10-K: United States Oil Fund, LP Files 10-K Report Detailing Investment Strategy and Risk Factors

United States Oil Fund, LP (USO) released its annual 10-K report, outlining its investment strategy focused on tracking the price of light, sweet crude oil and detailing various risk factors.

Summary

• The United States Oil Fund, LP (USO) is a commodity pool aiming to mirror the daily changes in the spot price of light, sweet crude oil, primarily through investments in futures contracts.
• USO's investment objective is to have its per share NAV's average daily percentage change over 30 days within plus or minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract.
• The fund primarily invests in Oil Futures Contracts and, to a lesser extent, in Other Oil-Related Investments, such as OTC swaps, to meet its investment objective.
• USO has transitioned its investment portfolio to primarily invest in Benchmark Oil Futures Contracts, consistent with its strategy prior to 2020, but retains the flexibility to invest in other contracts and instruments.
• The report details the impact of market conditions, regulatory requirements, and risk mitigation measures on USOs investment decisions.
• USO's assets are held in segregated accounts with FCMs and in Treasuries, cash, and cash equivalents with its custodian.
• The fund's management fee is 0.45% per annum on its average daily total net assets.
• USO's total expenses for the year ended December 31, 2023, were $248,483,855, or 0.75% of average daily net assets.
• As of December 31, 2023, USO had 23,423,603 outstanding shares and a per share NAV of $66.91.
• The report also discusses the impact of contango and backwardation on USOs returns.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While USO has transitioned its portfolio to primarily invest in Benchmark Oil Futures Contracts, aligning with its pre-2020 strategy, the fund's per share NAV decreased, and it exceeded accountability levels. The report also highlights various risks and challenges, leading to a somewhat negative sentiment.

Positives

• USO has transitioned its portfolio to primarily invest in Benchmark Oil Futures Contracts, aligning with its pre-2020 strategy.
• The fund has the flexibility to invest in other contracts and instruments to meet its investment objective.
• USO's actual total return outperformed its benchmark by 4.19% for the year ended December 31, 2023.
• USO's assets are held in segregated accounts with FCMs and in Treasuries, cash, and cash equivalents with its custodian, providing a level of security.

Negatives

• USO's per share NAV decreased from $70.05 at the end of 2022 to $66.91 at the end of 2023.
• USO exceeded accountability levels of the NYMEX during the year ended December 31, 2023, including when it held a maximum of 21,570 Crude Oil Futures CL contracts.
• The fund's performance is subject to the impact of contango and backwardation in the oil futures market.
• USO's ability to track its benchmark may be affected by market conditions, regulatory requirements, and risk mitigation measures.

Risks

• The NAV of USOs shares is directly related to the value of the Benchmark Oil Futures Contracts and other assets held by USO, and fluctuations in these prices could materially affect an investment.
• Infectious disease outbreaks like COVID-19 could negatively affect the valuation and performance of USOs investments.
• An investment in USO may provide little or no diversification benefits.
• Daily percentage changes in USOs NAV may not correlate with daily percentage changes in the price of the Benchmark Oil Futures Contract.
• Natural forces in the oil futures market known as backwardation and contango may increase USOs tracking error and/or negatively impact total return.
• 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 USOs FCMs have the potential to cause tracking error.
• USO 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.
• USO 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.
• USO may temporarily limit the offering of Creation Baskets.
• Certain of USOs investments could be illiquid, which could cause large losses to investors at any time or from time to time.
• The failure or bankruptcy of a clearing broker or USOs Custodian could result in a substantial loss of USOs assets.
• Due to the increased use of technologies, intentional and unintentional cyber-attacks pose operational and information security risks.
• USOs investment returns could be negatively affected by climate change and greenhouse gas restrictions.
• USO and USCF are subjects of class action, derivative and other litigation.

Future Outlook

USO intends to continue to pursue its investment objective as described in the report, but may invest in Oil Futures Contracts beyond the Benchmark Oil Futures Contract and Other Oil-Related Investments if market conditions, regulatory requirements, risk mitigation measures, liquidity requirements, or other factors require it.

Management Comments

• USCF believes that market arbitrage opportunities will cause daily changes in USOs share price on the NYSE Arca on a percentage basis to closely track daily changes in USOs per share NAV.
• USCF further believes that the daily changes in the price of the Benchmark Oil Futures Contract have historically closely tracked the daily changes in spot 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 USOs 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, plus interest earned on USOs collateral holdings, less USOs expenses.

Industry Context

The report highlights the impact of global events, such as the COVID-19 pandemic and the Russia-Ukraine war, on the crude oil market and USO's performance. It also discusses the influence of OPEC and non-OPEC production decisions on oil prices. The report also details the impact of regulatory changes on the trading of futures contracts and OTC swaps.

Comparison to Industry Standards

• USO's tracking objective of plus or minus 10% of the Benchmark Oil Futures Contract over a 30-day period is a common benchmark for commodity-tracking ETFs.
• The report details the impact of contango and backwardation, which are common challenges for commodity futures-based ETFs, and how USO manages these risks.
• The discussion of position limits and accountability levels is standard for commodity funds that invest in futures contracts.
• The report's discussion of OTC swap risks and counterparty credit risk is consistent with industry standards for funds that use derivatives.
• The report's discussion of the impact of market volatility and regulatory changes is consistent with the challenges faced by other commodity-based investment products.

Legal Proceedings

• USO and USCF were named as defendants in an action filed by Optimum Strategies Fund I, LP, which was dismissed by the court.
• USCF and USO settled with the SEC and CFTC regarding certain matters, paying a total of $2,500,000 in civil monetary penalties.
• USCF, USO, and certain individuals are defendants in a consolidated class action lawsuit, In re: United States Oil Fund, LP Securities Litigation, which is still pending.
• USCF, USO, and certain individuals are defendants in a derivative action, In re United States Oil Fund, LP Derivative Litigation, which is stayed pending the outcome of the class action lawsuit.
• USO and USCF were named as defendants in a putative class action complaint, the Wang Class Action, which was voluntarily dismissed.
• USCF, USO, and certain individuals are defendants in a derivative action, the Mehan Action, which is stayed pending the outcome of the class action lawsuit.

Related Party Transactions

• USO pays USCF a management fee of 0.45% per annum on its average daily total net assets.
• USCF pays the fees of the Marketing Agent and BNY Mellon for their services.
• USO pays a licensing fee to the NYMEX.
• USO 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 and other oil-related investments.
• Shareholders may experience losses due to market volatility, contango, backwardation, and other factors.
• Authorized Participants are the only entities that can directly create or redeem shares with USO.
• USO's performance is directly linked to the price of crude oil, which is influenced by global economic and political factors.
• USO's ability to track its benchmark may be affected by market conditions, regulatory requirements, and risk mitigation measures.

Next Steps

• USO will continue to monitor market conditions, regulatory requirements, and risk mitigation measures to make investment decisions.
• USO will continue to disclose its end of day portfolio on its website, www.uscfinvestments.com.

Key Dates

Keywords

Crude Oil, Futures Contracts, Commodity Pool, OTC Swaps, Benchmark Oil Futures Contract, Contango, Backwardation, NAV, Risk Factors, USO