10-K: United States 12 Month Oil Fund, LP: Annual Report Highlights Investment Strategy and Financial Performance

The United States 12 Month Oil Fund, LP's annual report details its investment strategy focused on tracking the spot price of light, sweet crude oil through futures contracts, while also outlining its financial performance and risk factors.

Summary

• The United States 12 Month Oil Fund, LP (USL) is a commodity pool aiming to mirror the daily changes in the spot price of light, sweet crude oil using a basket of 12 futures contracts.
• USL invests primarily in light, sweet crude oil futures contracts, and to a lesser extent, other oil-related investments to meet regulatory requirements or market conditions.
• The fund's objective is for its net asset value (NAV) to track the average daily percentage change in the price of the Benchmark Oil Futures Contracts within a plus or minus 10% range over any 30-day period.
• USL does not intend to take physical delivery of crude oil, instead closing positions and reinvesting proceeds.
• The fund's performance is affected by market conditions, including contango and backwardation, which can cause its returns to differ from the spot price of crude oil.
• USL's total expenses, including management fees, brokerage commissions, and other costs, were approximately 0.86% of average daily net assets for the period.
• As of December 31, 2023, USL held 938 futures contracts for light, sweet crude oil traded on the NYMEX and did not hold any Oil Futures Contracts traded on the ICE Futures.
• For the fiscal year ended December 31, 2023, USL did not exceed the accountability levels imposed by the NYMEX or ICE Futures, however, the aggregated total of certain of the Related Public Funds did exceed the accountability levels.

Sentiment

Score: 6

Explanation: The document is neutral in tone, providing a factual overview of the fund's performance, strategy, and risks. While it acknowledges market volatility and potential challenges, it does not express undue optimism or pessimism.

Positives

• USL's investment strategy is designed to provide investors with a cost-effective way to invest indirectly in crude oil.
• The fund's management seeks to minimize tracking error between its NAV and the Benchmark Oil Futures Contracts.
• USL's assets are held in segregated accounts pursuant to the Commodity Exchange Act and CFTC regulations.
• USL has multiple FCMs to facilitate trading and reduce counterparty risk.
• The fund's website provides daily disclosure of portfolio holdings.

Negatives

• USL's performance is subject to market volatility and may not perfectly track the spot price of crude oil.
• Contango and backwardation can significantly impact the fund's total return.
• Accountability levels and position limits set by exchanges may cause tracking error.
• The fund is not actively managed, which means it will not close out positions during a decline except in specific circumstances.
• USL does not intend to make cash distributions, which may create tax liabilities for investors without corresponding cash flow.
• The fund is subject to credit risk with respect to counterparties to OTC contracts.

Risks

• The NAV of USL's shares is directly related to the value of the Benchmark Oil Futures Contracts and other assets held by USL, and fluctuations in these prices could materially affect an investment.
• Infectious disease outbreaks like COVID-19 could negatively affect the valuation and performance of USL's investments.
• An investment in USL may provide little or no diversification benefits.
• Daily percentage changes in USL's NAV may not correlate with daily percentage changes in the average of the prices of the Benchmark Oil Futures Contracts.
• Daily percentage changes in the price of the Benchmark Oil Futures Contracts may not correlate with daily percentage changes in the spot price of crude oil.
• Accountability levels, position limits, and daily price fluctuation limits set by the exchanges have the potential to cause tracking error.
• Risk mitigation measures imposed by USL's FCMs have the potential to cause tracking error.
• An investor's tax liability may exceed the amount of distributions, if any, on its shares.
• USL will be subject to credit risk with respect to counterparties to OTC contracts.
• Valuing OTC derivatives may be less certain than actively traded financial instruments.
• USL could become leveraged if it had insufficient assets to meet its margin or collateral requirements.
• USL may temporarily limit the offering of Creation Baskets.
• Certain of USL's investments could be illiquid.
• USL is not actively managed and its investment objective is to track the Benchmark Oil Futures Contracts.
• USL may not meet the listing standards of NYSE Arca, which would adversely impact an investor's ability to sell shares.
• The NYSE Arca may halt trading in USL's shares.
• The liquidity of USL's shares may also be affected by the withdrawal from participation of Authorized Participants.
• Shareholders that are not Authorized Participants may only purchase or sell their shares in secondary trading markets.
• The lack of an active trading market for USL's shares may result in losses on an investor's investment in USL.
• Limited partners and shareholders do not participate in the management of USL and do not control USCF.
• Limited partners may have limited liability in certain circumstances, including potentially having liability for the return of wrongful distributions.
• USCF's LLC Agreement provides limited authority to the Non-Management Directors.
• There is a risk that USL will not earn trading gains sufficient to compensate for the fees and expenses that it must pay.
• USL is subject to extensive regulatory reporting and compliance.
• Regulatory changes or actions, including the implementation of new legislation is impossible to predict but may significantly and adversely affect USL.
• USL is not a registered investment company so shareholders do not have the protections of the 1940 Act.
• Trading in international markets could expose USL to credit and regulatory risk.
• USL and USCF may have conflicts of interest.
• USL could terminate at any time.
• USL does not expect to make cash distributions.
• An unanticipated number of Redemption Basket requests during a short period of time could have an adverse effect on USL's NAV.
• The suspension in the ability of Authorized Participants to purchase Creation Baskets could cause USL's NAV to differ materially from its trading price.
• USL may determine that, to allow it to reinvest the proceeds from sales of its Creation Baskets in currently permitted assets in a manner that meets its investment objective, it may limit its offers of Creation Baskets.
• In a rising rate environment, USL may not be able to fully invest at prevailing rates until any current investments in Treasury Bills mature in order to avoid selling those investments at a loss.
• USL may potentially lose money by investing in government money market funds.
• The failure or bankruptcy of a clearing broker could result in a substantial loss of USL's assets.
• The failure or bankruptcy of USL's Custodian could result in a substantial loss of USL's assets.
• Due to the increased use of technologies, intentional and unintentional cyber-attacks pose operational and information security risks.
• USL's investment returns could be negatively affected by climate change and greenhouse gas restrictions.
• USCF is the subject of class action, derivative and other litigation.

Future Outlook

USL intends to continue to pursue its investment objective as described in the report, and USCF believes that the changes in percentage terms of USLs NAV will continue to closely track the daily changes in percentage terms in the average of the prices of the Benchmark Oil Futures Contracts.

Management Comments

• USCF believes that market arbitrage opportunities will cause daily changes in USLs share price on the NYSE Arca on a percentage basis to closely track daily changes in USLs per share NAV on a percentage basis.
• USCF further believes that the daily changes in the average prices of the Benchmark Oil Futures Contracts have historically tracked the daily changes in prices of light, sweet crude oil.
• USCF believes that the net effect of these relationships will be that the daily changes in the price of USLs shares on the NYSE Arca on a percentage basis will closely track the daily changes in the spot price of a barrel of light, sweet crude oil on a percentage basis, less USLs expenses.

Industry Context

The report highlights the volatility in the crude oil market, influenced by factors such as the COVID-19 pandemic, the Russia-Ukraine war, and OPEC production decisions. These factors impact the price of oil futures contracts, which in turn affect USL's performance. The report also discusses the impact of contango and backwardation, which are natural market forces that can affect the total return on an investment in USL's shares relative to a hypothetical direct investment in crude oil.

Comparison to Industry Standards

• USL's strategy of tracking a basket of 12 futures contracts is a common approach for commodity-based ETFs, but the specific weighting and roll methodology can vary.
• The expense ratio of 0.86% is within the range of similar commodity-focused ETFs, but can be higher than broad market index ETFs.
• USL's tracking error, while generally within its target range, is subject to market conditions and regulatory limits, which is a common challenge for commodity ETFs.
• The report notes that USL's performance is impacted by contango and backwardation, which is a common issue for all commodity futures-based ETFs.
• USL's use of multiple FCMs is a standard practice to mitigate counterparty risk, similar to other commodity ETFs.

Legal Proceedings

• USL and USCF were named as defendants in an action filed by Optimum Strategies Fund I, LP, which was subsequently dismissed.
• USCF and USO reached a settlement with the SEC and CFTC relating to matters set forth in certain Wells Notices.
• USCF, USO, and certain individuals were named as defendants in a putative class action, In re: United States Oil Fund, LP Securities Litigation, which is still pending.
• USCF, USO, and certain individuals were named as defendants in a derivative action, In re United States Oil Fund, LP Derivative Litigation, which is stayed pending the outcome of the class action.
• USCF, USO, and certain individuals were named as defendants in a derivative action, Mehan Action, which is stayed pending the outcome of the class action.

Related Party Transactions

• USL pays USCF a management fee of 0.60% per annum on its average daily total net assets.
• USCF pays the fees of the Marketing Agent and BNY Mellon for their services.
• USL pays a licensing fee to the NYMEX.
• USL pays a portion of the fees and expenses of the independent directors of USCF.

Stakeholder Impact

• Shareholders are exposed to the risks associated with investing in crude oil futures contracts.
• Shareholders may experience tax liabilities without corresponding cash distributions.
• Authorized Participants are the only entities that can directly create or redeem shares with USL.
• The fund's performance is subject to market volatility and may not perfectly track the spot price of crude oil.
• The fund's performance is impacted by contango and backwardation, which can cause its returns to differ from the spot price of crude oil.

Next Steps

• USL intends to continue to pursue its investment objective as described in the report.
• USCF will continue to monitor market conditions and regulatory requirements to manage USL's portfolio effectively.

Key Dates

Keywords

crude oil, futures contracts, commodity pool, oil prices, investment strategy, net asset value, contango, backwardation, NYSE Arca, USL, USCF, derivatives, risk management, financial performance