United States Oil Fund, LP - Quarter Report: 2007 March (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 March 31, 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
UNITED
STATES OIL FUND, LP
|
||
Table
of Contents
|
||
Part
I. FINANCIAL INFORMATION
|
Page
|
|
Item 6. Exhibit Index |
Part
I.
|
FINANCIAL
INFORMATION
|
Financial
Statements
|
Index
to Financial Statements
1
United
States Oil Fund, LP
|
|||||||
Statements
of Financial Condition
|
|||||||
March
31, 2007 (Unaudited) and December 31, 2006
|
|||||||
|
|||||||
March
31, 2007
|
December
31, 2006
|
||||||
Assets
|
|||||||
Cash
and cash equivalents
|
$
|
829,357,802
|
$
|
712,883,812
|
|||
Equity
in UBS Securities LLC trading accounts:
|
|||||||
Cash
|
112,254,100
|
87,123,636
|
|||||
Unrealized
gain (loss) on open commodity futures contracts
|
61,523,560
|
|
(34,383,000
|
)
|
|||
Receivable
for units sold
|
36,771,071
|
36,080,896
|
|||||
Interest
receivable
|
3,177,995
|
2,626,230
|
|||||
Other
assets
|
314,874
|
17,000
|
|||||
Total
assets
|
$
|
1,043,399,402
|
$
|
804,348,574
|
|||
Liabilities
and Partners' Capital
|
|||||||
General
Partner management fees (Note 3)
|
$
|
347,472
|
$
|
332,736
|
|||
Payable
for units redeemed
|
57,304,324 | - | |||||
Commissions
payable
|
52,236
|
44,386
|
|||||
Other
liabilities
|
132,122
|
22,198
|
|||||
Total
liabilities
|
57,836,154
|
399,320
|
|||||
Commitments
and Contingencies (Notes 3,
4 and 5)
|
|||||||
Partners'
Capital
|
|||||||
General
Partner
|
-
|
-
|
|||||
Limited
Partners
|
985,563,248
|
803,949,254
|
|||||
Total
Partners' Capital
|
985,563,248
|
803,949,254
|
|||||
Total
liabilities and partners' capital
|
$
|
1,043,399,402
|
$
|
804,348,574
|
|||
Limited
Partners' units outstanding
|
18,400,000
|
15,500,000
|
|||||
Net
asset value per unit
|
$
|
53.56
|
$
|
51.87
|
|||
Market
value per unit
|
$
|
53.35
|
$
|
51.60
|
|||
See
accompanying notes to financial statements.
|
2
United
States Oil Fund, LP
|
||||||||||
Schedule
of Investments (Unaudited)
|
||||||||||
March 31,
2007
|
||||||||||
Open
Futures Contracts
|
||||||||||
Gain
on Open
|
||||||||||
Number
of
|
Commodity
|
%
of Partners'
|
||||||||
|
Contracts
|
Contracts
|
Capital
|
|||||||
United
States Contracts
|
||||||||||
Crude
Oil Futures contracts, expires May 2007
|
14,961
|
$
|
61,523,560
|
|
6.24
|
|
||||
Cash
Equivalents
|
||||||||||
|
Cost
|
Market
Value
|
||||||||
United
States - Money Market Funds
|
||||||||||
AIM
STIT- Liquid Assets Portfolio
|
$
|
204,127,050
|
$
|
204,127,050
|
20.71
|
|||||
AIM
STIT- STIC Prime Portfolio
|
204,013,530
|
204,013,530
|
20.70
|
|||||||
Goldman
Sachs Financial Square Funds - Prime Obligations Fund
|
224,279,519
|
224,279,519
|
22.76
|
|||||||
$
|
632,420,099
|
|
632,420,099
|
64.17
|
Cash |
196,937,703
|
19.98
|
|||||
Total cash and cash equivalents |
829,357,802
|
84.15
|
|||||
Cash
on deposit with broker
|
|
112,254,100
|
11.39
|
||||
Liabilities,
less receivables and other assets
|
(17,572,214
|
) |
(1.78
|
) | |||
Total
Partners' Capital
|
$
|
985,563,248
|
100.00
|
||||
See
accompanying notes to financial statements.
|
3
Statements
of Operations (Unaudited)
|
|||||||
For
the three months ended March 31, 2007 and March 31,
2006
|
|||||||
Three
months ended
|
|||||||
March
31, 2007
|
March
31, 2006
|
||||||
Income
|
|||||||
Gains
(losses) on trading of commodity futures contracts:
|
|||||||
Realized
losses on closed positions
|
$
|
(11,189,500
|
)
|
$
|
-
|
||
Change
in unrealized gains on open positions
|
95,906,560
|
|
-
|
||||
Interest
income
|
11,928,573
|
-
|
|||||
Other
income
|
79,000
|
-
|
|||||
Total
income
|
96,724,633
|
|
-
|
||||
Expenses
|
|||||||
General
Partner management fees (Note 3)
|
1,144,115
|
-
|
|||||
Brokerage
commissions
|
420,212
|
-
|
|||||
Other
expenses
|
196,215
|
-
|
|||||
Total
expenses
|
1,760,542
|
-
|
|||||
Net
income
|
$
|
94,964,091
|
|
$
|
-
|
||
Net
income per limited partnership unit
|
$
|
1.69
|
|
$
|
-
|
|
|
Net
income per weighted average limited partnership
unit
|
$
|
4.71
|
|
$
|
-
|
||
Weighted
average limited partnership units outstanding
|
20,164,045
|
-
|
|||||
See
accompanying notes to financial statements.
|
4
Statement
of Changes in Partners' Capital (Unaudited)
|
||||||||||
For
the three months ended March 31, 2007
|
||||||||||
General
Partner
|
Limited
Partners
|
Total
|
||||||||
Balances,
at December 31, 2006
|
$ |
-
|
$ |
803,949,254
|
$
|
803,949,254
|
||||
Addition
of 25,300,000 partnership units
|
-
|
1,193,135,260
|
1,193,135,260
|
|||||||
Redemption
of 22,400,000 partnership units
|
-
|
|
(1,106,485,357
|
)
|
(1,106,485,357
|
)
|
||||
Net
income
|
-
|
94,964,091
|
|
94,964,091
|
|
|||||
Balances,
at March 31, 2007
|
$
|
-
|
$
|
985,563,248
|
$
|
985,563,248
|
||||
Net
Asset Value Per Unit
|
||||||||||
At April 10, 2006 (commencement of operations) | $ | 67.39 | ||||||||
At
December 31, 2006
|
$
|
51.87
|
||||||||
At
March 31, 2007
|
$
|
53.56
|
||||||||
See
accompanying notes to financial statements.
|
5
Statements
of Cash Flows (Unaudited)
|
|||||||
For
the three months ended March 31, 2007 and March 31,
2006
|
|||||||
|
|
Three
months ended
|
|||||
March
31, 2007
|
March
31, 2006
|
||||||
Cash
Flows from Operating Activities:
|
|||||||
Net
income
|
$
|
94,964,091
|
|
$
|
-
|
||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|||||||
Increase
in commodity futures trading account - cash
|
(25,130,464
|
)
|
-
|
||||
Unrealized
gain on futures contracts
|
(95,906,560
|
) |
-
|
||||
Increase
in interest receivable and other assets
|
(849,639
|
)
|
-
|
||||
Increase
in management fees payable
|
14,736
|
- | |||||
Increase
in commissions payable
|
7,850
|
-
|
|||||
Increase
in other liabilities
|
109,924
|
-
|
|||||
Net
cash used in operating activities
|
(26,790,062
|
)
|
-
|
||||
Cash
Flows from Financing Activities:
|
|||||||
Subscription
of partnership units
|
1,192,445,085
|
-
|
|||||
Redemption
of partnership units
|
(1,049,181,033
|
)
|
-
|
||||
Net
cash provided by financing activities
|
143,264,052
|
-
|
|||||
Net
Increase in Cash and Cash Equivalents
|
116,473,990
|
-
|
|||||
Cash
and Cash Equivalents,
beginning of period
|
712,883,812
|
1,000
|
|||||
Cash
and Cash Equivalents,
end of period
|
$
|
829,357,802
|
$
|
1,000
|
|||
See
accompanying notes to financial statements.
|
6
United
States Oil Fund, LP
Notes
to Financial Statements
March
31, 2007 (Unaudited)
NOTE
1 - ORGANIZATION AND BUSINESS
The
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 Limited Partnership Agreement (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 West Texas Intermediate ("WTI") light, sweet crude
oil,
less the Fund’s expenses. The Fund will accomplish its objectives through
investments in futures contracts for WTI light, sweet crude oil, other
types of
crude oil, heating oil, gasoline, natural gas and other petroleum-based
fuels
that are traded on the New York Mercantile Exchange (the "NYMEX"), ICE
Futures 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. As of March 31, 2007, USOF held 14,661 Oil Futures
Contracts
traded on the NYMEX and 300 Oil Futures Contracts traded on the ICE
Futures.
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. The
General Partner is a member of the National Futures Association (“NFA”) and
became a commodity pool operator effective December 1, 2005. The
Fund
has a fiscal year ending on December 31. 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 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 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 Fund Unit. In addition, authorized purchasers
pay
the Fund a $1,000 fee for the creation of each Creation Basket.
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 statement of financial condition
and the
difference between original contract amount and 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 financial statements. Changes in the unrealized
gains or losses between periods are reflected in the statement of operations.
The Fund earns interest on its assets denominated in U.S. dollars
on deposit at the Broker at the 90-day Treasury bill rate less fifty basis
points.
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.
Redemptions
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 Fund Units in the
Redemption
Basket.
Partnership
Capital and Allocation of Partnership Income and Losses
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 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 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 NYMEX
closing price on that day to determine the value of contracts held
on the
NYMEX.
Net
Income/(Loss) per Limited Partnership 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 March 31, 2007.
Offering
Costs
Offering
costs incurred in connection with the registration of additional Units
after the
initial registration of Units will be 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
As
of
March 31, 2007, cash and cash equivalents included money market portfolios
and
overnight time deposits with original maturity dates of three months
or
less.
Use
of Estimates
The
preparation of 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 financial statement, and the reported amounts of the
revenue and
expenses during the reporting period. Actual results could differ from
those
estimates.
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,
based on average daily net assets that are equal to 0.50% per annum
on average
net assets of $1,000,000,000 or less and 0.20% per annum of average
daily net
assets that are greater than $1,000,000,000.
Ongoing
Registration
Fees
The
Fund pays all costs and expenses associated with
the ongoing registration of Units. These costs and expenses include but are
not limited to registration fees paid to the SEC, the National Association
of
Securities Dealers, or any other regulatory agency in connection with
the offer
and sale of Units, and all legal, accounting, printing, and other expenses
associated therewith. For the period ending March 31, 2007, the Fund
has
incurred $369,059 in ongoing registration fees as stated above.
Director's
Fees
The
Fund is responsible for paying the fees and
expenses of the independent directors who are also audit committee
members. These fees for calendar year 2007 are estimated to be $184,000,
this includes a fee of $35,000 per independent director in lieu of
directors and
officers liability insurance.
Licensing
Fees
As
discussed in Note 4, the Fund anticipates
finalizing the licensing agreement with the NYMEX. Pursuant to the
agreement,
the Fund will pay a licensing fee of 0.04% on the Fund's assets up
to
$1,000,000,000 and 0.02% on assets in excess of this amount. For the
period
ending March 31, 2007, the Fund has accrued $132,122 under this
arrangement.
Other
Expenses and Fees
In
addition to the above, the Fund will pay all
brokerage fees, taxes and other expenses in connection with the operation
of the
Fund excluding costs and expenses to be paid by the General Partner
as outlined
in Note 4.
NOTE
4 - CONTRACTS AND AGREEMENTS
The
Fund
is party to a marketing agent agreement dated 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 - $500 million; 0.04% on Fund assets from $500 million
- $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.
8
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 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 the greater of a minimum amount of $250,000 annually or an asset
charge
of (a) 0.06% for the first $500 million of the Fund's net assets, (b)
0.0465%
for the Fund's net assets greater than $500 million but less than $1
billion,
and (c) 0.035% of the Fund's net assets that exceed $1 billion. The General
Partner also pays a $50,000 annual fee for the 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. The Fund
and the
NYMEX are discussing entering into and are in the process of finalizing
a
License Agreement whereby the Fund will be granted a non-exclusive license
to
use certain of the NYMEX’s settlement prices and service marks. Under the
proposed License Agreement, the NYMEX would receive an asset-based fee
for the
license, which will be paid by the Fund.
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, formerly
ABN
AMRO Incorporated, the futures commission merchant (the "Broker"). The
agreement provides that the Broker charge the Fund commissions of approximately
$7 per round-turn trade plus applicable exchange and NFA fees for futures
contracts and options on futures contracts.
NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
The
Fund
engages in the speculative trading of futures contracts and options
on 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 futures contracts is the exchange clearing
corporation. 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 (“FCM”). Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act
requires an
FCM to segregate all customer transactions and assets from the FCM’s proprietary
activities.
The
Fund’s cash and other property, such as U.S. Treasury Bills, deposited with
an
FCM are considered commingled with all other customer funds subject to
the FCM’s
segregation requirements. In the event of an FCM’s insolvency, recovery may be
limited to a pro rata share of segregated funds available. It is possible
that
the recovered amount could be less than the total of cash and other property
deposited.
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, the Fund is exposed to a market risk equal to the value
of
futures contracts purchased and unlimited liability on such contracts
sold
short. As both a buyer and a seller of options, 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.
9
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
reviewing the credit standing of each broker or counterparty with which
it
conducts business.
The
financial instruments held by the Fund are reported in the 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.
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 is currently 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 6
- FINANCIAL HIGHLIGHTS
The
following table presents per Unit performance data and other supplemental
financial data for the three months ended March 31, 2007 and March 31,
2006 for
the limited partners. This information has been derived from information
presented in the financial statements.
For
the three months ended
|
|||||||
March
31, 2007
|
March
31, 2006
|
||||||
(Unaudited)
|
(Unaudited)
|
||||||
Per
Unit Operating Performance:
|
|||||||
Net
asset value, beginning of period
|
$
|
51.87
|
$
|
-
|
|||
Total
income
|
1.78
|
-
|
|||||
Total
expenses
|
(0.09
|
)
|
-
|
||||
Net
increase in net asset value
|
1.69
|
|
-
|
||||
Net
asset value, end of period
|
$
|
53.56
|
$
|
-
|
|||
Total
Return
|
3.26
|
%
|
-
|
%
|
|||
Ratios
to Average Net Assets (annualized)
|
|||||||
Total
income
|
40.41
|
%
|
-
|
%
|
|||
Expenses
excluding management fees
|
(0.26
|
)%
|
-
|
%
|
|||
Management
fees
|
(0.48
|
)%
|
-
|
%
|
|||
Net
income
|
39.67
|
%
|
-
|
%
|
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
Effective
April 18, 2007, the General Partner
pays Brown Brothers for its Custody, Fund Accounting and Fund Administration
services 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 and USNG's combined net
assets,
(b) 0.0465% for USOF and USNG's combined net assets greater than $500
million but less than $1 billion, and (c) 0.035% for USOF and USNG's
combined
net assets in excess of $1 billion.
On
April 18, 2007, USOF's current registration
statement was amended by Form S-3 to allow incorporation by reference
of USOF's
past and future SEC reports on Form 10-K, Form 10-Q and Form 8-K into
its
prospectus.
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 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 which 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” or the negative of
these words or 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. Except for historical information contained
herein,
this “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contains forward-looking statements that involve known and
unknown risks and uncertainties that may cause USOF's actual results or
outcome to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements.
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 West Texas Intermediate ("WTI")
light,
sweet crude oil delivered to Cushing, Oklahoma, also on a daily basis, 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. 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 WTI light, sweet crude
oil
or any particular futures contract based on WTI 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 WTI 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 WTI 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,
is authorized by the Third Amended and Restated Agreement of Limited
Partnership (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 commodities trading advisors or futures commission
merchants.
11
Valuation
of Crude Oil Futures Contracts and the Computation of the
NAV
The
NAV
of USOF 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 as of the earlier of the close of the NYSE or 4:00 p.m. New York
time.
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. As of March 31, 2007, the
total unrealized gain on the crude oil futures contracts owned or held
on that day was $61,523,560 and USOF established cash deposits were equal
to $112,254,100. 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. The ending per Unit NAV on March 31, 2007 was $53.56.
Since
its
initial offering of 17,000,000 units, USOF has had two follow up 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 following its initial offering
were sold
by it for cash at the units’ NAV as described in the applicable prospectus. As
of April 26, 2007, USOF had issued 60,100,000 units, of which 18,200,000
were
outstanding.
More
units were issued than are outstanding due to the redemption of units as
contemplated and permitted by USOF 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.
Portfolio
Expenses.
USOF’s
expenses consist of its management fees, brokerage fees and commissions,
certain
offering costs, licensing fees and the fees and expenses of the independent
directors. The 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 January 1, 2007 to March 31, 2007, the daily average total net
assets of USOF were $970,772,068.
During
the period from January 1, 2007 to March 31, 2007 the total net assets of
USOF did exceed $1 billion on a number of days. The investment advisory fee
paid
by USOF amounted to $1,144,115,
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. The management expenses as a percentage of total net assets
averaged 0.48% over the course of the quarter.
The
Fund pays for all brokerage fees, taxes and
other expenses, including licensing fees for the use of intellectual property,
registration or other fees paid to the SEC, the National Association of
Securities Dealers, or any other regulatory agency in connection with follow
on
offers and sales of its units and all legal, accounting, printing and other
expenses associated therewith. The Fund also pays the fees and expenses,
including for directors and officers' liability insurance, of the independent
directors. For the three month period ended March 31, 2007, the Fund has
incurred $369,059 in ongoing registration fees. In addition, the Fund agreed
to
pay the independent directors $184,000 to cover their expenses and pay for
their
services for 2007.
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"). During the period from January 1, 2007 to March
31, 2007, total commissions paid to brokers amounted to $420,212.
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 figures for the first
quarter of 2007 represent approximately 0.18%
of
total net assets. However, there can be no assurance that commission costs
and
portfolio turnover will not cause commission expenses to rise in future
quarters.
Interest
Income.
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 cash deposits or in Treasuries. 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 cash or Treasuries earn
interest that accrues on a daily basis. For the period from January 1, 2007
through March 31, 2007, USOF earned $11,928,573
in
interest income on such cash holdings. Based on USOF’s average daily total net
assets, this is equivalent to an annualized yield of 4.98%.
USOF
did not purchase Treasuries during the period from January 1, 2007 through
March 31, 2007 and held all of its funds in cash or cash equivalents during
this
time period.
12
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 the portfolio such that over any rolling period of 30
valuation days, the average daily change in the NAV is within a range of
90% to
110% (0.9 to 1.1), of the average daily change 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. 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 ended March 31, 2007, the simple average daily change in
the
Benchmark Oil Futures Contract was 0.331%, while the simple average daily
change
in the NAV of USOF over the same time period was 0.348%. 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 3%, 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/0001327068/000100371507000172/dailymovement.jpg)
![](https://www.sec.gov/Archives/edgar/data/0001327068/000100371507000172/newreturn.jpg)
13
Since
the
offering of USOF units to the public on April 10, 2006 to March 31, 2007,
the simple average daily change in the Benchmark Oil Futures Contract was
-0.0880%,
while
the simple average daily change in the NAV of USOF over the same time period
was
-0.0785%.
The
average daily difference was 0.0095% (or -0.9 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
3%,
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 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.
For
the
period January 1, 2007 through March 31, 2007, the actual total return of
USOF
as measured by changes in its NAV was 3.26%.
This
is based on an initial NAV of $51.87 on January 1, 2007 and an ending
NAV as of March 31, 2007 of $53.56 (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 first quarter of 2007 with an
estimated NAV of $53.01,
for a
total return over the relevant time period of 2.2%.
The
difference between the actual NAV total return of USOF of 3.26%
and the
expected total return based on the Benchmark Oil Futures Contracts of
2.2%
was an
error over the time period of +1.06%,
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 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.
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 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, 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 first
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
is not always 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.
The
second major factor that could affect tracking results is the interest that
USOF earns 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 first 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 investment
advisory fee, brokerage commissions and other expenses (inlcuding ongoing
registration fees, licensing fees and the fees and expenses of the
independent directors), 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 first quarter of 2007, USOF
earned on an annualized basis approximately 4.98%
on its
cash holdings. It also incurred cash expenses on an annualized basis of 0.48%
for investment advisory fees and approximately 0.18% in brokerage commission
costs related to the purchase and sale of futures contracts, and 0.08% for
other
expenses. The foregoing fees and expenses resulted in a net yield on an
annualized basis of approximately 4.24% 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 investment advisory 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.
14
The
third
major factor affecting tracking results is if USOF holds oil related investments
in its portfolios other than the current Benchmark Oil Futures Contract that
fail to closely track the Benchmark Oil Futures 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 first quarter of 2007, USOF did
not
hold any oil related investments other than the then current Benchmark 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 January 1, 2007 to March 31, 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. In addition, a series of production cuts by members of the
Organization of Oil Exporting Countries have tightened world oil markets.
Though the crude oil market’s concerns about tensions with key crude oil
producing countries, such as Iran and Venezuela, remained, such concerns
appear
to have moderated somewhat, at least in the short term. As a result of the
foregoing, crude oil prices fell sharply during early and mid January 2007
and showed periods of greater volatility than usual. However, over the balance
of the first quarter, crude oil prices gained back in price and finished
the
quarter higher than where they started.
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 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.
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 cash),
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 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 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.
15
Historically,
the futures oil 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 early part of 2007, these markets have experienced
contango. This has 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 on December 31, 2006 and
held
to March 31, 2007, increased, based upon the changes in the closing market
prices for USOF units on those days, by 3.26%, while the spot price of crude
oil
for immediate delivery during the same period increased 7.90% (note: this
comparison ignores the potential costs associated with physically owning
and
storing crude oil). However, 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, or changes in the price of the Benchmark Oil Futures Contract. This
period
of contango did not meaningfully impact USOF’s investment objective of having
percentage changes in its per unit price 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.
Subsequent
Events
Effective
April 18, 2007, the General Partner
pays Brown Brothers Harriman & Co. for its Custody, Fund
Accounting and Fund Administration services 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 and USNG's combined net assets, (b) 0.0465% for USOF and
USNG's combined net assets greater than $500 million but less than $1 billion,
and (c) 0.035% for USOF and USNG's combined net assets in excess of $1
billion.
On
April 18, 2007, USOF's current registration
statement was amended by Form S-3 to allow incorporation by reference of
USOF's
past and future SEC reports on Form 10-K, Form 10-Q and Form 8-K into its
prospectus.
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 makes in preparing
USOF's 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. While
not
currently applicable given the fact that during the time period covered by
this
report, USOF was not investing in futures contracts not traded on a United
States futures exchange to the extent USOF makes such investments in the
future,
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 continue
to
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 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 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 cash. USOF has allocated substantially all of 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. Cash
or Treasuries 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.
16
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 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. Through March 31, 2007, USOF was not
forced
to liquidate any of its positions as a result of daily limits, however, USOF
cannot predict whether such an event may occur in the future. Through December
31, 2006, 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. Currently, the General Partner is solely responsible for paying
its and USOF's expenses. If (1) it were unable to pay such expenses,
(2) such affiliates were to discontinue the payment of these expenses and
(3) 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 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 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 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. During the first quarter of 2007, the only foreign
exchange USOF made on investments of oil interests was the ICE Futures. There
can be no assurance that any counterparty, clearinghouse, or their members
or
financial backers would 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 (the "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. Commodities Futures Trading Commission
(the "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
March 31, 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 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.
17
Redemption
Basket Obligation
In
order
to meet its investment objective and pay its contractual obligations described
below, USOF requires liquidity to redeem Redemption Baskets. USOF has to
date satisfied this obligation by paying from the cash or cash equivalents
it
holds 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 an NAV of $1 billion
or
less, and thereafter 0.20% of the NAV above $1 billion. The General Partner
or
its affiliate 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 and its Units with the SEC and the AMEX,
respectively. However, the costs of registering and listing additional shares
of
USOF with the SEC are directly borne on an ongoing basis by USOF, and not
by the
General Partner.
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 USOF's marketing
agent,
ALPS Distributors, Inc. The General Partner is also in the process of
negotiating a licensing agreement with the NYMEX under which certain licensing
fees will be paid to the exchange by USOF.
In
addition to the General Partner's management fee, USOF pays its brokerage
fees,
over-the-counter dealer spreads, fees to the Broker (or any other Futures
Clearing Merchant that the General Partner may elect to use for execution
or
clearing of futures trades), 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. Other expenses not in the ordinary course
of business include brokerage fees, licensing fees for intellectual property
used by USOF and the fees and costs associated with the offering of USOF's
Units. Commission payments to the Broker or any other Futures Clearing 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.
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 with
an
option to renew, or, in some cases, are in effect for the duration of USOF's
existence. The parties may terminate these agreements earlier for certain
reasons listed in the agreements.
18
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 such contract 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 price of
the
crude oil spot, or 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 WTI spot price, 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.
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 three months ended March 31, 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 (the
“Exchange Act”), 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
a principle executive officer and principal financial officer of USOF would
perform 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.
19
Part
II.
|
OTHER
INFORMATION
|
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 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
|
|
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
*
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: May
15, 2007
|
By:
/s/ Howard
Mah
|
Howard
Mah
|
Chief
Financial Officer
|
DateDate: May
15, 2007
|
20