) | 47,194,880 | (24,111,280 | ) | |||||||||
Interest
income
|
7,187,424
|
4,235,056
|
30,175,872
|
6,118,863
|
||||||||||||
Other
income
|
73,000
|
40,000
|
231,000
|
81,000
|
||||||||||||
Total
income (loss)
|
94,227,844
|
(81,746,774
|
) | 188,610,592 | (83,772,637 | ) | ||||||||||
Expenses
|
||||||||||||||||
General
Partner management fees (Note 3)
|
721,676
|
452,264
|
3,007,089
|
671,287
|
||||||||||||
Brokerage
commissions
|
194,908
|
129,645
|
951,049
|
199,945
|
||||||||||||
Other
expenses
|
272,947
|
-
|
1,081,089
|
-
|
||||||||||||
Total
expenses
|
1,189,531
|
581,909
|
5,039,227
|
871,232
|
||||||||||||
Net
income (loss)
|
$ |
93,038,313
|
$ |
(82,328,683
|
) | $ | 183,571,365 | $ | (84,643,869 | ) | ||||||
Net
income (loss) per limited partnership unit
|
$ |
9.48
|
$ |
(12.76
|
) | $ | 10.79 | $ | (10.33 | ) | ||||||
Net
income (loss) per weighted average limited partnership
unit
|
$ |
9.35
|
$ |
(14.80
|
) | $ | 11.46 | $ | (19.59 | ) | ||||||
Weighted
average limited partnership units outstanding
|
9,945,652
|
5,563,043
|
16,017,949
|
4,321,264
|
||||||||||||
See
accompanying notes to condensed financial statements.
|
4
Condensed
Statement of Changes in Partners' Capital
(Unaudited)
|
||||||||||
For
the nine months ended September 30, 2007
|
||||||||||
General
Partner
|
Limited
Partners
|
Total
|
||||||||
Balances,
at December 31, 2006
|
$ |
-
|
$ |
803,949,254
|
$
|
803,949,254
|
||||
Addition
of 56,700,000 partnership units
|
-
|
2,877,872,329
|
2,877,872,329
|
|||||||
Redemption
of 65,300,000 partnership units
|
-
|
|
(3,433,011,298
|
)
|
(3,433,011,298
|
)
|
||||
Net
income
|
-
|
183,571,365
|
|
183,571,365
|
|
|||||
Balances,
at September 30, 2007
|
$
|
-
|
$
|
432,381,650
|
$
|
432,381,650
|
||||
Net
Asset Value Per Unit
|
||||||||||
At
December 31, 2006
|
$
|
51.87
|
||||||||
At
September 30, 2007
|
$
|
62.66
|
||||||||
See
accompanying notes to condensed financial
statements.
|
5
Condensed
Statements of Cash Flows (Unaudited)
|
|||||||
For
the nine months ended September 30, 2007 and the period
from April 10,
2006 (commencement of operations) to September 30,
2006
|
|||||||
Period
from
|
|||||||
|
|
Nine
months ended
|
April
10, 2006 to
|
||||
September
30, 2007
|
September
30, 2006
|
||||||
Cash
Flows from Operating Activities:
|
|||||||
Net
income (loss)
|
$
|
183,571,365
|
|
$
|
(84,643,869
|
) | |
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|||||||
Purchase
of investment securities
|
- | (160,000,000 | ) | ||||
Increase
in commodity futures trading account - cash
|
35,805,017
|
|
(63,157,281
|
) | |||
Unrealized
(gains) losses on futures contracts
|
(47,194,880
|
) |
24,111,280
|
||||
Decrease
(increase) in interest receivable and other assets
|
1,390,231
|
|
(555,200
|
) | |||
(Decrease)
increase in management fees payable
|
(137,886
|
) | 171,244 | ||||
Decrease
in commissions payable
|
(21,500
|
) |
-
|
||||
Increase
in other liabilities
|
155,674
|
-
|
|||||
Net
cash used in operating activities
|
173,568,021
|
|
(284,073,826
|
) | |||
Cash
Flows from Financing Activities:
|
|||||||
Subscription
of partnership units
|
2,858,056,667
|
967,563,778
|
|||||
Redemption
of partnership units
|
(3,344,005,164
|
)
|
(462,048,622
|
) | |||
Net
cash provided by(used in) financing activities
|
(485,948,497
|
) |
505,515,156
|
||||
Net
(Decrease) Increase in Cash and Cash
Equivalents
|
(312,380,476
|
) |
221,441,330
|
||||
Cash
and Cash Equivalents,
beginning of period
|
712,883,812
|
1,000
|
|||||
Cash
and Cash Equivalents,
end of period
|
$
|
400,503,336
|
$
|
221,442,330
|
|||
See
accompanying notes to condensed financial statements.
|
6
United
States Oil Fund, LP
Notes
to Condensed Financial Statements
For
the period ended September 30, 2007 (Unaudited)
NOTE
1 - ORGANIZATION AND BUSINESS
United
States Oil Fund, LP (the “Fund” or "USOF") is organized as a limited
partnership under the laws of the state of Delaware. The Fund is a commodity
pool that issues units that may be purchased and sold on the American Stock
Exchange (the "AMEX"). The Fund will continue in perpetuity, unless terminated
sooner upon the occurrence of one or more events as described in its Third
Amended and Restated Agreement of Limited Partnership (the “Limited
Partnership Agreement”). The investment objective of the Fund is for the changes
in percentage terms of its net asset value to reflect the changes in percentage
terms of the price of light, sweet crude oil delivered to Cushing,
Oklahoma, as measured by the changes in the price of the futures contract
on
light, sweet crude oil as traded on the New York Mercantile Exchange (the
"NYMEX") that is the near month contract to expire, except when the near
month
contract is within two weeks of expiration, in which case the futures contract
will be the next month contract to expire, less the Fund’s expenses. The
Fund will accomplish its objective through investments 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 and 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. As of September 30, 2007, USOF held
4,992
Oil Futures Contracts traded on the NYMEX and 300 Oil Futures Contracts
traded
on the ICE Futures.
The
Fund
commenced operations on April 10, 2006 and has a fiscal year ending on
December
31. 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
General Partner is a member of the National Futures Association (the “NFA”) and
became a commodity pool operator with the Commodity Futures Trading Commission
effective December 1, 2005. Victoria
Bay Asset Management, LLC is also the general partner of United
States Natural Gas Fund, LP ("USNG") which listed its units on the AMEX
under
the ticker symbol "UNG" on April 18, 2007.
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 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.
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 Unit determined as of 4:00 p.m. New York time
on the day the order to create the basket is properly received. In addition,
authorized purchasers pay the Fund a $1,000 fee for each order to create
one or
more Creation Baskets. Units
can
be purchased or sold on a nationally recognized securities exchange in
smaller
increments than a Creation Basket. Units purchased or sold on a nationally
recognized securities exchange will not be made at the net asset value
of the
Fund but rather at market prices quoted on such exchange.
In
April
2006, the Fund initially registered 17,000,000 Units on Form S-1 with the
SEC.
On April 10, 2006, the Fund listed its Units on the
AMEX under the
ticker symbol “USO”. On that day, the Fund established its initial net asset
value by setting the price at $67.39 per Unit and issued 200,000 Units
in
exchange for $13,478,000. 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 NYMEX on the last business day prior to the
effective
date of the Fund's initial registration statement filed on Form S-1. As of
September 30, 2007, the Fund had registered a total of 97,000,000 Units.
The
Fund also commenced investment operations on April 10, 2006 by purchasing
Oil
Futures Contracts traded on the NYMEX based on light, sweet crude
oil.
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. The Fund earns interest on assets denominated in
U.S. dollars on deposit with the futures commission merchant at the
90-day Treasury bill rate less 50 basis points. In addition, the Fund 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
The
Fund
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 consisting of 100,000 Units
from the
Fund as of the beginning of each business day based upon the prior
day’s net
asset value. Authorized purchasers 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 Units in the Redemption Basket determined as of 4:00
p.m. New York time on the day the order to redeem the basket is properly
received.
The
Fund
receives or pays the proceeds from Units sold or redeemed one business
day after
the trade-date of the purchase or redemption. The amounts due from
authorized purchasers are reflected in the Fund’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 is allocated among the partners of the Fund 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
Limited Partnership Agreement.
7
Calculation
of Net Asset Value
The
Fund
calculates its 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 closing price for the contracts on the relevant exchange on that day
to
determine the value of contracts held on such exchange.
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 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, 2007.
Offering
Costs
Offering
costs incurred in connection with the registration of additional Units
after the
initial registration of Units are borne by the Fund. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated therewith. 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
and
cash equivalents include money market portfolios and overnight 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
the
Fund’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
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 has arranged for one or 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
and based on average daily net assets, that is equal to 0.50% per annum
on
average daily net assets of $1,000,000,000 or less and 0.20% per annum
on
average daily net assets that are greater than $1,000,000,000.
Ongoing
Registration Fees and Other Offering
Expenses
Since
January 19, 2007, offering costs incurred in connection with the registration
of
additional Units are borne by the Fund. 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 month period ended September
30, 2007, the Fund incurred $384,058 in registration fees and other
offering expenses.
Director's
Fees
The
Fund
is responsible for paying the fees and expenses, including directors'
and
officers' liability insurance, of the independent directors of the General
Partner who are also audit committee members. The Fund shares these
fees with USNG based on the relative assets of each fund, computed on
a daily
basis. These fees for calendar year 2007 are estimated to be a total
of $276,000
for both funds.
Licensing
Fees
As
discussed in Note 4, the Fund entered into a licensing agreement with the
NYMEX on May 30, 2007. The agreement has an effective date of April 10,
2006.
Pursuant to the agreement, the Fund 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. Since inception, the Fund has incurred
$336,372 under this arrangement.
Investor
Tax Reporting
Cost
The
fees
and expenses associated with the Fund's tax accounting and reporting
requirements, with the exception of certain initial implementation
service fees
and base service fees which will be borne by the General Partner, will be
paid by the Fund. These costs are estimated to be $450,000 for the year
ending December 31, 2007.
Other
Expenses and Fees
In
addition to the fees described above, the
Fund pays all brokerage fees, taxes and other expenses in connection with
the operation of the Fund, excluding costs and expenses paid by the General
Partner as outlined in Note 4.
8
NOTE
4 - CONTRACTS AND AGREEMENTS
The
Fund
is party to a marketing agent agreement, dated as of March 13, 2006,
with ALPS
Distributors Inc. (“ALPS”), a Colorado corporation, 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:
0.00% on
Fund assets from $0 to $500 million; 0.04% on Fund assets from $500 million
to $4 billion; and 0.03% 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: the cost of placing advertisements in various periodicals; web
construction and development; and 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 pays the fees of
the
custodian, which shall be determined by the parties from time to time.
In
addition, the Fund is party to an administrative agency agreement, dated
March
13, 2006, with the General Partner and 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
capacities, the greater of a minimum amount of $125,000 annually or an
asset
charge of (a) 0.06% for the first $500 million of USOF's and USNG's combined
net
assets, (b) 0.0465% for USOF's and USNG's combined net assets greater than
$500
million but less than $1 billion, and (c) 0.035% for USOF's and USNG's
combined
net assets in excess of $1 billion. The General Partner also pays a $25,000
annual fee for transfer agency services and transaction fees ranging
from $7.00 to $15.00 per transaction.
The
Fund
invests primarily in Oil Futures Contracts traded on the NYMEX. On May
30, 2007,
the Fund and the NYMEX entered into a license agreement whereby the
Fund 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
April 10, 2006. Under the license agreement, the Fund 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.
The
Fund
expressly disclaims any association with the NYMEX or endorsement of the
Fund by
the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
The
Fund
has entered into a brokerage agreement with UBS Securities LLC (the "Futures
Commission Merchant"). The
agreement requires the Futures Commission Merchant to provide services
to the
Fund in connection with the purchase and sale of Oil Futures Contracts and
other oil interests that may be purchased and sold by or through the Futures
Commission Merchant for the Fund’s account. The agreement provides that
the Futures Commission Merchant charge the Fund commissions of approximately
$7
per round-turn trade, plus applicable exchange and NFA fees for Oil Futures
Contracts and options on Oil Futures Contracts.
NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
The
Fund
engages in the speculative trading of Oil Futures Contracts and options on
Oil Futures Contracts (collectively, “derivatives”). The Fund 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.
All
of
the contracts currently traded by the Fund 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, the Fund must rely solely on the credit
of its
respective individual counterparties. However, in the future, if the Fund
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. The Fund 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, the Fund
bears the risk of financial failure by the clearing broker.
The
purchase and sale of futures and options on futures contracts requires
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.
The
Fund’s cash and other property, such as U.S. Treasury Bills, 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 amount of cash and other
property
deposited.
USOF
invests its cash in money market funds that seek
to maintain a stable net asset value. USOF is exposed to any risk of loss
associated with an investment in these money market funds. As
of September 30, 2007, USOF had deposits in domestic and foreign financial
institutions in the amount of $293,572,960. This amount is subject to loss
should these institutions cease operations.
9
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, the Fund is exposed to 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, the Fund 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.
The
Fund’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, the Fund 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 the Fund 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.
On
March
17, 2006, the Fund received a letter from Goldman, Sachs & Co. (“Goldman
Sachs”) 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 is currently reviewing the Goldman Sachs published
patent applications, and has engaged in discussions with Goldman Sachs
regarding
its pending applications and the Fund’s own pending patent application. The Fund
is unable to determine the outcome of this matter 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.
NOTE 6
- FINANCIAL HIGHLIGHTS
The
following table presents per Unit performance data and other supplemental
financial data for the nine months ended September 30, 2007 and the period
from
April 10, 2006 (commencement of operations) to September 30, 2006 for the
limited partners. This information has been derived from information presented
in the condensed financial statements.
|
|
|
|
For
the period from
|
|||
For
the nine months ended
|
April
10, 2006 to
|
||||||
September
30, 2007
|
September
30, 2006
|
||||||
(Unaudited)
|
(Unaudited)
|
||||||
Per
Unit Operating Performance:
|
|||||||
Net
asset value, beginning of period
|
$
|
51.87
|
$
|
67.39
|
|||
Total
income (loss)
|
11.10
|
(10.13
|
) | ||||
Total
expenses
|
(0.31
|
)
|
(0.20
|
) | |||
Net
increase/(decrease) in net asset value
|
10.79
|
|
(10.33
|
) | |||
Net
asset value, end of period
|
$
|
62.66
|
$
|
57.06
|
|||
Total
Return
|
20.80
|
%
|
(15.33
|
)%
|
|||
Ratios
to Average Net Assets (annualized)
|
|||||||
Total
income (loss)
|
30.94
|
%
|
(62.31
|
)%
|
|||
Expenses
excluding management fees
|
(0.33
|
)%
|
(0.15
|
)%
|
|||
Management
fees
|
(0.50
|
)%
|
(0.50
|
)%
|
|||
Net
income (loss)
|
30.11
|
%
|
(62.96
|
)%
|
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 to and withdrawals
from the Fund.
NOTE 7
- SUBSEQUENT EVENTS
On
October 31, 2007, the Fund filed a Registration Statement on Form S-3
with the
SEC to register an additional 30,000,000 Units.
10
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto of United States Oil Fund, LP
("USOF") 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 USOF’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
USOF'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 USOF cannot
assure investors that the projections included in these forward-looking
statements will come to pass. USOF's actual results could differ materially
from
those expressed or implied by the forward-looking statements as a result
of
various factors.
USOF
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 USOF assumes no obligation to update any such forward-looking
statements. Although USOF 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 USOF may make directly to them or through reports that USOF 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
USOF,
a
Delaware limited partnership, is a commodity pool that issues units that
may be purchased and sold on the American Stock Exchange (the "AMEX"). The
investment objective of USOF is for changes in percentage terms of the
units’ net asset value ("NAV") on a daily basis to reflect the changes
in percentage terms in the spot price of light, sweet crude oil delivered
to Cushing, Oklahoma, also on a daily basis, as measured by the changes in
the
price of the futures contract on light, sweet crude oil as traded on the
New
York Mercantile Exchange (the "NYMEX") that is the near month contract to
expire, except when the near month contract is within two weeks of expiration,
in which case the futures contract will be the next month contract to expire,
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 (the "Benchmark Oil Futures Contract"),
also
measured in percentage terms. USOF’s General Partner believes the Benchmark Oil
Futures Contract historically has exhibited a close correlation with the
spot
price of light, sweet crude oil. It is not the intent of USOF to
be
operated in a fashion such that its 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.
At
present, on any valuation day the Benchmark Oil Futures Contract is the near
month futures contract for light, sweet crude oil traded on the New York
Mercantile Exchange (the "NYMEX") unless the near month contract will
expire within two weeks of the valuation day, in which case the Benchmark
Oil
Futures Contract is the next month contract for light, sweet crude oil
traded on the NYMEX. “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.
USOF
may
also invest in futures contracts for 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 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
with the Commodity Futures Trading Commission, is authorized by the Third
Amended and Restated Agreement of Limited Partnership of USOF (the "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
commodity trading advisors or futures commission merchants.
Valuation
of Crude Oil Futures Contracts and the Computation of the
NAV
The
NAV
of the units is calculated once each trading day as of the earlier of the
close
of the New York Stock Exchange (the "NYSE") or 4:00 p.m. New
York time. The NAV for a particular trading day is released after 4:15 p.m.
New York time. Trading on the AMEX typically closes at 4:15 p.m. New
York time. USOF uses the NYMEX 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 NYMEX, but calculates or determines the value of all other USOF
investments, including ICE Futures or other futures contracts, as of the
earlier
of the close of the NYSE or 4:00 p.m. New York time.
11
Management’s
Discussion of Results of Operations and the Crude Oil
Market
Results
of Operations. On
April 10, 2006, USOF listed its units on the AMEX under the ticker symbol
“USO.”
On that day USOF established its initial offering 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.
Since
its
initial offering of 17,000,000 units, USOF has made two subsequent offerings
of
its units: 30,000,000 units which were registered with the SEC on October
18,
2006 and an additional 50,000,000 units which were registered with the
SEC on
January 30, 2007. Units offered by USOF in subsequent offerings were
sold by it for cash at the units’ NAV as described in the applicable prospectus.
As of September 30, 2007, USOF had issued 85,700,000 units, of which
6,900,000 were outstanding.
More
units have been issued than are outstanding due to the redemption of units
as
contemplated and permitted under the LP Agreement. Unlike funds that are
registered under the Investment Company Act of 1940, as amended, units
that have
been redeemed by USOF cannot be resold by USOF without registration of
their
offering with the SEC. As
a
result, USOF anticipates that further offerings of its units will be registered
with the SEC in the future in anticipation of additional
issuances.
As
of
September 30, 2007, the total unrealized gain on crude oil futures
contracts owned or held on that day was $12,811,880 and USOF established
cash
deposits that were equal to $451,821,955. The majority of those cash assets
were held in overnight deposits at USOF’s custodian bank, while 11.4% of the
cash balance was held as margin deposits with the Futures Commission Merchant
for the Oil Futures Contracts purchased. The ending per unit NAV on September
30, 2007 was $62.66.
Portfolio
Expenses. USOF’s expenses consist of 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 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 management fee is 0.5%. For total net assets over $1 billion,
the management fee is 0.2% on the incremental amount of assets. During the
period from January 1, 2007 to September 30, 2007, the daily average total
net assets of USOF were $815,003,993. During the period from January
1, 2007 to September 30, 2007, the total net assets of USOF did exceed $1
billion on a number of days. The management fee paid by USOF amounted to
$3,007,089, which was calculated at the 0.50% rate for total net assets up
to
and including $1 billion and at the rate of 0.20% on total net assets over
$1
billion, and accrued daily. Management expenses as a percentage of total
net
assets averaged 0.50% over the course of the nine month period. By comparison,
for the three months ended September 30, 2006, the average daily total net
assets of USOF was approximately $359,609,583. At no time during the quarter
did
the total net assets rise above the $1 billion level. The investment advisory
fee paid by USOF amounted to $452,264. Management expenses as a percentage
of
total net assets averaged 0.50% over the course of this three month
period.
USOF pays
for all brokerage fees, taxes and other expenses, including 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 subsequent offers and sales of its units
and all legal, accounting, printing and other expenses associated
therewith. For the nine month period ended September 30, 2007,
USOF incurred $384,058 in ongoing registration fees and other offering
expenses. USOF is responsible for paying the fees and expenses, including
directors' and officers' liability insurance, of the independent directors
of
the General Partner who are also audit committee members. USOF shares
these fees with United States Natural Gas Fund, LP ("USNG") based on the
relative assets of each fund computed on a daily basis. These fees for calendar
year 2007 are estimated to be a total of $276,000 for both funds. By comparison,
for the three months ended September 30, 2006, the cost of registration fees,
as
well as director’s and officer’s liability insurance for the independent
directors of the General Partner who are also audit committee members, were
paid
for by the General Partner and were not an expense of USOF.
USOF
also
incurs commissions to brokers for the purchase and sale of futures contracts,
Other Oil Interests or short-term obligations of the United States of two
years or less ("Treasuries"). For the three and nine months ended September
30,
2007, total commissions paid to brokers amounted to $194,908 and $951,049,
respectively. Prior to the initial offering, USOF had estimated that its
annual
level of such commissions was expected to be 0.35% of total net assets. As
an annualized percentage of total net assets, the figures for the three and
nine months ended September 30, 2007 represent approximately 0.14%
and 0.16%, respectively, of total net assets. By
comparison, for the three months ended September 30, 2006, total commissions
paid amounted to $129,645. However, the average daily net assets of USOF
during
that time period were smaller than during the same time period in 2007. As
an
annualized percentage of total net assets, the third quarter of 2006 figure
represents approximately 0.14%. However, there can be no assurance that
commission costs and portfolio turnover will not cause commission expenses
to
rise in future quarters.
Interest
Income. USOF 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
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 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 held with USOF’s
custodian bank. The Treasuries, cash and/or cash equivalents earn
interest that accrues on a daily basis. For the three and nine months ended
September 30, 2007, USOF earned $7,187,424 and $30,175,872,
respectively, in interest income on such cash holdings. Based on USOF’s
average daily total net assets, this is equivalent to an annualized yield
of
5.05% and 4.95%, respectively. USOF did not purchase Treasuries during the
period from January 1, 2007 through September 30, 2007 and held all of its
funds in cash or cash equivalents during this time period. By comparison,
for
the three months ended September 30, 2006, USOF earned $4,235,056 in interest
income on cash holdings. Based on USOF’s average daily total net assets during
this time period, which were smaller than for the same time period in 2007,
the
interest earned equaled an annualized yield of 4.7%.
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 Oil Futures Contract, also on a percentage basis. Specifically,
USOF
seeks to manage its 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 of the Benchmark Oil Futures
Contract. As an example, if the average daily movement of the Benchmark
Oil
Futures Contract 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 Oil Futures Contract or the spot
price
for 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.
12
For
the
30 valuation days ended September 30, 2007, the simple average daily change
in
the Benchmark Oil Futures Contract was 0.525%, while the simple average daily
change in the NAV of USOF over the same time period was 0.541%. The average
daily difference was 0.017% (or 1.7 basis points, where 1 basis point equals
1/100 of 1%). As a percentage of the daily movement of the Benchmark Oil
Futures
Contract, the average error in daily tracking by the NAV was 2.07%, meaning
that
over this time period USOF’s tracking error was within the plus or minus 10%
range established as its benchmark tracking goal.
![](https://www.sec.gov/Archives/edgar/data/0001327068/000100371507000370/dailymovement.jpg)
![](https://www.sec.gov/Archives/edgar/data/0001327068/000100371507000370/return.jpg)
13
Since
the
offering of USOF units to the public on April 10, 2006 to September 30,
2007, the simple average daily change in the Benchmark Oil Futures Contract
was
-0.017%,
while
the simple average daily change in the NAV of USOF over the same time period
was
-0.006%.
The
average daily difference was 0.011% (or 1.1 basis point, where 1 basis
point
equals 1/100 of 1%). As a percentage of the daily movement of the Benchmark
Oil
Futures Contract, the average error in daily tracking by the NAV was
3.17%,
meaning that over this time period USOF’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 USOF versus
the
return of its Benchmark Oil Futures Contract can be calculated by comparing
the
actual return of USOF, measured by changes in its 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 Oil Futures Contract.
For
the
period from July 1, 2007 through September 30, 2007, the actual total
return of USOF as measured by changes in its NAV was 17.83%.
This
is based on an initial NAV of $53.18 on June 30, 2007 and an ending
NAV as of September 30, 2007 of $62.66. During this time period, USOF made
no distributions to its unitholders. However, if USOF’s daily changes in its NAV
had instead exactly tracked the changes in the daily return of the Benchmark
Oil
Futures Contracts, USOF would have ended the third quarter of 2007 with an
estimated NAV of $61.99,
for a
total return over the relevant time period of 16.58%.
The
difference between the actual NAV total return of USOF of 17.83%
and the
expected total return based on the Benchmark Oil Futures Contracts of
16.58%
was an
error over the time period of +1.25%,
which
is to say that USOF’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 USOF collects on its cash and cash equivalent holdings.
In
addition, during the nine month period ended September 30, 2007, 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.
There
are
currently three factors that have, during the latest period, or are most
likely
to impact USOF’s ability to accurately track its Benchmark Oil Futures
Contract.
First, USOF
may buy or sell its holdings in the then current Benchmark 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 Oil Futures Contract,
which, 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
third
quarter
of 2007, management attempted to minimize the effect of these transactions
by
seeking to execute its purchase or sales of the Benchmark Oil Futures Contracts
at, or as close as possible to, the end of the day settlement price. However,
it may not always be possible for USOF 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 USOF’s attempt to track its
benchmark over time.
Second,
USOF earns interest on its cash and Treasury holdings. USOF is not required
to distribute any portion of its income to its unitholders and did not
make any
distribution to unitholders in the third quarter of 2007. 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 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), 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 Oil Futures Contracts. During
the
third quarter of 2007, USOF earned, on an annualized basis, approximately
5.05%
on its
cash holdings. It also incurred cash expenses on an annualized basis of
0.50%
for management fees and approximately 0.14% in brokerage commission costs
related to the purchase and sale of futures contracts, and 0.19% for other
expenses. The foregoing fees and expenses resulted in a net yield on an
annualized basis of approximately 4.21% and 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 management fee and the brokerage commissions, then the 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 Oil Futures
Contracts.
Third, USOF
may hold Other Oil Interests in its portfolio that may fail to closely
track the Benchmark Oil Futures Contract's total return movements. In
that case,
the error in tracking the benchmark could 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 third quarter of 2007, USOF did not hold any Other
Oil
Interests. However, there can be no assurance that in future quarters
USOF will
not make use of such Other Oil Interests.
During
the third quarter of 2007, the prices of front month futures contracts rose from
near the $70.00 level to approximately the $81.00 level. The price
of front
month contracts were also higher than the price of second or third
month
contracts for most of this time period.
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. 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 holding in a near month contract position 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.
14
If
the
futures market is in backwardation, e.g., when the expected price of 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.
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 $50. Over time, if contango remained constant, the
difference would continue to increase.
Historically,
the oil futures markets have experienced periods of contango and
backwardation, with backwardation being in place more often than contango.
During the past two years, including 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. While the investment objective of USOF is not to
have the market price of its units match, dollar for dollar, changes in
the spot
price of oil, contango and backwardation have impacted the total return
on an
investment in USOF units during the past year relative to a hypothetical
direct investment in crude oil. For example, an investment made in USOF
units
made during the second quarter of 2007, a
period
of contango in the crude oil markets, decreased by -0.71%, while the spot
price
of crude oil for immediate delivery during the same period increased by
7.30%. Conversely,
an investment made in USOF units during the third quarter of 2007, a period
in
which the crude oil futures market was mostly in backwardation, increased
by
17.82% while the spot price of crude oil increased by 15.53% (note: these
comparisons ignore the potential costs associated with physically owning
and
storing crude oil which could be substantial). These periods of
contango do not meaningfully impact USOF’s investment objective of having
percentage changes in its per unit NAV track percentage changes in the
price of
the Benchmark Oil Futures Contract since the impact of backwardation and
contango tended to equally impact the percentage changes in price of both
USOF’s
units and the Benchmark Oil Futures Contract. 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 period from July 1, 2007 to September 30, 2007, 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 remained steady
despite concerns about violence impacting production in Iraq and Nigeria.
At the
same
time, a concern remains about the ability of major oil producing countries
to
continue to raise their production to accommodate increasing
demand.
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. 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 makes in preparing USOF'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. To the extent USOF makes such investments, the values
used by USOF for its forward contracts will be provided by its commodity
broker
who values over-the-counter contracts 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, USOF 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
USOF
has
not made, and 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 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. USOF’s
liquidity needs include: redeeming units, providing margin deposits for
its
existing oil futures contracts or 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
currently generates cash primarily from (i) the sale of Creation Baskets
and
(ii) interest earned on Treasuries, cash and/or cash equivalents. USOF
has
allocated substantially all of its net assets to trading in oil interests.
A
significant portion of its NAV was held in Treasuries, cash and/or cash
equivalents that was used as margin for USOF's trading in oil
interests. Treasuries, cash and/or cash equivalents as a
percentage of the total net assets 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.
15
USOF's
investment in oil interests may 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 nor
liquidated unless the traders are willing to effect trades at or within
the
specified daily limit. Such market conditions could prevent USOF from promptly
liquidating its positions in Oil Futures Contracts. For the period from
July 1,
2007 through September 30, 2007, USOF was not forced to purchase or liquidate
any of its positions while daily limits were in effect; however, USOF cannot
predict whether such an event may occur in the future.
Prior
to
March 23, 2007, all payments with respect to USOF's
and the General Partner's expenses were paid by their affiliates.
Neither
USOF nor the General Partner has any obligation or intention to refund
such
payments by their affiliates. These affiliates are under no obligation
to pay USOF’s or the General Partner's current or future expenses.
If 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, involves USOF entering into contractual commitments to purchase
or sell oil at a specified date in the future. The gross or face amount
of
the 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 is generally only 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 is limited
to
the gross face amount of the contracts 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 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 USOF. The limited experience
that
USOF has 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 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 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 their
financial backers will satisfy their obligations to USOF in such circumstances.
The General Partner attempts to manage the credit risk of USOF by following
various trading limitations and policies. In particular, USOF posts margin
and/or holds liquid assets that are 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 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 USOF to limit its credit exposure. UBS Securities LLC, 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,
is required by U.S. Commodity 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. A futures
commission merchant is not allowed to commingle USOF's assets with its
other
assets. In addition, the CFTC requires commodity brokers to hold in a secure
account the USOF assets related to foreign Oil Futures Contract trading.
During
the third quarter of 2007, the only foreign exchange on which USOF
made investments was the ICE Futures, which is a London based futures
exchange. Those
crude oil contracts are denominated in U.S. dollars.
As
of September 30, 2007, USOF had deposits in
domestic and foreign financial institutions in the amount of $293,572,960.
This
amount is subject to loss should these institutions cease
operations.
Off
Balance Sheet Financing
As
of
September 30, 2007, 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 which 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.
16
Redemption
Basket Obligation
In
order
to meet its investment objective and pay its contractual obligations described
below, USOF requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called Redemption Baskets. USOF 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
USOF's
primary contractual obligations are with the General Partner. In return
for its
services, the General Partner is entitled to a management fee calculated
as a
fixed percentage of USOF's NAV, currently 0.50% for a NAV of $1 billion
or less,
and thereafter 0.20% for a NAV above $1 billion. The General Partner agreed
to pay the start-up costs associated with the formation of USOF, primarily
its
legal, accounting and other costs in connection with the General Partner's
registration with the CFTC as a commodity pool operator and the registration
and
listing of USOF and its units with the SEC and the AMEX, respectively.
However, the costs of registering and listing additional units of USOF
with the
SEC are directly borne on an ongoing basis by USOF, and not by the General
Partner.
The
General Partner pays 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 the
preparation of USOF's condensed financial statements and its SEC and CFTC
reports. The General Partner also pays the fees of USOF's accountants and a
separate firm for providing tax related services, as well as those of USOF's
marketing agent, ALPS Distributors, Inc. The General Partner and USOF have
also entered into a licensing agreement with the NYMEX pursuant to which
USOF and the affiliated funds managed by the General Partner pay a licensing
fee
to the NYMEX.
In
addition to the General Partner's management fee, USOF 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,
registration and, subsequent to the initial offering, the fees paid to
the SEC,
FINRA or any other regulatory agency in connection with the offer and sale
of
units, as well as the legal, printing, accounting and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not incurred
in the ordinary course of USOF'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. USOF 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).
The
parties cannot anticipate the amount of payments that will be required
under
these arrangements for future periods, as USOF'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
and have
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 described in the agreements.
17
Quantitative
and Qualitative Disclosures About Market
Risk
|
Over-the-Counter
Derivatives (Including Spreads and Straddles)
In
the
future, USOF 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 over-the-counter contracts bears the credit risk
that the other party may not be able to perform its obligations under
its
contract.
Some
oil-based derivatives transactions contain fairly generic terms and conditions
and are available from a wide range of participants. Other 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 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, USOF 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 that may be invested in
by
USOF.
To
protect itself from the credit risk that arises in connection with such
contracts, USOF may enter into agreements with each counterparty that
provide
for the netting of its overall exposure to its counterparty, such as
the
agreements published by the International Swaps and Derivatives Association,
Inc. USOF also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address USOF’s exposure to the
counterparty. In
addition, it is also possible for USOF and its counterparty to agree
to clear
their agreement through an established futures clearing house such as
those
connected to NYMEX or the ICE Futures. In that event, USOF would no longer
have
credit risk of its original counterparty as the clearing house would
now be
USOF’s counterparty. USOF would still retain any price risk associated with
its
transaction.
USOF
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
Oil
Futures Contract. USOF 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 USOF to changes in the price relationship
between
futures contracts which will expire sooner and those that will expire
later.
USOF 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 USOF, or the General Partner felt
if it
would lead to an overall lower cost of trading to achieve a given level
of
economic exposure to movements in oil prices. USOF 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. USOF 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 USOF 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, 2007, USOF did not employ any hedging
methods since all of its investments were made over an exchange. Therefore,
USOF
was not exposed to counterparty risk.
Controls
and Procedures
|
Disclosure
Controls and Procedures.
USOF
maintains disclosure controls and procedures that are designed to ensure
that
material information required to be disclosed in USOF’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 USOF if
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.
Change
in Internal Control Over Financial Reporting.
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.
18
Part
II.
|
OTHER
INFORMATION
|
Other
Information
|
Monthly
Account Statements
Pursuant
to the requirement under part 4.22 of the Commodity 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 NAV. The account
statement is filed with 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 USOF’s
website at www.unitedstatesoilfund.com.
Exhibits
|
Listed
below are the exhibits which are filed or furnished 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
|
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*
Filed herewith
**
Furnished herewith
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
|
DateDate: November
13, 2007
|
By: /s/
Howard Mah
|
Howard
Mah
|
Chief
Financial Officer
|
DateDate: November
13, 2007
|
19