10-Q: United States Oil Fund Reports Strong Q1 Performance Amidst Volatile Crude Oil Market

The United States Oil Fund (USO) reported a significant increase in net asset value during the first quarter of 2024, driven by gains in crude oil futures contracts.

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 first quarter of 2024, USO's net income was $240.3 million, or $12.02 per limited partner share, compared to a net loss of $69.7 million in the same period last year.
• The fund's net asset value (NAV) per share increased from $66.91 at the end of 2023 to $78.93 as of March 31, 2024.
• USO primarily invests in futures contracts for crude oil and other petroleum-based fuels, and may also invest in other oil-related investments such as OTC swaps.
• The fund transitioned its investment portfolio to primarily invest in Benchmark Oil Futures Contracts, consistent with its strategy prior to the Spring of 2020.
• USO's average daily total net assets were $1.42 billion for the quarter, compared to $1.69 billion for the same period in 2023.
• The fund's total return for the quarter was 17.96%, compared to a loss of 5.11% in the first quarter of 2023.
• USO's management fee is 0.45% per annum of average daily total net assets.
• The fund's brokerage commissions were $394,046 for the quarter, an increase from $175,146 in the same period last year.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong financial results and a return to the fund's core investment strategy. However, it also acknowledges ongoing market risks and regulatory challenges, which temper the overall sentiment.

Positives

• USO experienced a substantial increase in net income and NAV per share during the quarter.
• The fund's total return significantly outperformed the same period last year.
• USO successfully transitioned its investment portfolio back to its pre-2020 strategy of primarily investing in Benchmark Oil Futures Contracts.
• The fund's income from interest and dividends increased due to higher interest rates.

Negatives

• USO's average daily total net assets decreased compared to the same period last year.
• Brokerage commissions increased due to higher trading volume, which increased expenses.
• The fund is subject to market risks associated with crude oil price volatility and counterparty risks with OTC swaps.

Risks

• USO is exposed to market risk due to fluctuations in crude oil prices.
• The fund faces counterparty risk with OTC swaps, where the counterparty may fail to meet its obligations.
• Regulatory changes, such as position limits and margin requirements, could impact USO's ability to meet its investment objective.
• Geopolitical risks, including the Russia-Ukraine war and Middle East conflict, could lead to supply disruptions and increased volatility.
• Infectious disease outbreaks, like COVID-19, could negatively affect USO and the valuation of its investments.
• Rising interest rates could negatively impact the value of fixed income securities held by USO.

Future Outlook

USO will continue to invest primarily in Benchmark Oil Futures Contracts, but may also invest in other Oil Futures Contracts and Other Oil-Related Investments if market conditions, regulatory requirements, or risk mitigation measures require it. The fund will also monitor and adjust its portfolio in response to market volatility and geopolitical events.

Management Comments

• USCF seeks to manage USOs portfolio such that changes in its average daily per share NAV, on a percentage basis, closely track the daily changes in the average price of the Benchmark Oil Futures Contract, also on a percentage basis.
• USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Oil Futures Contracts and Other Oil-Related Investments.
• USCF anticipates that interest rates may continue to stagnate over the near future.
• It is anticipated that fees and expenses paid by USO may continue to be lower than interest earned by USO.

Industry Context

The report reflects the ongoing volatility in the crude oil market, influenced by factors such as geopolitical tensions, supply chain disruptions, and global demand fluctuations. USO's performance is closely tied to these market dynamics, and its strategy of primarily investing in Benchmark Oil Futures Contracts is a response to these conditions. The fund's ability to track its benchmark is also affected by market conditions, regulatory limits, and risk mitigation measures imposed by its FCMs.

Comparison to Industry Standards

• USO's performance is benchmarked against the daily changes in the price of the Benchmark Oil Futures Contract, aiming to stay within a range of 90% to 110% of the benchmark's average daily change over 30-day periods.
• The fund's total return of 17.96% for the quarter indicates a strong performance compared to the previous year, where it experienced a loss of 5.11%.
• While USO aims to track the benchmark, factors like expenses, interest income, and execution prices can cause deviations.
• Other similar commodity-based ETFs and funds may have different tracking methodologies and expense ratios, which could lead to varying performance results.
• The report notes that USO's performance is impacted by contango and backwardation in the futures market, which is a common factor for funds investing in commodity futures.

Legal Proceedings

• USO and USCF were named as defendants in an action filed by Optimum Strategies Fund I, LP, which was dismissed with prejudice.
• USCF and USO resolved matters with the SEC and CFTC related to Wells Notices issued in 2020, resulting in cease-and-desist orders and 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 being vigorously contested.
• USO is also involved in a derivative action, In re United States Oil Fund, LP Derivative Litigation, which is stayed pending the outcome of the class action lawsuit.

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 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 experienced a significant increase in the value of their investment during the quarter.
• The fund's performance is subject to market risks, which could impact shareholder returns.
• Authorized Participants can create and redeem shares in blocks of 100,000.
• The fund's expenses, including management fees and brokerage commissions, are borne by shareholders.

Next Steps

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

Key Dates

Keywords

crude oil, futures contracts, oil prices, commodity pool, net asset value, OTC swaps, USO, investment, energy, benchmark oil futures contract