10-Q: United States Oil Fund Reports Mixed Results Amidst Volatile Oil Market

The United States Oil Fund (USO) reported a net loss for the quarter ended September 30, 2024, despite an increase in net asset value per share, amidst a volatile crude oil market.

Summary

• The United States Oil Fund (USO) is a commodity pool that aims to track the daily changes in the spot price of light, sweet crude oil.
• For the three months ended September 30, 2024, USO reported a net loss of $135.45 million, or $9.77 per limited partner share.
• This compares to a net income of $355.09 million, or $17.11 per share, for the same period in 2023.
• However, the net asset value per share increased from $66.91 at the end of 2023 to $69.86 as of September 30, 2024.
• The fund's total assets decreased from $1.59 billion at the end of 2023 to $1.42 billion as of September 30, 2024.
• USO primarily invests in futures contracts for light, sweet crude oil and other oil-related investments.
• The fund's performance is impacted by market conditions, regulatory requirements, and risk mitigation measures.
• USO transitioned its investment portfolio to primarily invest in Benchmark Oil Futures Contracts between September 2023 and January 2024.
• The fund's investment objective is to have the average daily percentage change in its NAV within plus or minus 10% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over 30 successive valuation days.

Sentiment

Score: 4

Explanation: The sentiment is slightly negative due to the reported net loss for the quarter, despite an increase in NAV per share. The document also highlights various risks and challenges associated with the fund's operations.

Positives

• The net asset value per share increased from $66.91 at the end of 2023 to $69.86 as of September 30, 2024.
• USO's average daily NAV change was within the plus or minus 10% range of the Benchmark Oil Futures Contract over the 30-day period ending September 30, 2024.
• The fund has transitioned its investment portfolio to primarily invest in Benchmark Oil Futures Contracts.
• USO earned $48.99 million in dividend and interest income on Treasuries, cash and/or cash equivalents for the nine months ended September 30, 2024.
• The annualized yield based on average daily total net assets was 4.89% for the nine months ended September 30, 2024.

Negatives

• USO reported a net loss of $135.45 million for the three months ended September 30, 2024.
• The fund's total assets decreased from $1.59 billion at the end of 2023 to $1.42 billion as of September 30, 2024.
• USO incurred $4.51 million in management fees for the nine months ended September 30, 2024.
• Total fees and other expenses excluding management fees were $3.76 million for the nine months ended September 30, 2024.
• Total commissions accrued to brokers were $1.11 million for the nine months ended September 30, 2024.

Risks

• USO is exposed to market risk due to fluctuations in crude oil prices.
• The fund is subject to credit risk from counterparties in OTC swap transactions.
• Regulatory changes, including position limits and margin requirements, could impact USO's ability to meet its investment objective.
• Geopolitical events, such as the Russia-Ukraine war and Middle East conflict, can cause volatility in the oil market.
• Infectious disease outbreaks, like COVID-19, can negatively affect USO and the valuation of its investments.
• Rising interest rates could negatively impact the value of USO's fixed income securities.
• USO may lose money by investing in government money market funds.
• The fund's performance is impacted by contango and backwardation in the futures market.

Future Outlook

USO 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 to do so in order to meet its investment objective. The fund anticipates that interest rates may continue to stagnate over the near future and that fees and expenses paid by USO may continue to be lower than interest earned by USO.

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 reflects the ongoing volatility in the crude oil market, influenced by factors such as geopolitical tensions, supply chain disruptions, and economic conditions. USO's performance is directly tied to these market dynamics, and its investment strategy is adjusted to navigate these challenges. The fund's transition to primarily investing in Benchmark Oil Futures Contracts is a response to the market volatility experienced in 2020.

Comparison to Industry Standards

• USO's investment objective is to track the daily changes in the spot price of light, sweet crude oil, which is a common goal for many commodity-based ETFs and funds.
• The fund's use of futures contracts and OTC swaps is a standard practice in the commodity investment space.
• USO's management fee of 0.45% is within the range of fees charged by similar commodity-focused investment products.
• The fund's tracking error, measured by the difference between its NAV and the Benchmark Oil Futures Contract, is a key metric for evaluating its performance against its stated objective.
• The report highlights the impact of contango and backwardation on the fund's returns, which is a common challenge for commodity futures-based investments.
• The fund's risk management practices, including the use of margin and collateral, are consistent with industry standards for managing counterparty risk.

Legal Proceedings

• USO and USCF were named as defendants in an action filed by Optimum Strategies Fund I, LP, which was dismissed on March 15, 2023.
• USCF and USO resolved investigations with the SEC and CFTC, paying civil monetary penalties totaling $2.5 million.
• USCF, USO, and certain individuals are defendants in a consolidated class action lawsuit, In re: United States Oil Fund, LP Securities Litigation.
• USCF, USO, and certain individuals are defendants in a derivative action, In re United States Oil Fund, LP Derivative Litigation.

Related Party Transactions

• USCF receives a management fee of 0.45% per annum of average daily total net assets.
• USCF pays the fees of the Marketing Agent and BNY Mellon for their services.
• USO and the Related Public Funds pay a licensing fee to the NYMEX.

Stakeholder Impact

• Shareholders are impacted by the fund's performance, which is subject to market volatility and other risks.
• Authorized Participants are impacted by the fund's creation and redemption processes.
• Employees of USCF are impacted by the fund's operations and regulatory compliance.
• Counterparties in OTC swap transactions are impacted by the fund's credit risk management practices.

Next Steps

• USO will continue to monitor market conditions and adjust its investment strategy as needed.
• The fund will continue to comply with regulatory requirements and risk mitigation measures.
• USO will continue to provide monthly account statements to its shareholders.

Key Dates

Keywords

Crude Oil, Futures Contracts, Commodity Pool, WTI, NYMEX, OTC Swaps, Net Asset Value, USO, Oil Prices, Contango, Backwardation