Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
USO > SEC Filings for USO > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for UNITED STATES OIL FUND, LP

Form 10-K for UNITED STATES OIL FUND, LP


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the financial statements and the notes thereto of USO included elsewhere in this annual report on Form 10-K.

Forward-Looking Information

This annual report on Form 10-K, including this "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding the plans and objectives of management for future operations. This information may involve known and unknown risks, uncertainties and other factors that may cause USO's actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe USO's future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project," the negative of these words, other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and USO cannot assure investors that the projections included in these forward-looking statements will come to pass. USO's actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

USO has based the forward-looking statements included in this annual report on Form 10-K on information available to it on the date of this annual report on Form 10-K, and USO assumes no obligation to update any such forward-looking statements. Although USO undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, investors are advised to consult any additional disclosures that USO may make directly to them or through reports that USO in the future files with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Introduction

USO, a Delaware limited partnership, is a commodity pool that issues shares that may be purchased and sold on the NYSE Arca. The investment objective of USO is for the daily changes in percentage terms of its shares' per share NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in the price of the futures contract for light, sweet crude oil traded on the NYMEX that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire (the "Benchmark Oil Futures Contract"), less USO's expenses. "Near month contract" means the next contract traded on the NYMEX due to expire. "Next month contract" means the first contract traded on the NYMEX due to expire after the near month contract. It is not the intent of USO to be operated in a fashion such that the per share NAV will equal, in dollar terms, the spot price of light, sweet crude oil or any particular futures contract based on light, sweet crude oil. It is not the intent of USO to be operated in a fashion such that its per share NAV will reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one day. 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.

USO seeks to achieve its investment objective by investing in a combination of Oil Futures Contracts and Other Oil-Related Investments such that daily changes in its per share NAV, measured in percentage terms, will closely track the daily changes in the price of the Benchmark Oil Futures Contract, also measured in percentage terms. USCF believes the daily changes in the price of the Benchmark Oil Futures Contract have historically exhibited a close correlation with the daily changes in the spot price of light, sweet crude oil.

On any valuation day, the Benchmark Oil Futures Contract is the near month futures contract for light, sweet crude oil traded on the NYMEX unless the near month contract is within two weeks of expiration in which case the Benchmark Oil Futures Contract becomes, over a 4-day period, the next month contract for light, sweet crude oil traded on the NYMEX.

The regulation of commodity interest trading in the United States and other countries is an evolving area of the law. The various statements made in this summary are subject to modification by legislative action and changes in the rules and regulations of the CFTC, the NFA, the futures exchanges, clearing organizations and other regulatory bodies. Pending final resolution of all applicable regulatory requirements, some examples of how new rules and regulations could impact USO are discussed in "Item 1. Business" and "Item 1A. Risk Factors" in this annual report on Form 10-K.

Price Movements

Crude oil futures prices were volatile during the year ended December 31, 2013 and exhibited moderate daily swings along with an uneven upward trend during the year. The price of the Benchmark Oil Futures Contract started the year at $91.82 per barrel. The low of the year was on April 17, 2013, when the price dropped to $86.97 per barrel. The high of the year was September 6, 2013, when the price reached $110.53 per barrel. The year ended with the Benchmark Oil Futures Contract at $98.42 per barrel, up approximately 7.19% over the year. USO's per share NAV began the year at $33.42 and ended the year at $35.23 on December 31, 2013, an increase of approximately 5.42% over the year. USO's per share NAV reached its high for the year on September 6, 2013 at $39.48 and reached its low for the year on April 17, 2013 at $31.00. The Benchmark Oil Futures Contract prices listed above began with the February 2013 contracts and ended with the February 2014 contracts. The increase of approximately 7.19% on the Benchmark Oil Futures Contract listed above is a hypothetical return only and could not actually be achieved by an investor holding Oil Futures Contracts. An investment in Oil Futures Contracts would need to be rolled forward during the time period described in order to achieve such a result. Furthermore, the change in the nominal price of these differing crude Oil Futures Contracts, measured from the start of the year to the end of the year, does not represent the actual benchmark results that USO seeks to track, which are more fully described below, in the section titled "Tracking USO's Benchmark."

During the year ended December 31, 2013, crude oil moved predominantly into a mild state of backwardation, meaning that the price of the near month crude Oil Futures Contract was greater than the price of the next month crude Oil Futures Contract, or contracts further away from expiration. Crude oil inventories, which reached historic levels in January 2009 and February 2009 and which appeared to be the primary cause of the steep level of contango, began to drop in March 2009 and continued to drop for the remainder of 2010 and the beginning of 2011. During the year ended December 31, 2012, crude oil inventories began to climb higher, which contributed to the crude oil futures market remaining in contango through the end of December 2012. During the year ended December 31, 2013, crude oil inventories, particularly those in Cushing, Oklahoma, began to draw down from present levels, which contributed to the crude oil futures market moving into backwardation through the end of December 2013. For a discussion of the impact of backwardation and contango on total returns, see "Term Structure of Crude Oil Prices and the Impact on Total Returns" below.

Valuation of Oil Futures Contracts and the Computation of the Per Share NAV

The per share NAV of USO's shares is calculated once each NYSE Arca trading day. The per share NAV for a particular trading day is released after 4:00 p.m. New York time. Trading during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. The Administrator uses the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time) for the contracts held on the NYMEX, but calculates or determines the value of all other USO investments, including ICE Futures contracts or other futures contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York time.

Results of Operations and the Crude Oil Market

Results of Operations. On April 10, 2006, USO listed its shares on the AMEX under the ticker symbol "USO." On that day, USO established its initial offering price at $67.39 per share and issued 200,000 shares to the initial Authorized Purchaser, KV Execution Services LLC, in exchange for $13,479,000 in cash. As a result of the acquisition of the AMEX by NYSE Euronext, USO's shares no longer trade on the AMEX and commenced trading on the NYSE Arca on November 25, 2008.

Since its initial offering of 17,000,000 shares, USO has registered seven subsequent offerings of its shares: 30,000,000 shares which were registered with the SEC on October 18, 2006, 50,000,000 shares which were registered with the SEC on January 30, 2007, 30,000,000 shares which were registered with the SEC on December 4, 2007, 100,000,000 shares which were registered with the SEC on February 7, 2008, 100,000,000 shares which were registered with the SEC on September 29, 2008, 300,000,000 shares which were registered with the SEC on January 16, 2009 and 1,000,000,000 shares which were registered with the SEC on June 29, 2009. Shares offered by USO in the subsequent offerings were sold by it for cash at the shares' per share NAV as described in the applicable prospectus. As of December 31, 2013, USO had issued 923,900,000 shares, 16,300,000 of which were outstanding. As of December 31, 2013, there were 703,100,000 shares registered but not yet issued.

More shares may have been issued by USO than are outstanding due to the redemption of shares. Unlike funds that are registered under the 1940 Act, shares that have been redeemed by USO cannot be resold by USO. As a result, USO contemplates that additional offerings of its shares will be registered with the SEC in the future in anticipation of additional issuances and redemptions.

As of December 31, 2013, USO had the following authorized purchasers: ABN AMRO, Banc of America Securities LLC, Citigroup Global Markets Inc., Credit Suisse USA, Deutsche Bank Securities Inc., FIMAT USA LLC, Goldman Sachs & Company, Goldman Sachs Execution & Clearing LP, JP Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Company Inc., Nomura Securities International Inc., Pru Global Securities, LLC, RBC Capital Markets Corporation, SG Americas Securities LLC, Timber Hill LLC, Virtu Financial Capital Markets, Virtu Financial DB LLC and Wedbush Securities Inc.

For the Year Ended December 31, 2013 Compared to the Years Ended December 31, 2012 and 2011

As of December 31, 2013, the total unrealized gain on Oil Futures Contracts owned or held on that day was $2,724,970 and USO established cash deposits and investments in Treasuries and money market funds that were equal to $591,682,659. USO held 96.48% of its cash assets in overnight deposits and investments in Treasuries and money market funds at the Custodian, while 3.52% of the cash balance was held as investments in Treasuries and margin deposits for the Oil Futures Contracts purchased at the FCM. The ending per share NAV on December 31, 2013 was $35.23.

By comparison, as of December 31, 2012, the total unrealized gain on Oil Futures Contracts owned or held on that day was $67,180,420 and USO established cash deposits and investments in Treasuries and money market funds that were equal to $1,173,767,770. USO held 86.81% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 13.19% of the cash balance was held as investments in Treasuries and margin deposits for the Oil Futures Contracts purchased at the FCM. The decrease in cash assets in overnight deposits and investments in Treasuries and money market funds for December 31, 2013, as compared to December 31, 2012, was the result of USO's smaller size as of December 31, 2013 as measured by total net assets. The ending per share NAV on December 31, 2012 was $33.42. The increase in the per share NAV for December 31, 2013, as compared to December 31, 2012 was a result of higher prices for crude oil and the related increase in the value of the Oil Futures Contracts in which USO had invested between the year ended December 31, 2012 and the year ended December 31, 2013.

By comparison, as of December 31, 2011, the total unrealized loss on Oil Futures Contracts owned or held on that day was $6,472,310 and USO established cash deposits and investments in Treasuries and money market funds that were equal to $1,142,274,720. USO held 73.42% of its cash assets in overnight deposits and investments in money market funds at the Custodian, while 26.58% of the cash balance was held as investments in Treasuries and margin deposits for the Oil Futures Contracts purchased at the FCM. The increase in cash assets in overnight deposits and investments in Treasuries and money market funds for December 31, 2012, as compared to December 31, 2011, was the result of USO's larger size as of December 31, 2012 as measured by total net assets. The ending per share NAV on December 31, 2011 was $38.07. The decrease in the per share NAV for December 31, 2012, as compared to December 31, 2011 was primarily due to Oil Futures Contracts being in a state of contango between the year ended December 31, 2011 and the year ended December 31, 2012.

Portfolio Expenses. USO's expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management fee that USO pays to USCF is calculated as a percentage of the total net assets of USO. USO pays USCF a management fee of 0.45% of its average net assets. The fee is accrued daily and paid monthly.

During the year ended December 31, 2013, the average daily total net assets of USO were $884,864,542. The management fee incurred by USO during the year amounted to $3,981,890. By comparison, during the year ended December 31, 2012, the average daily total net assets of USO were $1,278,210,933. The management fee paid by USO during the year amounted to $5,751,949. By comparison, during the year ended December 31, 2011, the average daily total net assets of USO were $1,502,467,409. The management fee paid by USO during the year amounted to $6,761,103.

In addition to the management fee, USO pays all brokerage fees and other expenses, including tax reporting costs, licensing fees for the use of intellectual property, ongoing registration or other fees paid to the SEC, FINRA and any other regulatory agency in connection with offers and sales of its shares subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The total of these fees and expenses for the year ended December 31, 2013 was $2,745,175, as compared to $3,203,087 for the year ended December 31, 2012 and $3,042,965 for the year ended December 31, 2011. The decrease in total expenses excluding management fees for the year ended December 31, 2013, as compared to the year ended December 31, 2012, was primarily due to USO's smaller size during the year ended December 31, 2013 as measured by total net assets. The increase in total expenses excluding management fees for the year ended December 31, 2012, as compared to the year ended December 31, 2011, was primarily due an increased amortization rate for registration expenses and tax reporting costs during the year ended December 31, 2012. For the year ended December 31, 2013, USO incurred $362,265 in ongoing registration fees and other expenses relating to the registration and offering of additional shares. By comparison, for the years ended December 31, 2012 and 2011, USO incurred $176,971 and $47,450, respectively, in ongoing registration fees and other expenses relating to the registration and offering of additional shares. The increase in registration fees and expenses incurred by USO for the year ended December 31, 2013, as compared to the year ended December 31, 2012, was primarily due to an increased amortization schedule during the year ended December 31, 2013 as compared to the year ended December 31, 2012. The increase in registration fees and expenses incurred by USO for the year ended December 31, 2012, as compared to the year ended December 31, 2011 was primarily due to a higher amortization rate of registration fees and expenses for the year ended December 31, 2012.

USO is responsible for paying its portion of the directors' and officers' liability insurance of USO and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of USO and the Related Public Funds organized as limited partnerships and, as of July 8, 2011, the Related Public Funds organized as a series of a Delaware statutory trust. USO shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses for the year ended December 31, 2013 amounted to a total of $555,465 for USO and the Related Public Funds. USO's portion of such fees and expenses for the year ended December 31, 2013 was $195,352. By comparison, for the year ended December 31, 2012, these fees and expenses amounted to a total of $540,586 for USO and the Related Public Funds. USO's portion of such fees and expenses for the year ended December 31, 2012 was $235,481. The decrease in directors' fees and expenses for the year ended December 31, 2013, as compared to the year ended December 31, 2012 was primarily due to a decrease of USO's pro rata share of the Related Public Funds assets. By comparison, for the year ended December 31, 2011, these fees and expenses amounted to a total of $607,582 for USO and the Related Public Funds. USO's portion of such fees and expenses for the year ended December 31, 2011 was $229,954. The decrease in directors' fees and expenses for the year ended December 31, 2012, as compared to the year ended December 31, 2011, was primarily due to the non-incurrence of the independent directors' deferred compensation expense for the year ended December 31, 2012, which was amortized during the years ended December 31, 2011 and 2010. Effective as of April 1, 2010, USO became responsible for paying its portion of any payments that may become due to the independent directors pursuant to the deferred compensation agreements entered into between the independent directors, USCF, USO and the Related Public Funds, except for USCI, CPER, USAG and USMI.

USO also incurs commissions to brokers for the purchase and sale of Oil Futures Contracts, Other Oil-Related Investments or Treasuries. During the year ended December 31, 2013, total commissions accrued to brokers amounted to $965,576. Of this amount, approximately $698,519, or 72.34%, was a result of rebalancing costs and approximately $267,057, or 27.66%, was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2012, total commissions accrued to brokers amounted to $1,298,827. Of this amount, approximately $1,061,305, or 81.71%, was a result of rebalancing costs and approximately $237,522, or 18.29%, was the result of trades necessitated by creation and redemption activity. By comparison, during the year ended December 31, 2011, total commissions accrued to brokers amounted to $1,529,433. Of this amount, approximately $1,148,618, or 75.10%, was a result of rebalancing costs and approximately $380,815, or 24.90%, was the result of trades necessitated by creation and redemption activity. The decrease in the total commissions accrued to brokers for the year ended December 31, 2013 as compared to the year ended December 31, 2012, was primarily a result of the decrease in USO's average total net assets during the year ended December 31, 2013 as compared to the year ended December 31, 2012. The decrease in the total commissions accrued to brokers for the year ended December 31, 2012, as compared to the year ended December 31, 2011, was primarily a result of the decrease in USO's average total net assets during the year ended December 31, 2012. As an annualized percentage of average daily total net assets, the figure for the year ended December 31, 2013 represents approximately 0.11% of average daily total net assets. By comparison, the figure for the year ended December 31, 2012 represented approximately 0.10% of average daily total net assets and the figure for the year ended December 31, 2011 represented approximately 0.10% of average daily total net assets. However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.

The fees and expenses associated with USO's audit expenses and tax accounting and reporting requirements are paid by USO. These costs are estimated to be $1,000,000 for the year ended December 31, 2013.

Dividend and Interest Income. USO seeks to invest its assets such that it holds Oil Futures Contracts and Other Oil-Related Investments in an amount equal to the total net assets of its portfolio. Typically, such investments do not require USO to pay the full amount of the contract value at the time of purchase, but rather require USO to post an amount as a margin deposit against the eventual settlement of the contract. As a result, USO retains an amount that is approximately equal to its total net assets, which USO invests in Treasuries, cash and/or cash equivalents. This includes both the amount on deposit with the FCM as margin and in Treasuries, as well as unrestricted cash and cash equivalents held with USO's Custodian. The Treasuries, cash and/or cash equivalents earn income that accrues on a daily basis. For the year ended December 31, 2013, USO earned $296,411 in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on USO's average daily total net assets, this was equivalent to an annualized yield of approximately 0.03%. USO purchased Treasuries during the year ended December 31, 2013 and also held cash and/or cash equivalents during this time period. By comparison, for the years ended December 31, 2012 and 2011, USO earned $397,374 and $265,966, respectively, in dividend and interest income on such Treasuries, cash and/or cash equivalents. Based on USO's average daily total net assets, this was equivalent to an annualized yield of approximately 0.03% and 0.02%, respectively. USO purchased Treasuries during the years ended December 31, 2012 and 2011 and also held cash and/or cash equivalents during these time periods. Interest rates on short-term investments held by USO, including cash, cash equivalents and Treasuries, were similar during the year ended December 31, 2013 compared to the year ended December 31, 2012 and similar compared to the year ended December 31, 2011. As a result, the amount of income earned by USO as a percentage of average daily total net assets was similar during the year ended December 31, 2013 as compared to the year ended December 31, 2012 and was similar as compared to the year ended December 31, 2011.

For the Three Months Ended December 31, 2013 Compared to the Three Months Ended December 31, 2012 and 2011

Portfolio Expenses. During the three months ended December 31, 2013, the average daily total net assets of USO were $781,038,536. The management fee incurred by USO during the period amounted to $885,890.

By comparison, during the three months ended December 31, 2012, the average daily total net assets of USO were $1,299,599,789. The management fee paid by USO during the period amounted to $1,470,039. By comparison, during the three months ended December 31, 2011, the average daily total net assets of USO were $1,189,180,447. The management fee paid by USO during the period amounted to $1,348,823.

In addition to the management fee, USO pays all brokerage fees and other expenses, including tax reporting costs, licensing fees for the use of intellectual property, ongoing registration or other fees paid to the SEC, FINRA and any other regulatory agency in connection with offers and sales of its shares subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith. The total of these fees and expenses for the three months ended December 31, 2013 was $531,111, as compared to $845,069 for the three months ended December 31, 2012 and $631,286 for the three months ended December 31, 2011. The decrease in total expenses excluding management fees for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012, was primarily due USO's smaller size during the three months ended December 31, 2013 as measured by total net assets. The increase in total expenses excluding management fees for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, was primarily due to an increased amortization rate for registration expenses during the three months ended December 31, 2012. For the three months ended December 31, 2013, USO incurred $19,612 in ongoing registration fees and other expenses relating to the registration and offering of additional shares. By comparison, for the three months ended December 31, 2012 and 2011, USO incurred $115,473 and $11,960, respectively, in ongoing registration fees and other expenses relating to the registration and offering of additional shares. The decrease in registration fees and expenses incurred by USO for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012, was primarily due to a decreased amortization schedule during the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. The increase in registration fees and expenses incurred by USO for the three months ended December 31, 2012, as compared to the three months ended December 31, 2011, was primarily due to amortization of prepaid registration costs during the three months ended December 31, 2012.

USO is responsible for paying its portion of the directors' and officers' liability insurance of USO and the Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members of USO and the Related Public Funds organized as limited partnerships and, as of July 8, 2011, the Related Public Funds organized as a series of a Delaware statutory trust. USO shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each fund computed on a daily basis. These fees and expenses for the year ended December 31, 2013 amounted to a total of $555,465 for USO and the Related Public Funds. USO's portion of such fees and expenses for the year ended December 31, 2013 was $195,352.

USO also incurs commissions to brokers for the purchase and sale of Oil Futures Contracts, Other Oil-Related Investments or Treasuries. During the three months ended December 31, 2013, total commissions accrued to brokers amounted to $255,109. Of this amount, approximately $148,281, or 58.12%, was a result of rebalancing costs and approximately $106,829, or 41.88%, was the result of trades necessitated by creation and redemption activity. By comparison, during the three months ended December 31, 2012, total commissions accrued to brokers amounted to $338,321. Of this amount, approximately $296,128, or 87.53%, was a result of rebalancing costs and approximately $42,193, or 12.47%, was the result of trades necessitated by creation and redemption activity. By comparison, during the three months ended December 31, 2011, total commissions accrued to brokers amounted to $332,407. Of this amount, approximately $230,297, or 69.28%, was a result of rebalancing costs and approximately $102,110, or 30.72%, was the result of trades necessitated by creation and redemption activity. The decrease in the total commissions accrued to brokers for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012, was primarily . . .

  Add USO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for USO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.