United States Oil Fund, LP - Quarter Report: 2008 June (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 June 30, 2008.
|
OR
¨
|
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: 001-32834
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) (Zip code)
(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, a non-accelerated filer or a smaller reporting company.
See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one.)
Accelerated
filer x
|
|
Smaller
reporting company o
|
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.):
¨
Yes x
No
UNITED
STATES OIL FUND, LP
Table
of Contents
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Page
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Part
I. FINANCIAL INFORMATION
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||
Item
1. Condensed Financial Statements.
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1
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
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14
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
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27
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Item
4. Controls and Procedures.
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28
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Part
II. OTHER INFORMATION
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Item
1. Legal Proceedings.
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29
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Item
1A. Risk Factors.
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29
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
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29
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Item
3. Defaults Upon Senior Securities.
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29
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Item
4. Submission of Matters to a Vote of Security Holders
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29
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Item
5. Other Information.
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29
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Item
6. Exhibits.
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29
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Part
I. FINANCIAL
INFORMATION
Item 1. Condensed
Financial Statements.
Index
to Condensed Financial Statements
Documents
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|
Page
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Condensed
Statements of Financial Condition at June 30, 2008 (Unaudited) and
December 31, 2007
|
|
2
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|
|
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Condensed
Schedule of Investments (Unaudited) at June 30, 2008
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3
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|
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Condensed
Statements of Operations (Unaudited) for the three and six months
ended June 30, 2008 and 2007
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4
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|
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Condensed
Statement of Changes in Partners’ Capital (Unaudited) for the six months
ended June 30, 2008
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5
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Condensed
Statements of Cash Flows (Unaudited) for the six months ended June
30,
2008 and June 30, 2007
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6
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Notes
to Condensed Financial Statements for the period ended June 30, 2008
(Unaudited)
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7
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1
United
States Oil Fund, LP
Condensed
Statements of Financial Condition
At
June 30, 2008 (Unaudited) and December 31, 2007
June 30, 2008
|
December 31, 2007
|
||||||
Assets
|
|||||||
Cash
and cash equivalents
|
$
|
964,577,170
|
$
|
354,816,049
|
|||
Equity
in UBS Securities LLC trading accounts:
|
|||||||
Cash
|
86,530,572
|
86,330,750
|
|||||
Unrealized
gain (loss) on open commodity futures contracts
|
12,645,840
|
35,705,020
|
|||||
Receivable
for units sold
|
102,044,162
|
7,581,679
|
|||||
Interest
receivable
|
1,245,310
|
962,551
|
|||||
Other
assets
|
196,683
|
420,705
|
|||||
Total
assets
|
$
|
1,167,239,737
|
$
|
485,816,754
|
|||
|
|||||||
Liabilities
and Partners' Capital
|
|
||||||
General
Partner management fees (Note 3)
|
$
|
389,560
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$
|
226,782
|
|||
Payable
for units redeemed
|
305,111,583
|
-
|
|||||
Brokerage
commissions payable
|
19,886
|
22,886
|
|||||
Other
liabilities
|
534,361
|
344,349
|
|||||
Total
liabilities
|
306,055,390
|
594,017
|
|||||
Commitments
and Contingencies (Notes 3, 4 and 5)
|
|||||||
Partners'
Capital
|
|||||||
General
Partner
|
-
|
-
|
|||||
Limited
Partners
|
861,184,347
|
485,222,737
|
|||||
Total
Partners' Capital
|
861,184,347
|
485,222,737
|
|||||
Total
liabilities and partners' capital
|
$
|
1,167,239,737
|
$
|
485,816,754
|
|||
|
|
||||||
Limited
Partners' units outstanding
|
7,600,000
|
6,400,000
|
|||||
Net
asset value per unit
|
$
|
113.31
|
$
|
75.82
|
|||
Market
value per unit
|
$
|
113.66
|
$
|
75.75
|
See
accompanying notes to condensed financial statements.
2
United
States Oil Fund, LP
Condensed
Schedule of Investments (Unaudited)
At
June 30, 2008
Open
Futures Contracts
Number of Contracts |
Gain on Open Commodity |
% of
Partners' Capital |
||||||||
United
States Contracts
|
||||||||||
Crude
Oil Futures contracts, expires August 2008
|
6,150
|
$
|
12,645,840
|
1.47
|
||||||
Cash
Equivalents
|
||||||||||
|
Cost
|
Market Value
|
||||||||
United
States - Money Market Funds
|
||||||||||
Goldman
Sachs Financial Square Funds - Government Fund
|
$
|
600,435,389
|
$
|
600,435,389
|
69.72
|
|||||
Goldman
Sachs Financial Square Funds - Treasury Instruments Fund
|
528,171
|
528,171
|
0.06
|
|||||||
$
|
600,963,560
|
600,963,560
|
69.78
|
|||||||
Cash
|
363,613,610
|
42.22
|
||||||||
Total
Cash and Cash Equivalents
|
964,577,170
|
112.00
|
||||||||
Cash
on deposit with broker
|
86,530,572
|
10.05
|
||||||||
Liabilities,
less receivables and other assets
|
(202,569,235
|
)
|
(23.52
|
)
|
||||||
Total
Partners' Capital
|
$
|
861,184,347
|
100.00
|
See
accompanying notes to condensed financial statements.
3
United
States Oil Fund, LP
Condensed
Statements of Operations (Unaudited)
For
the three months ended June 30, 2008 and 2007 and the six months ended June
30,
2008 and 2007
Three months
ended
|
Three months
ended
|
Six Months
ended
|
Six Months
ended
|
||||||||||
June 30, 2008
|
June 30, 2007
|
June 30, 2008
|
June 30, 2007
|
||||||||||
Income
|
|||||||||||||
Gains
(losses) on trading of commodity futures contracts:
|
|||||||||||||
Realized
gains on closed positions
|
$
|
219,796,640
|
$
|
12,440,610
|
$
|
296,624,430
|
$
|
1,251,110
|
|||||
Change
in unrealized gains (losses) on open positions
|
25,995,310
|
(25,921,370
|
)
|
(23,059,180
|
)
|
69,985,190
|
|||||||
Interest
income
|
3,449,932
|
11,059,875
|
6,345,232
|
22,988,448
|
|||||||||
Other
income
|
60,000
|
79,000
|
149,000
|
158,000
|
|||||||||
Total
income(loss)
|
249,301,882
|
(2,341,885
|
)
|
280,059,482
|
94,382,748
|
||||||||
Expenses
|
|||||||||||||
General
Partner management fees (Note 3)
|
910,705
|
1,141,298
|
1,441,636
|
2,285,413
|
|||||||||
Brokerage
commissions
|
261,586
|
335,929
|
500,175
|
756,141
|
|||||||||
Other
expenses
|
730,928
|
611,927
|
1,307,191
|
808,142
|
|||||||||
Total
expenses
|
1,903,219
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2,089,154
|
3,249,002
|
3,849,696
|
|||||||||
Net
income (loss)
|
$
|
247,398,663
|
$
|
(4,431,039
|
)
|
$
|
276,810,480
|
$
|
90,533,052
|
||||
Net
income (loss) per limited partnership unit
|
$
|
32.24
|
$
|
(0.38
|
)
|
$
|
37.99
|
$
|
1.31
|
||||
Net
income (loss) per weighted average limited partnership
unit
|
$
|
33.52
|
$
|
(0.24
|
)
|
$
|
42.87
|
$
|
4.73
|
||||
Weighted
average limited partnership units outstanding
|
7,380,220
|
18,132,222
|
6,457,143
|
19,136,111
|
See
accompanying notes to condensed financial statements.
4
Condensed
Statement of Changes in Partners' Capital (Unaudited)
For
the six months ended June 30, 2008
General
Partner
|
Limited
Partners
|
Total
|
||||||||
Balances,
at December 31, 2007
|
$
|
-
|
$
|
485,222,737
|
$
|
485,222,737
|
||||
Addition
of 56,500,000 partnership units
|
-
|
4,952,866,521
|
4,952,866,521
|
|||||||
Redemption
of 55,300,000 partnership units
|
-
|
(4,853,715,391
|
)
|
(4,853,715,391
|
)
|
|||||
Net
income
|
-
|
276,810,480
|
276,810,480
|
|||||||
|
||||||||||
Balances,
at June 30, 2008
|
-
|
$
|
861,184,347
|
$
|
861,184,347
|
|||||
|
|
|
||||||||
|
||||||||||
Net
Asset Value Per Unit
|
||||||||||
At
December 31, 2007
|
$
|
75.82
|
||||||||
At
June 30, 2008
|
$
|
113.31
|
See
accompanying notes to condensed financial statements.
5
Condensed
Statements of Cash Flows (Unaudited)
For
the six months ended June 30, 2008 and June 30, 2007
Six months ended
|
Six months ended
|
||||||
June
30, 2008
|
June
30, 2007
|
||||||
Cash
Flows from Operating Activities:
|
|||||||
Net
income
|
$
|
276,810,480
|
$
|
90,533,052
|
|||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|||||||
Increase
in commodity futures trading account - cash
|
(199,822
|
)
|
(38,499,054
|
)
|
|||
Unrealized
(gains) losses on futures contracts
|
23,059,180
|
(69,985,190
|
)
|
||||
Decrease
(increase) in interest receivable and other assets
|
(58,737
|
)
|
479,278
|
||||
Increase
in management fees payable
|
162,778
|
27,241
|
|||||
Increase
(decrease) in commissions payable
|
(3,000
|
)
|
500
|
||||
Increase
in other liabilities
|
190,012
|
298,539
|
|||||
Net
cash provided by (used in) operating activities
|
299,960,891
|
(17,145,634
|
)
|
||||
Cash
Flows from Financing Activities:
|
|||||||
Subscription
of partnership units
|
4,858,404,038
|
2,044,829,789
|
|||||
Redemption
of partnership units
|
(4,548,603,808
|
)
|
(2,144,191,423
|
)
|
|||
Net
cash provided by (used in) financing activities
|
309,800,230
|
(99,361,634
|
)
|
||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
609,761,121
|
(116,507,268
|
)
|
||||
|
|||||||
Cash
and Cash Equivalents, beginning of period
|
354,816,049
|
712,883,812
|
|||||
Cash
and Cash Equivalents, end of period
|
$
|
964,577,170
|
$
|
596,376,544
|
See
accompanying notes to condensed financial statements.
6
Notes
to Condensed Financial Statements
For
the period ended June 30, 2008 (Unaudited)
NOTE
1 - ORGANIZATION AND BUSINESS
The
United States Oil Fund, LP (“USOF”) was organized as a limited partnership under
the laws of the state of Delaware on May 12, 2005. USOF is a commodity pool
that
issues units that may be purchased and sold on the American Stock Exchange
(the “AMEX”). USOF will continue in perpetuity, unless terminated sooner upon
the occurrence of one or more events as described in its Fourth Amended and
Restated Agreement of Limited Partnership dated as of November 13, 2007 (the
“LP
Agreement”). The investment objective of USOF 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 USOF’s expenses. USOF accomplishes
its objective through investments in futures contracts for light, sweet
crude oil, and other types of crude oil, heating oil, gasoline, natural gas
and
other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other
U.S. and foreign exchanges (collectively, “Oil Futures Contracts”) and
other oil related investments such as cash-settled options on Oil Futures
Contracts, forward contracts for oil and over-the-counter transactions that
are
based on the price of crude oil, heating oil, gasoline, natural gas and other
petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing
(collectively, “Other Oil Interests”). As of June 30, 2008, USOF held 6,150 Oil
Futures Contracts traded on the NYMEX.
USOF
commenced investment operations on April 10, 2006 and has a fiscal year ending
on December 31. United States Commodity Funds LLC (formerly known as Victoria
Bay Asset Management, LLC) (the “General Partner”) is responsible for the
management of USOF. 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. The General
Partner is also the general partner of the United States Natural Gas Fund,
LP
(“USNG”), the United States 12 Month Oil Fund, LP (“US12OF”), the United
States Gasoline Fund, LP (“USG”) and the United States Heating Oil Fund, LP
(“USHO”), which listed their units on the AMEX under the ticker
symbols “UNG” on April 18, 2007, “USL” on December 6, 2007, “UGA” on
February 26, 2008 and “UHN” on April 9, 2008, respectively.
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.
USOF
issues limited partnership interests (“units”) to certain authorized purchasers
(“Authorized Purchasers”) by offering baskets consisting of 100,000 units
(“Creation Baskets”) through ALPS Distributors, Inc. (the “Marketing
Agent”). The purchase price for a Creation Basket is based upon the net asset
value of a unit 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 USOF a $1,000 fee for each order to create one or more
Creation Baskets. Units may 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 are not made
at
the net asset value of USOF but rather at market prices quoted on such
exchange.
In
April
2006, USOF initially registered 17,000,000 units on Form S-1 with the SEC.
On
April 10, 2006, USOF listed its units on the AMEX under the ticker symbol “USO”.
On that day, USOF established its initial net asset value by setting the
price at $67.39 per unit and issued 200,000 units in exchange for $13,479,000.
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 USOF’s initial
registration statement filed on Form S-1. USOF also commenced investment
operations on April 10, 2006 by purchasing Oil Futures Contracts traded on
the
NYMEX based on light, sweet crude oil. As of June 30, 2008, USOF
had registered a total of 227,000,000 units.
7
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. USOF earns interest on
its assets denominated in U.S. dollars on deposit with the futures commission
merchant at the 90-day Treasury bill rate. In addition, USOF 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
USOF
is
not subject to federal income taxes; each partner reports its allocable share
of
income, gain, loss deductions or credits on its own income tax
return.
Creations and
Redemptions
Authorized
Purchasers may purchase units “Creation
Baskets”
or
redeem units “Redemption
Baskets”
only in blocks of 100,000 units equal to the net asset value
of
the units determined as of 4:00 p.m. New York time on the day the order is
placed.
USOF
records 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 USOF’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 USOF in proportion to the number of
units each partner holds as of the close of each month. The General Partner
may
revise, alter or otherwise modify this method of allocation as described in
the
LP Agreement.
Calculation
of Net Asset Value
USOF
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. USOF uses the closing
price for the contracts on the relevant exchange on that day to determine the
value of contracts held on such exchange.
8
Net
Income (Loss) per Unit
Net
income (loss) per unit is the difference between the net asset value per
unit at the beginning of each period and at the end of each period. The
weighted average number of units outstanding was computed for purposes of
disclosing net 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 June 30, 2008.
Offering
Costs
Offering
costs incurred in connection with the registration of additional units after
the
initial registration of units are borne by USOF. 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 funds and overnight deposits or time
deposits with original maturity dates of three months or less.
Use
of Estimates
The
preparation of condensed financial statements in conformity with accounting
principles generally accepted in the United States of America requires USOF’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 USOF AND RELATED PARTY TRANSACTIONS
General
Partner Management Fee
Under
the
LP Agreement, the General Partner is responsible for investing the assets of
USOF in accordance with the objectives and policies of USOF. 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 USOF. For these services, USOF 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 USOF. 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 six month periods ended June 30,
2008 and 2007, USOF incurred $252,305 and $369,059, respectively, in
registration fees and other offering expenses.
Director’s
Fees
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 USNG, US12OF, USG
and USHO based on the relative assets of each fund, computed on a daily basis.
These fees for the calendar year 2008 are estimated to be a total of $286,000
for all five funds.
9
Licensing
Fees
As
discussed in Note 4, USOF 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, USOF and the affiliated funds managed by the General Partner
pay a licensing fee that is equal to 0.04% for the first $1,000,000,000 of
combined assets of the funds and 0.02% for combined assets above $1,000,000,000.
During the six month periods ended June 30, 2008 and 2007, USOF incurred
$103,376 and $183,377 under this arrangement.
Investor
Tax Reporting Cost
The
fees
and expenses associated with USOF’s tax accounting and reporting requirements,
with the exception of certain initial implementation service fees and base
service fees which were borne by the General Partner, are paid by
USOF. These costs are estimated to be $928,749 for the year ending December
31, 2008.
Other
Expenses and Fees
In
addition to the fees described above, USOF pays all brokerage fees, taxes
and other expenses in connection with the operation of USOF, excluding costs
and
expenses paid by the General Partner as outlined in Note 4.
NOTE
4 - CONTRACTS AND AGREEMENTS
USOF
is
party to a marketing agent agreement, dated as of March 13, 2006, with the
Marketing Agent, whereby the Marketing Agent provides certain marketing services
for USOF 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 USOF’s assets from $0 - $500 million;
0.04% on USOF’s assets from $500 million - $4 billion; and 0.03% on USOF’s
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; or the printing and production of various
marketing materials.
USOF
is
also party to a custodian agreement, dated March 13, 2006, with Brown Brothers
Harriman & Co. (“BBH&Co.”), whereby BBH&Co. holds investments on
behalf of USOF. The General Partner pays the fees of the custodian, which
are determined by the parties from time to time. In addition, USOF is party
to
an administrative agency agreement, dated March 13, 2006, with the General
Partner and BBH&Co., whereby BBH&Co. acts as the administrative agent,
transfer agent and registrar for USOF. The General Partner also pays the fees
of
BBH&Co. for its services under this agreement and such fees are determined
by the parties from time to time.
Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, the greater of a minimum of $125,000 annually or an asset-based
charge of (a) 0.06% for the first $500 million of USOF’s, USNG’s, US12OF’s,
USG’s and USHO’s combined net assets, (b) 0.0465% for USOF’s, USNG’s, US12OF’s,
USG’s and USHO’s combined net assets greater than $500 million but less than $1
billion, and (c) 0.035% for USOF’s, USNG’s, US12OF’s, USG’s and USHO’s combined
net assets in excess of $1 billion. The General Partner also pays a $25,000
annual fee for the transfer agency services and transaction fees ranging from
$7.00 to $15.00 per transaction.
USOF
has
entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”).
The agreement requires UBS Securities to provide services to USOF in connection
with the purchase and sale of Oil Futures Contracts and Other Oil Interests
that
may be purchased and sold by or through UBS Securities for USOF’s account. The
agreement provides that UBS Securities charge USOF commissions of approximately
$7 per round-turn trade, plus applicable exchange and NFA fees for Oil Futures
Contracts and options on Oil Futures Contracts.
USOF
invests primarily in Oil Futures Contracts traded on the NYMEX. On May 30,
2007,
USOF and the NYMEX entered into a license agreement whereby USOF 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, USOF and the affiliated funds managed by the General
Partner pay the NYMEX an asset-based fee for the license, the terms of which
are
described in Note 3.
10
USOF
expressly disclaims any association with the NYMEX or endorsement of USOF by
the
NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
NOTE
5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND
CONTINGENCIES
USOF engages
in the speculative trading of futures contracts and options on futures contracts
(collectively, “derivatives”). USOF 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 USOF 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, USOF must rely solely on the credit of its respective individual
counterparties. However, in the future, if USOF 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. USOF 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, USOF bears the risk of financial failure
by
the clearing broker.
The
purchase and sale of futures and options on futures contracts require margin
deposits with a futures commission merchant. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act requires
a
futures commission merchant to segregate all customer transactions and assets
from the futures commission merchant’s proprietary activities.
USOF’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 of cash and other property
deposited. The insolvency of a futures commission merchant could result in
the
complete loss of USOF’s assets posted with that futures commission merchant;
however, the vast majority of USOF’s assets are held in Treasuries, cash and/or
cash equivalents with USOF’s custodian and would not be impacted by the
insolvency of a futures commission merchant. Also, the failure or insolvency
of
USOF’s custodian could result in a substantial loss of USOF’s
assets.
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 June 30, 2008 and December 31, 2007, USOF had
deposits in domestic and foreign financial institutions, including cash
investments in money market funds, in the amount of $1,051,107,742 and
$441,146,799, respectively. This amount is subject to loss should these
institutions cease operations.
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, USOF 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, USOF 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.
USOF’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, USOF 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 USOF 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.
11
Goldman,
Sachs & Co. (“Goldman Sachs”) sent USOF a letter on March 17, 2006,
providing USOF and the General Partner notice under 35 U.S.C. Section 154(d)
of
two pending United States patent applications, Publication Nos. 2004/0225593A1
and 2006/0036533A1. Both patent applications are generally directed to a method
and system for creating and administering a publicly traded interest in a
commodity pool. In particular, the abstract of each patent application defines
a
means for creating and administering a publicly traded interest in a commodity
pool that includes the steps of forming a commodity pool having a first position
in a futures contract and a corresponding second position in a margin
investment, and issuing equity interests of the commodity pool to third party
investors. Subsequently, two U.S. patents were issued; the first, patent number
US7,283,978B2, was issued on October 16, 2007, and the second, patent number
US7,319,984B2, was issued on January 15, 2008.
Preliminarily,
USOF’s management is of the view that the structure and operations of USOF
and its affiliated commodity pools do not infringe these patents. USOF is also
in the process of reviewing prior art (prior structures and operations of
similar investment vehicles) that may invalidate one or more of the claims
in
these patents. In addition, USOF has retained patent counsel to advise it on
these matters and is in the process of obtaining their opinions regarding the
non-infringement of each of these patents by USOF and/or the patents’ invalidity
based on prior art. If the patents were alleged to apply to USOF’s structure
and/or operations, and are found by a court to be valid and infringed, Goldman
Sachs may be awarded significant monetary damages and/or injunctive relief.
NOTE 6
- FINANCIAL HIGHLIGHTS
The
following table presents per unit performance data and other supplemental
financial data for the six months ended June 30, 2008 and June 30, 2007 for
the
limited partners. This information has been derived from information presented
in the condensed financial statements.
|
|
|
|||||
Per
Unit Operating Performance:
|
For the six
months
ended June 30, 2008 |
For the six
months
ended
June 30, 2007 |
|||||
|
|
|
|||||
Net
asset value, beginning of period
|
$
|
75.82
|
$
|
51.87
|
|||
Total
income
|
37.99
|
1.51
|
|||||
Total
expenses
|
(0.50
|
)
|
(0.20
|
)
|
|||
Net
increase in net asset value
|
37.49
|
1.31
|
|||||
Net
asset value, end of period
|
$
|
113.31
|
$
|
53.18
|
|||
|
|||||||
Total
Return
|
49.45
|
%
|
2.53
|
%
|
|||
|
|||||||
Ratios
to Average Net Assets
|
|||||||
Total
income
|
47.95
|
%
|
10.00
|
%
|
|||
Expenses
excluding management fees*
|
(0.62
|
)%
|
(0.34
|
)%
|
|||
Management
fees*
|
(0.50
|
)%
|
(0.50
|
)%
|
|||
Net
income
|
47.40
|
%
|
9.60
|
%
|
|||
*Annualized
|
Total
returns are calculated based on the change in value during the period. An
individual limited partner’s total return and ratio may vary from the above
total returns and ratios based on the timing of contributions to and withdrawals
from USOF.
12
NOTE 7 –
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective
January 1, 2008, USOF adopted FAS 157 - Fair Value Measurements (“FAS 157” or
the “Statement”). FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (“GAAP”), and
expands disclosures about fair value measurement. The changes to current
practice resulting from the application of the Statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurement. The Statement establishes
a
fair value hierarchy that distinguishes between (1) market participant
assumptions developed based on market data obtained from sources independent
of
USOF (observable inputs) and (2) USOF’s own assumptions about market participant
assumptions developed based on the best information available under the
circumstances (unobservable inputs). The three levels defined by the FAS 157
hierarchy are as follows:
Level
I – Quoted prices (unadjusted) in active markets for identical
assets
or liabilities that the reporting entity has the ability to access at the
measurement date.
Level
II – Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. Level
II
assets include the following: quoted prices for similar
assets
or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, inputs other than quoted prices
that are observable for the asset or liability, and inputs that are derived
principally from or corroborated by observable market data by correlation or
other means (market-corroborated inputs).
Level
III – Unobservable pricing input at the measurement date for the asset or
liability. Unobservable inputs shall be used to measure fair value to the extent
that observable inputs are not available.
In
some
instances, the inputs used to measure fair value might fall in different levels
of the fair value hierarchy. The level in the fair value hierarchy within which
the fair value measurement in its entirety falls shall be determined based
on
the lowest input level that is significant to the fair value measurement in
its
entirety.
The
following table summarizes the valuation of USOF’s securities at June 30, 2008
using the fair value hierarchy:
At June
30, 2008
|
Total
|
Level I
|
Level II
|
Level III
|
|||||||||
|
|
|
|
||||||||||
Investments
|
$
|
600,963,560
|
$
|
600,963,560
|
$
|
-
|
$
|
-
|
|||||
Derivative
assets
|
12,645,840
|
12,645,840
|
-
|
-
|
13
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion should be read in conjunction with the condensed financial
statements and the notes thereto of the United States 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 its
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 the NAV will equal, in dollar terms, the spot
price of light, sweet crude oil or any particular futures contract based
on light, sweet crude oil. Management believes that it is not practical to
manage the portfolio to achieve such an investment goal when investing in listed
crude oil futures contracts.
On
any
valuation day, the Benchmark Oil Futures Contract is the near month futures
contract for light, sweet crude oil traded on 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”). For convenience and unless otherwise specified, Oil Futures
Contracts and Other Oil Interests collectively are referred to as “Oil
Interests” in this quarterly report on Form 10-Q.
14
The
general partner of USOF, United States Commodity Funds LLC (formerly, Victoria
Bay Asset Management, LLC) (the “General Partner”), which is registered as
a commodity pool operator (“CPO”) with the U.S. Commodity Futures Trading
Commission (the “CFTC”), is authorized by the Fourth 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 and
establish the terms of employment for, and termination of, commodity trading
advisors or futures commission merchants.
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 the NYMEX or 2:30 p.m. New York time) for the contracts held on the
NYMEX, but calculates or determines the value of all other 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.
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 $13,479,000 in cash.
Since
its
initial offering of 17,000,000 units, USOF has made four subsequent offerings
of
its units: 30,000,000 units which were registered with the SEC on October
18, 2006, 50,000,000 units which were registered with the SEC on January
30, 2007, 30,000,000 units which were registered with the SEC on
December 4, 2007 and an additional 100,000,000 units which were registered
with the SEC on February 7, 2008. 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 June 30, 2008, USOF had issued 163,900,000
units, 7,600,000 of which were outstanding.
As of
June 30, 2008 there were 63,100,000
units
registered but not yet issued.
More
units may have been issued by USOF than are outstanding due to the redemption
of
units. Unlike funds that are registered under the Investment Company Act of
1940, as amended, units that have been redeemed by USOF cannot be resold by
USOF. As a result, USOF contemplates that additional offerings of its units
will
be registered with the SEC in the future in anticipation of additional issuances
and redemptions.
As
of
June 30, 2008, the total unrealized gain on crude oil Oil Futures
Contracts owned or held on that day was $12,645,840 and USOF established cash
deposits, including cash investments in money market funds that were equal
to $1,051,107,742. The majority of those cash assets were held in overnight
deposits at USOF’s custodian bank, while 8.23% 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 June 30, 2008 was
$113.31.
Portfolio
Expenses.
USOF’s
expenses consist of investment management fees, brokerage fees and
commissions, certain offering costs, licensing fees and the fees and expenses
of
the independent directors of the General Partner. The management fee that
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 0.50%. For total net assets over $1 billion, the management fee is 0.20%
on the incremental amount of assets. The fee is accrued daily.
During
the six month period ended June 30, 2008, the daily average total net assets
of USOF were $584,021,003. During the six month period ended June 30,
2008, the total net assets of USOF did exceed $1 billion. The management
fee paid by USOF during the period amounted to $1,441,636. Management fees
as a
percentage of total net assets averaged 0.50% over the course of this six month
period. By comparison, for the six month period ended June 30, 2007, the average
daily total net assets of USOF were $943,409,582. During the six month period
ended June 30, 2007, the total net assets of USOF did exceed $1 billion on
a
number of days. The management fee paid by USOF for this six month period
amounted to $2,285,413, 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 average net
assets over $1 billion, and accrued daily. Management fees as a percentage
of
average net assets averaged 0.48% over the course of this six month
period.
15
USOF pays
for all brokerage fees, taxes and other expenses, including certain tax
reporting costs, licensing fees for the use of intellectual property, ongoing
registration or other fees paid to the SEC, the Financial Industry Regulatory
Authority (“FINRA”) and any other regulatory agency in connection with
offers and sales of its units subsequent to the initial offering and all legal,
accounting, printing and other expenses associated therewith. For the six
month period ended June 30, 2008, USOF incurred $252,305 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 USNG, US12OF, USG and USHO based
on the relative assets of each fund computed on a daily basis. These fees for
calendar year 2008 are estimated to be a total of $286,000 for all five funds.
By comparison, for the six month period ended June 30, 2007, USOF incurred
$369,059 in ongoing registration fees and other offering expenses. In addition,
USOF 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 Oil Futures
Contracts, Other Oil Interests or short-term obligations of the United
States of two years or less (“Treasuries”). During the six month period ended
June 30, 2008, total commissions paid to brokers amounted to $500,175. Prior
to
the initial offering of its units, 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 figure for the six month
period ended June 30, 2008 represented approximately 0.17% of average net
assets. By comparison, for the six month period ended June 30, 2007, total
commissions paid amounted to $756,141. However, the average daily net assets
of
USOF during that time period were larger than during the same time period in
2008. As an annualized percentage of average net assets, the figure for the
six
month period ended June 30, 2007 represented approximately 0.16% of average
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 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 six month period ended June 30, 2008, USOF
earned $6,345,232 in interest income on such cash holdings. Based on USOF’s
average daily total net assets during this time period, this is equivalent
to an
annualized yield of 2.18%. USOF did not purchase Treasuries during the six
month period ended June 30, 2008 and held all of its funds in cash and/or cash
equivalents during this time period. By comparison, for the six month period
ended June 30, 2007, USOF earned $22,988,448 in interest income on cash
holdings. Based on USOF’s average daily total net assets during this time
period, which were larger than USOF’s assets during the same time period in
2008, this is equivalent to an annualized yield of 4.94%.
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 of the 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 or the spot price
for 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.
16
For
the
30 valuation days ended June 30, 2008, the simple average daily change in the
Benchmark Oil Futures Contract was 0.38%, while the simple average daily change
in the NAV of USOF over the same time period was 0.385%. The average daily
difference was 0.005% (or 0.5 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 0.76%, meaning
that
over this time period USOF’s tracking error was within the plus or minus 10%
range established as its benchmark tracking goal.
![United States Oil Fund](https://www.sec.gov/Archives/edgar/data/0001327068/000114420408045191/chart1.jpg)
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
17
![United States Oil Fund](https://www.sec.gov/Archives/edgar/data/0001327068/000114420408045191/chart2.jpg)
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
Since
the
offering of USOF units to the public on April 10, 2006 to June 30, 2008,
the simple average daily change in the Benchmark Oil Futures Contract was
0.100%, while the simple average daily change in the NAV of USOF over the same
time period was 0.110%.
The
average daily difference was 0.01% (or 1.0 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
2.44%,
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
six month period ended June 30, 2008, the actual total return of USOF as
measured by changes in its NAV was 49.45%. This is based on an initial
NAV of $75.82 on December 31, 2007 and an ending NAV as of June 30,
2008 of $113.31. 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 Contract,
USOF would have ended the second quarter of 2008 with an estimated NAV of
$112.65,
for a
total return over the relevant time period of 48.58%.
The
difference between the actual NAV total return of USOF of 49.45% and the
expected total return based on the Benchmark Oil Futures Contract of 48.58%
was
an error over the time period of 0.87%,
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 six month period ended June 30, 2008, 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.
18
By
comparison, for the six month period ended June 30, 2007, the actual total
return of USOF as measured by changes in its NAV was 2.53%. This was based
on an
initial NAV of $51.87 on January 1, 2007 and an ending NAV as of June
29, 2007 of $53.18. 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 Contract,
USOF would have ended the second quarter of 2007 with an estimated NAV of
$52.66, for a total return over the relevant time period of -1.68%. The
difference between the actual NAV total return of USOF of 2.53% and the expected
total return based on the Benchmark Oil Futures Contract of -1.68% was an error
over the time period of +0.97%, 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 six month period
ended June 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.
There
are
currently three factors that have impacted, 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. During the
six
month period ended June 30, 2008, 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, cash equivalents and Treasury holdings.
USOF is not required to distribute any portion of its income to its unitholders
and did not make any distributions to unitholders during the six month period
ended June 30, 2008. 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 Contract.
During the six month period ended June 30, 2008, USOF earned, on an annualized
basis, approximately 2.18% on its cash holdings. It also incurred cash expenses
on an annualized basis of 0.50% for management fees and approximately 0.17%
in
brokerage commission costs related to the purchase and sale of futures
contracts, and 0.45% for other expenses. The foregoing fees and expenses
resulted in a net yield on an annualized basis of approximately 1.07% 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 Contract.
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 six month period ended June 30, 2008, 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 six month period ended June 30, 2008,
the
prices of front month Benchmark Futures Contracts rose from near the $96.00
level to approximately the $140.00 level. The prices of front month contracts
were also higher than the prices of second or third month contracts for most
of
this time period.
19
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 later month contracts. For example, if the price of
the
near month contract is higher than the next month contract (a situation referred
to as “backwardation” in the futures market), then absent any other change there
is a tendency for the price of a next month contract to rise in value as it
becomes the near month contract and approaches expiration. Conversely, if the
price of a near month contract is lower than the next month contract (a
situation referred to as “contango” in the futures market), then absent any
other change there is a tendency for the price of a next month contract to
decline in value as it becomes the near month contract and approaches
expiration.
As
an
example, assume that the price of crude oil for immediate delivery (the “spot”
price), was $50 per barrel, and the value of a position in the near month
futures contract was also $50. Over time, the price of the barrel of crude
oil
will fluctuate based on a number of market factors, including demand for
oil relative to its supply. The value of the near month contract will likewise
fluctuate in reaction to a number of market factors. If investors seek to
maintain their 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 crude oil in the future would be less, the investor would
be buying a next month contract for a lower price than the current near month
contract. Hypothetically, and assuming no other changes to either prevailing
crude oil prices or the price relationship between the spot price, the near
month contract and the next month contract (and ignoring the impact of
commission costs and the interest earned on Treasuries, cash and/or cash
equivalents), the value of the next month contract would rise as it approaches
expiration and becomes the new near month contract. In this example, the value
of the $50 investment would tend to rise faster than the spot price of crude
oil, or fall slower. As a result, it would be possible in this hypothetical
example for the price of spot crude oil to have risen to $60 after some period
of time, while the value of the investment in the futures contract would have
risen to $65, assuming backwardation is large enough or enough time has elapsed.
Similarly, the spot price of crude oil could have fallen to $40 while the value
of an investment in the futures contract could have fallen to only $45. Over
time, if backwardation remained constant, the difference would continue to
increase.
If
the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing crude oil
prices or the price relationship between the spot price, the near month contract
and the next month contract (and ignoring the impact of commission costs and
the
interest earned on cash), the value of the next month contract would fall as
it
approaches expiration and becomes the new near month contract. In this example,
it would mean that the value of the $50 investment would tend to rise slower
than the spot price of crude oil, or fall faster. As a result, it would be
possible in this hypothetical example for the spot price of crude oil to
have risen to $60 after some period of time, while the value of the investment
in the futures contract will have risen to only $55, assuming contango is large
enough or enough time has elapsed. Similarly, the spot price of crude oil could
have fallen to $45 while the value of an investment in the futures contract
could have fallen to $40. Over time, if contango remained constant, the
difference would continue to increase.
Historically,
the oil futures markets have experienced periods of contango and
backwardation, with backwardation being in place more often than contango.
During the previous 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 and remained
in
that condition for the rest of the year. The crude oil market remained in
backwardation until late in the second quarter when it moved into a contango
market. The
chart
below compares the price of the near month contract to the average price of
the
first 12 months over the last 10 years (1998-2007). When the price of the near
month contract is higher than the average price of the front 12 month contracts,
the market would be described as being in backwardation. When the price of
the
near month contract is lower than the average price of the front 12 month
contracts, the market would be described as being in contango. Although the
prices of the near month contract and the average price of the front 12 month
contracts do tend to move up or down together, it can be seen that at times
the
near month prices are clearly higher than the average price of the 12 month
contracts (backwardation), and other times they are below the average price
of
the front 12 month contracts (contango).
20
![United States Oil Fund](https://www.sec.gov/Archives/edgar/data/0001327068/000114420408045191/chart3.jpg)
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
An
alternative way to view the same data is to subtract from the dollar price
of
the near month contract the average dollar price of the front 12 month
contracts. If the resulting number is a positive number, then the near month
price is higher than the average price of the front 12 months and the market
could be described as being in backwardation. If the resulting number is a
negative number, then the near month price is lower than the average price
of
the front 12 months and the market could be described as being in contango.
The
chart below shows the results from subtracting from the near month price the
average price of the front 12 month contracts for the 10 year period between
1998 and 2007.
21
![United States Oil Fund](https://www.sec.gov/Archives/edgar/data/0001327068/000114420408045191/chart4.jpg)
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
An
investment in a portfolio that involved owning only the near month contract
would likely produce a different result than an investment in a portfolio that
owned an equal number of each of the front 12 month’s worth of contracts.
Generally speaking, when the crude oil futures market is in backwardation,
the
near month only portfolio would tend to have a higher total return than the
12
month portfolio. Conversely, if the crude oil futures market was in contango,
the portfolio containing 12 months' worth of contracts would tend to outperform
the near month only portfolio. The chart below shows the results of owning
a
portfolio consisting of the near month contract versus a portfolio containing
the front 12 months' worth of contracts. In this example, each month, the near
month only portfolio would sell the near month contract at expiration and buy
the next month out contract. The portfolio holding an equal number of the front
12 months' worth of contracts would sell the near month contract at expiration
and replace it with the contract that becomes the new twelfth month
contract.
22
![United States Oil Fund](https://www.sec.gov/Archives/edgar/data/0001327068/000114420408045191/chart5.jpg)
*PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
As
seen
in the chart, there have been periods of both positive and negative annual
total
returns for both portfolios over the last 10 years. In addition, there have
been
periods during which the near month only approach had higher returns, and
periods where the 12 month approach had higher total returns. The above chart
does not represent the performance history of USOF or any affiliated
funds.
Historically,
the oil futures markets have experienced periods of contango and
backwardation, with backwardation being in place more often than contango.
During the previous 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. The crude oil
markets remained in backwardation until late in the second quarter when it
moved
into a contango market. 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).
Periods
of contango or backwardation 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.
23
Crude
Oil Market.
During
the six month period ended June 30, 2008, crude oil prices were impacted by
several factors. On the consumption side, demand remained strong outside
the United States as continued global economic growth, especially in emerging
economies such as China and India, remained brisk. Additionally, the U.S.
dollar, the currency in which crude oil is traded globally, continued to fall,
effectively making crude oil cheaper for most non-U.S. dollar economies.
Concerns about a weakening U.S. economy leading to reduced demand for oil
products was a factor in the first quarter and became more pronounced in the
second quarter of 2008. On the supply side, production remained steady despite
concerns about violence impacting production in Iraq and Nigeria. Political
tensions between Iran and the United States also contributed to market concerns
about interruptions in production. At the same time, a concern remained about
the ability of major oil producing countries to continue to raise their
production to accommodate increasing demand. However, oil prices trended upward
during the quarter as a slowing U.S. economy was not enough to improve the
global supply and demand balance.
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. The values which are used by USOF for its forward
contracts are provided by its commodity broker who uses market prices when
available, while over-the-counter contracts are valued based on the present
value of estimated future cash flows that would be received from or paid to
a
third party in settlement of these derivative contracts prior to their delivery
date and valued on a daily basis. In addition, 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 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.
USOF
invests in Oil Interests to the fullest extent possible without being leveraged
or unable to satisfy its current or potential margin or collateral obligations
with respect to its investments in Oil Futures Contracts and Other Oil
Interests. A significant portion of the NAV is held in cash and cash
equivalents that are used as margin and as collateral for USOF’s trading in
Oil Interests. The percentage that Treasuries will bear to the total net
assets will vary from period to period as the market values of the Oil Interests
change. The balance of the net assets is held in USOF’s Oil Futures Contracts
and Other Oil Interests trading account. Interest earned on USOF’s
interest-bearing funds is paid to USOF.
24
USOF’s
investment in Oil Interests may be subject to periods of illiquidity because
of
market conditions, regulatory considerations and other reasons. For example,
most commodity exchanges limit the fluctuations in 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. During the six month period
ended June 30, 2008, 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 had in utilizing its model to trade in Oil Interests in a manner
intended to track the changes in the spot price of crude 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 generally 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 CFTC regulations to separately account for
and segregate as belonging to USOF, all assets of USOF relating to domestic
Oil
Futures Contracts trading. These futures commission merchants are 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 Contracts trading.
25
As
of
June 30, 2008, USOF had deposits in domestic and foreign financial institutions,
including cash investments in money market funds, in the amount of
$1,051,107,742. This amount is subject to loss should these institutions cease
operations.
Off
Balance Sheet Financing
As
of
June 30, 2008, 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.
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 CPO and the
registration and listing of USOF and its units with the SEC, FINRA 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 USOF’s marketing agent, ALPS Distributors,
Inc., and the fees of the custodian and transfer agent, Brown Brothers Harriman
& Co. (“BBH&Co.”), as well as BBH&Co.’s fees for performing
administrative services, including in connection with the preparation of USOF’s
condensed financial statements and its SEC and CFTC reports. 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. The General Partner also pays any fees
for implementation of services and base service fees charged by the accounting
firm responsible for preparing USOF’s tax reporting forms; however, USOF pays
the fees and expenses associated with its tax accounting and reporting
requirements.
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 other regulatory agencies in connection with the offer and sale of
units, as well as legal, printing, accounting and other expenses associated
therewith, and extraordinary expenses. The latter are expenses not incurred
in the ordinary course of 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 with
an
option to renew, or, in some cases, are in effect for the duration of USOF’s
existence. Either party may terminate these agreements earlier for certain
reasons described in the agreements.
26
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 an over-the-counter contract bears the credit risk
that the other party may not be able to perform its obligations under its
contract.
Some
crude oil-based derivatives transactions contain fairly generic terms and
conditions and are available from a wide range of participants. Other crude
oil-based derivatives have highly customized terms and conditions and are not
as
widely available. Many of these over-the-counter contracts are cash-settled
forwards for the future delivery of crude oil- or petroleum-based fuels that
have terms similar to the Oil Futures Contracts. Others take the form of “swaps”
in which the two parties exchange cash flows based on pre-determined formulas
tied to the spot price of crude oil, forward crude oil prices or crude oil
futures prices. For example, 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 such 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 the NYMEX or the ICE Futures. In that event, USOF
would no longer have credit risk of its original counterparty, as the
clearinghouse would now be USOF’s counterparty. USOF would still retain any
price risk associated with its transaction.
The
creditworthiness of each potential counterparty is assessed by the General
Partner. The General Partner assesses or reviews, as appropriate, the
creditworthiness of each potential or existing counterparty to an
over-the-counter contract pursuant to guidelines approved by the General
Partner’s board of directors. Furthermore, the General Partner on behalf of USOF
only enters into over-the-counter contracts with (a) members of the Federal
Reserve System or foreign banks with branches regulated by the Federal Reserve
Board; (b) primary dealers in U.S. government securities; (c) broker-dealers;
(d) commodities futures merchants; or (e) affiliates of the foregoing. Existing
counterparties are also reviewed periodically by the General
Partner.
USOF
anticipates that the use of Other Crude Oil-Related Investments together with
its investments in Futures Contracts will produce price and total return results
that closely track the investment goals of USOF.
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 if the General Partner felt
it
would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in oil prices. 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.
27
During
the six month period ended June 30, 2008, 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.
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.
28
Part
II. OTHER
INFORMATION
Item
1. Legal Proceedings.
Not
applicable.
Item
1A. Risk Factors.
There
has
not been a material change from the risk factors previously disclosed in USOF's
Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Not
applicable.
Item
3. Defaults Upon Senior Securities.
Not
applicable.
Item
4. Submission of Matters to a Vote of Security Holders.
Not
applicable.
Item 5. Other
Information.
Monthly
Account Statements
Pursuant
to the requirement under 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.
Item 6. 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
|
|
31.1*
|
Certification
by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2*
|
Certification
by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1**
|
Certification
by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2**
|
Certification
by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Filed herewith
**
Furnished herewith
29
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:
United States Commodity Funds LLC, its general partner
(formerly
known as Victoria Bay Asset Management, LLC)
/s/
Nicholas D. Gerber
|
|
Nicholas
D. Gerber
|
|
Chief
Executive Officer
|
|
Date: August
11, 2008
|
|
By:
|
/s/
Howard Mah
|
Howard
Mah
|
|
Chief
Financial Officer
|
|
Date: August
11, 2008
|
30