10-K: United States Brent Oil Fund (BNO) Reports Annual Results for 2024

United States Brent Oil Fund's 2024 annual report reveals a complex interplay of market forces, regulatory considerations, and internal controls impacting the fund's performance and investment strategy.

Summary

• The United States Brent Oil Fund, LP (BNO) is a commodity pool aiming to mirror the daily percentage changes in the spot price of Brent crude oil.
• BNO invests primarily in futures contracts and, to a lesser extent, in other crude oil-related investments.
• The fund's investment objective is to have the average daily percentage change in its NAV within plus/minus 10% of the average daily percentage change in the Benchmark Futures Contract over 30 successive valuation days.
• As of December 31, 2024, BNO had 3,800,000 shares outstanding and a per share NAV of $30.14.
• The fund's average daily total net assets for 2024 were $146,504,989.
• BNO earned $7,233,652 in dividend and interest income on Treasuries, cash, and cash equivalents, representing an annualized yield of 4.94%.
• The management fee paid to USCF was $1,098,840, while total fees and other expenses, excluding management fees, amounted to $576,915.
• Brokerage commissions totaled $113,944, or 0.08% of average total net assets.
• BNO's net income for the year ended December 31, 2024, was $10,597,827, or $2.75 per share.
• The fund's actual total return for 2024 was 10.04%, outperforming its benchmark by 6.01%.

Sentiment

Score: 7

Explanation: The document presents a balanced view, highlighting both positive financial results and various risks associated with the fund's operations and market conditions. The outperformance of the benchmark is a positive sign, but the numerous risk factors temper the overall sentiment.

Positives

• BNO's actual total return of 10.04% outperformed its benchmark by 6.01% for the year ended December 31, 2024.
• The fund earned $7,233,652 in dividend and interest income, representing an annualized yield of 4.94%.
• BNO's internal control over financial reporting is deemed effective as of December 31, 2024.
• The fund has an unlimited number of shares registered and available for issuance.

Negatives

• BNO's performance is subject to market risks, including commodity price risk and credit risk.
• The fund's ability to track its benchmark may be affected by accountability levels, position limits, and daily price fluctuation limits set by exchanges.
• Natural forces in the crude oil futures market, such as backwardation and contango, may increase BNO's tracking error and/or negatively impact total return.
• BNO is subject to regulatory changes and actions that could significantly and adversely affect the fund.
• The fund is subject to potential conflicts of interest involving USCF and its affiliates.

Risks

• The NAV of BNO's shares relates directly to the value of the Benchmark Futures Contract and other assets held by BNO, and fluctuations in the prices of these assets could materially adversely affect an investment in BNO's shares.
• An investment in BNO may provide little or no diversification benefits.
• Daily percentage changes in BNO's NAV may not correlate with daily percentage changes in the price of the Benchmark Futures Contract.
• Natural forces in the crude oil futures market known as backwardation and contango may increase BNO's tracking error and/or negatively impact total return.
• BNO will be subject to credit risk with respect to counterparties to OTC contracts entered into by BNO.
• BNO is not leveraged, but it could become leveraged if it had insufficient assets to completely meet its margin or collateral requirements relating to its investments.
• BNO may temporarily limit the offering of Creation Baskets.
• Certain of BNO's investments could be illiquid, which could cause large losses to investors at any time or from time to time.
• BNO is not actively managed and its investment objective is to track the Benchmark Futures Contract.
• BNO may not meet the listing standards of NYSE Arca, which could adversely impact an investor's ability to sell shares.
• The NYSE Arca may halt trading in BNO's shares, which would adversely impact an investor's ability to sell shares.
• Shareholders that are not Authorized Participants may only purchase or sell their shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect investors investment in the shares.
• Limited partners and shareholders do not participate in the management of BNO and do not control USCF, so they do not have any influence over basic matters that affect BNO.
• 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, and any Director of USCF may be removed by USCF's parent company, which is wholly owned by The Marygold Companies, Inc., a controlled public company where the majority of shares are owned by Nicholas D. Gerber along with certain of his family members and certain other shareholders.
• There is a risk that BNO will not earn trading gains sufficient to compensate for the fees and expenses that it must pay and as such BNO may not earn any profit.
• Regulatory changes or actions, including the implementation of new legislation is impossible to predict but may significantly and adversely affect BNO.
• BNO is not a registered investment company so shareholders do not have the protections of the 1940 Act.
• Trading in international markets could expose BNO to credit and regulatory risk.
• BNO and USCF may have conflicts of interest, which may permit them to favor their own interests to the detriment of shareholders.
• BNO could terminate at any time and cause the liquidation and potential loss of an investor's investment and could upset the overall maturity and timing of an investor's investment portfolio.
• BNO 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 BNO's NAV.
• The suspension in the ability of Authorized Participants to purchase Creation Baskets could cause BNO's NAV to differ materially from its trading price.
• BNO 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.
• BNO may be subject to interest rate risk, which may prevent BNO from investing fully at prevailing rates until any current investments in Treasury Bills mature in order to avoid selling those investments at a loss.
• As inflation increases, the present value of BNO's assets may decline.
• BNO 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 BNO's assets and could impair BNO in its ability to execute trades.
• The failure or bankruptcy of BNO's Custodian could result in a substantial loss of BNO's assets.
• Due to the increased use of technologies, intentional and unintentional cyber-attacks pose operational and information security risks.
• BNO'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

The report anticipates that fees and expenses paid by BNO may continue to be lower than interest earned by BNO, potentially leading to outperformance of its benchmark as long as interest earned is greater than the fees and expenses paid by BNO.

Management Comments

• USCF believes that market arbitrage opportunities will cause daily changes in BNOs share price on the NYSE Arca on a percentage basis to closely track daily changes in BNOs per share NAV on a percentage basis.
• USCF further believes that daily changes in prices of the Benchmark Futures Contract have historically tracked the daily changes in the spot price of Brent crude oil.
• USCF believes that the net effect of these relationships will be that the daily changes in the price of BNOs shares on the NYSE Arca on a percentage basis will closely track the daily changes in the spot price of Brent crude oil on a percentage basis, plus interest earned on BNOs collateral holdings, less BNOs expenses.

Industry Context

The report provides context on the crude oil market, including factors affecting supply and demand, the impact of contango and backwardation, and regulatory considerations.

Comparison to Industry Standards

• The report compares BNO's performance to its benchmark, the Benchmark Futures Contract, and discusses the factors that can impact its ability to track the benchmark.
• The report also provides correlation data comparing Brent crude oil price movements to other energy commodities and investment asset classes.
• The report notes that BNO's investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of Brent crude oil or any particular futures contract based on Brent crude oil, nor is BNOs investment objective for the percentage change in its NAV to reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one day.

Legal Proceedings

• USO and USCF were named as defendants in an action filed by Optimum Strategies Fund I, LP, a purported investor in call option contracts on USO (the Optimum Strategies Action).
• On November 8, 2021, USCF and USO announced a resolution with each of the SEC and the CFTC relating to matters set forth in certain Wells Notices issued by the staffs of each of the SEC and CFTC.
• On June 19, 2020, USCF, USO, John P. Love, and Stuart P. Crumbaugh were named as defendants in a putative class action filed by purported shareholder Robert Lucas (the Lucas Class Action).
• On July 10, 2020, purported shareholder Momo Wang filed a putative class action complaint, individually and on behalf of others similarly situated, against defendants USO, USCF, John P. Love, Stuart P. Crumbaugh, Nicholas D. Gerber, Andrew F Ngim, Robert L. Nguyen, Peter M. Robinson, Gordon L. Ellis, Malcolm R. Fobes, III, ABN Amro, BNP Paribas Securities Corp., Citadel Securities LLC, Citigroup Global Markets Inc., Credit Suisse Securities USA LLC, Deutsche Bank Securities Inc., Goldman Sachs & Company, JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Company Inc., Nomura Securities International Inc., RBC Capital Markets LLC, SG Americas Securities LLC, UBS Securities LLC, and Virtu Financial BD LLC, in the U.S. District Court for the Northern District of California as Civil Action No. 3:20-cv-4596 (the Wang Class Action).
• On August 10, 2020, purported shareholder Darshan Mehan filed a derivative action on behalf of nominal defendant USO, against defendants USCF, John P. Love, Stuart P. Crumbaugh, Nicholas D. Gerber, Andrew F Ngim, Robert L. Nguyen, Peter M. Robinson, Gordon L. Ellis, and Malcolm R. Fobes, III (the Mehan Action).
• On August 27, 2020, purported shareholders Michael Cantrell and AML Pharm. Inc. DBA Golden International filed two separate derivative actions on behalf of nominal defendant USO, against defendants USCF, John P. Love, Stuart P. Crumbaugh, Andrew F Ngim, Gordon L. Ellis, Malcolm R. Fobes, III, Nicholas D. Gerber, Robert L. Nguyen, and Peter M. Robinson in the U.S. District Court for the Southern District of New York at Civil Action No. 1:20-cv-06974 (the Cantrell Action) and Civil Action No. 1:20-cv-06981 (the AML Action), respectively.

Related Party Transactions

• BNO's primary contractual obligations are with USCF, which receives a management fee calculated as a percentage of BNO's NAV.
• USCF pays the fees of the Marketing Agent as well as BNY Mellon's fees for performing administrative, custodial, and transfer agency services.
• BNO pays a portion of the fees and expenses of the independent directors of USCF.

Stakeholder Impact

• The report provides information to shareholders regarding BNO's performance, investment strategy, and risks.
• The report also discusses the impact of regulatory changes and market conditions on BNO's operations.
• The report provides information to Authorized Participants regarding the creation and redemption of shares.

Next Steps

• USCF will continue to manage BNO's portfolio to track the Benchmark Futures Contract.
• BNO will continue to monitor and comply with regulatory requirements.
• USCF will continue to assess and manage risks associated with BNO's investments.

Key Dates