10-K: United States Oil Fund (USO) Reports 2024 Annual Results, Navigating Volatile Oil Markets

United States Oil Fund (USO) releases its 10-K filing for the year ended December 31, 2024, detailing its investment strategy, financial performance, and risk factors amidst fluctuating oil prices and regulatory changes.

Summary

• United States Oil Fund, LP (USO) is a commodity pool aiming to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil.
• USO primarily invests in light, sweet crude oil futures contracts and, to a lesser extent, other oil-related investments.
• For the year ended December 31, 2024, USO's per share NAV increased by approximately 12.76%, closing at $75.45.
• USO's investment strategy involves rolling its positions in Oil Interests each month over a ten-day period.
• USO's ability to track its benchmark is affected by factors such as market volatility, regulatory limits, and risk mitigation measures.
• USO is subject to accountability levels and position limits set by exchanges like the NYMEX and ICE Futures.
• 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 USO to do so in order to meet its investment objective.
• USO is exposed to risks including market risk, correlation risk, and credit risk.
• USCF, the general partner of USO, manages the fund and is responsible for its operations.
• USO does not expect to make cash distributions and intends to reinvest any realized gains.

Sentiment

Score: 6

Explanation: The document presents a balanced view, highlighting both positive performance and various risks and challenges. The sentiment is neutral, focusing on factual information and disclosures.

Positives

• USO's per share NAV increased by approximately 12.76% for the year ended December 31, 2024, closing at $75.45.
• USO has agreements with multiple FCMs, including RBC Capital Markets LLC, Marex Capital Markets Inc., Macquarie Futures USA LLC, and ADM Investor Services, Inc.
• USO has ISDA Master Agreements with Macquarie Bank Limited, Socit Gnrale S.A., and The Bank of Nova Scotia to serve as OTC swaps counterparties.

Negatives

• USO exceeded accountability levels of the NYMEX during the year ended December 31, 2024, including when it held a maximum of 18,287 Crude Oil Futures CL contracts, on the NYMEX, exceeding the any one month limit.
• USO is subject to the Position Limits Rule, which could inhibit its ability to invest in 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.

Risks

• Fluctuations in the prices of Oil Futures Contracts and Other Oil-Related Investments could materially adversely affect an investment in USOs shares.
• Infectious disease outbreaks like COVID-19 could negatively affect the valuation and performance of USOs investments.
• 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 entered into by USO.
• 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 could result in a substantial loss of USOs assets and could impair USO in its ability to execute trades.
• The failure or bankruptcy of 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, primarily investing in the Benchmark Oil Futures Contract, but may invest in other Oil Futures Contracts and Other Oil-Related Investments if market conditions, regulatory requirements, risk mitigation measures, liquidity requirements, or other factors require it to do so.

Industry Context

The announcement reflects the challenges and strategies of commodity-linked investment products in navigating volatile energy markets and evolving regulatory landscapes. The fund's performance is directly tied to the crude oil market, making it susceptible to global economic conditions, geopolitical events, and supply-demand dynamics.

Comparison to Industry Standards

• Comparable ETFs like ProShares Ultra Bloomberg Crude Oil (UCO) and Invesco DB Oil Fund (DBO) also aim to track crude oil prices but may use different investment strategies or benchmarks.
• USO's expense ratio of 0.45% is within the typical range for commodity ETFs, but investors should compare this to similar funds to assess cost-effectiveness.
• Tracking error is a key metric for evaluating commodity ETFs, and USO's historical tracking error should be compared to its peers to determine its effectiveness in replicating the benchmark.
• The fund's use of OTC swaps and other derivatives is common in the commodity ETF space, but investors should understand the associated risks and counterparty exposures.

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 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

• USO pays fees to USCF pursuant to the LP Agreement under which it is obligated to pay USCF an annualized fee of 0.45% of average daily total net assets.
• USCF pays the fees of the Marketing Agent as well as BNY Mellons fees for performing administrative, custodial, and transfer agency services.
• USO and the Related Public Funds, other than BNO, USCI and CPER, pay a licensing fee to the NYMEX.
• USO also pays the fees and expenses associated with its tax accounting and reporting requirements.
• USO also pays a portion of the fees and expenses of the independent directors of USCF.

Stakeholder Impact

• Shareholders are exposed to the risks and rewards of investing in crude oil futures contracts.
• Authorized Participants are responsible for the creation and redemption of shares.
• USCF manages the fund and is responsible for its operations.
• FCMs provide services to USO in connection with the purchase and sale of Oil Futures Contracts.
• Counterparties to OTC swaps are exposed to credit risk.

Key Dates