(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “accelerated“large accelerated filer," "accelerated filer” and large accelerated filer”"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one.)
Large accelerated filer ¨ Accelerated filer x¨ Non-accelerated filer x¨ Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).
¨ Yes x No
The aggregate market value of the registrant’s common stockunits held by non-affiliates of the registrant as of June 30, 20062007 was: $265,126,000.$673,000,000.
The registrant had 18,800,0004,100,000 outstanding units as of March 26, 2007.12, 2008.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Business. |
What is USOF?
United States Oil Fund, LP ("USOF") is a Delaware limited partnership organized on May 12, 2005. USOF maintains its main business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California 94502. USOF is a commodity pool.pool that issues limited partnership interests ("units") traded on the American Stock Exchange (the "AMEX"). It operates pursuant to the terms of the ThirdFourth Amended and Restated Agreement of Limited Partnership dated as of January 19,November 13, 2007 ("LP(the "LP Agreement"), which grants full management control to the General Partner.
Who is the General Partner?
On September 8, 2006, the General Partner formed the United States Natural Gas Fund, LP ("USNG'USNG"), another limited partnership that will beis a commodity pool and intends to issueissues units to be traded on the American Stock Exchange.AMEX. The investment objective of USNG is for the changes in percentage terms of the unit’sunits' net asset value ("NAV") to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the “Benchmark Futures Contract,”changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange (the "NYMEX"), less USNG’s expenses. USNG began trading on April 18, 2007. The General Partner is the general partner of USNG and will beis responsible for the management of the USNG. Wainwright will bewas the initial limited partner of USNG. Investors in USOF who wish to receive additional information concerning the United States Natural Gas Fund, LP, may do so by calling 1-800-920-0259, or going on-line to www.unitedstatesnaturalgasfund.com.
On June 27, 2007, the General Partner formed the United States 12 Month Oil Fund, LP (“US12OF”), also a limited partnership that is a commodity pool and issues units traded on the AMEX. The investment objective of US12OF is for changes in percentage terms of its units’ NAV to reflect the changes in percentage terms of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the average of the prices of 12 futures contracts on crude oil traded on the NYMEX, less US12OF's expenses. US12OF began trading on December 6, 2007. The General Partner is the general partner of US12OF and is responsible for the management of US12OF. Wainwright was the initial limited partner of US12OF. Investors in USOF who wish to receive additional information concerning the United States 12 Month Oil Fund, LP, may do so by calling 1-800-920-0259, or going on-line to www.unitedstates12monthoilfund.com.
On April 12, 2007, the General Partner formed the United States Gasoline Fund, LP (“USG”), also a limited partnership that is a commodity pool and issues units traded on the AMEX. The investment objective of USG is for the changes in percentage terms of its units’ NAV to reflect the changes in percentage terms of the price of unleaded gasoline delivered to the New York harbor, as measured by the changes in the price of the futures contract on gasoline traded on the NYMEX, less USG's expenses. USG began trading on February 26, 2008. The General Partner is the general partner of USG and is responsible for the management of USG. Wainwright was the initial limited partner of USG. Investors in USOF who wish to receive additional information concerning the United States Gasoline Fund, LP, may do so by calling 1-800-920-0259, or going on-line to www.unitedstatesgasolinefund.com.
The General Partner is currently in the process of registering two other exchange traded security funds, the United States Heating Oil Fund, LP (“USHO) and the United States 12 Month Natural Gas Fund, LP (“US12NG”). USHO will be a publicly traded limited partnership which seeks to have the changes in percentage terms of its units’ NAV track the changes in percentage terms of the price of heating oil (also known as No. 2 fuel) delivered to the New York harbor. US12NG will be a publicly traded limited partnership which will seek to have the changes in percentage terms of its units’ NAV reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the average of the prices of 12 futures contracts on natural gas traded on the NYMEX.
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The General Partner is required to evaluate the credit risk for USOF to the futures commission merchant, oversee the purchase and sale of USOF’s units by certain authorized purchasers ("Authorized Purchasers,Purchasers"), review daily positions and margin requirements of USOF and manage USOF’s investments. The General Partner also pays the fees of ALPS Distributors, Inc. ("Marketing(the "Marketing Agent"), Brown Brothers Harriman & Co. ("Administrator"), and Brown Brothers Harriman & Co. ("Custodian"BBH&Co.")., which acts as the administrator (the "Administrator") and the custodian (the "Custodian") for USOF.
Limited partners have no right to elect the General Partner on an annual or any other continuing basis. If the General Partner voluntarily withdraws, however, the holders of a majority of ourUSOF's outstanding limited partner interestsunits (excluding for purposes of such determination interestsunits owned, if any, by the withdrawing General Partner and its affiliates) may elect its successor. The General Partner may not be removed as general partner except upon approval by the affirmative vote of the holders of at least 66 and 2/3 percent of ourUSOF's outstanding limited partnership interestsunits (excluding limited partnership interestsunits owned, if any, by the General Partner and its affiliates), subject to the satisfaction of certain conditions set forth in the LP Agreement.
The business and affairs of ourthe General Partner are managed by a board of directors, which is comprised of four management directors, whosome of whom are also its executive officers (“Management(the “Management Directors”) and three independent directors who meet the independent director requirements established by the American Stock ExchangeAMEX and the Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, the Management Directors have the authority to manage the General Partner pursuant to its Third Amended and Restated Limited Liability Company Agreement. The board of directors of the General Partner has an audit committee which is made up of the three independent directors (Peter M. Robinson, Gordon L. Ellis and Malcolm R. Fobes III). The audit committee is governed by an audit committee charter that is posted on USOF’s website.website, http://www.unitedstatesoilfund.com. Mr. Fobes and Mr. Ellis meet the financial sophistication requirements of the American Stock ExchangeAMEX and the audit committee charter. Through its Management Directors, the General Partner manages the day-to-day operations of USOF.
How Does USOF Operate?
The net assets of USOF consist primarily of investments in futures contracts for West Texas Intermediate ("WTI") light, sweet crude oil, but may also consist of other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the New York Mercantile Exchange,NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Oil Futures Contracts”). USOF may also invest in other oil-related investments such as cash-settled options on Oil Futures Contracts, forward contracts for oil, and over-the-counter transactions that are based on the price of crude oil, and other petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing (collectively, “Other Oil Interests”). For convenience and unless otherwise specified, Oil Futures Contracts and Other Oil Interests collectively are referred to as “oil interests” in this annual report on Form 10-K.
USOF invests in oil interests to the fullest extent possible without being leveraged or unable to satisfy its current or potential margin or collateral obligations with respect to its investments in Oil Futures Contracts and Other Oil Interests. In pursuing this objective, the primary focus of the General Partner is the investment in Oil Futures Contracts and the management of its investments in short-term obligations of the United States of two years or less (“Treasuries”), cash andand/or cash equivalents for margining purposes and as collateral.
The investment objective of USOF is forto have the changes in percentage terms of the units’ net asset value ("NAV") toNAV reflect the changes in percentage terms of the spot price of WTI light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract on WTI light, sweet crude oil as traded on the New York Mercantile ExchangeNYMEX that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case the futures contract will be the next month contract to expire.expire, less USOF's expenses. It is not the intent of USOF to be operated in a fashion such that its 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.
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USOF seeks to achieve its investment objective by investing in a mix of Oil Futures Contracts and Other Oil Interests such that changes in USOF’s NAV will closely track the changes in the price of a specified Oil Futures Contract (“Benchmark(the “Benchmark Oil Futures Contract”). The General Partner believes changes in the price of the Benchmark Oil Futures Contract have historically exhibited a close correlation with the changes in the spot price of WTI light, sweet crude oil. On any valuation day (a valuation day is any day as of which USOF calculates its NAV), the Benchmark Oil Futures Contract is the near month contract for WTI light, sweet crude oil traded on the New York Mercantile ExchangeNYMEX unless the near month contract will expire within two weeks of the valuation day, in which case the Benchmark Oil Futures Contract is the next month contract for WTI light, sweet crude oil traded on the New York Mercantile Exchange.NYMEX.
| · | A is the average daily change in USOF’s NAV for any period of 30 successive valuation |
· | B is the average daily change in the price of the Benchmark Oil Futures Contract over the same period. |
The General Partner believes that market arbitrage opportunities cause daily changes in USOF’s unit price on the
.
An investment in the units allows both retail and institutional investors to easily gain exposure to the crude oil market in a cost-effective manner. TheIn addition, the units also provide additional means for diversifying an investor’s investments or hedging exposure to changes in oil prices.
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The Benchmark Oil Futures Contract will be changed or “rolled” from the near month contract to expire to the next month to expire over a four (4) day period.during one day.
These relationships are illustrated in the following diagram:
The Price of USOF’s Units Is Expected to Correlate Closely
With USOF’S NAV
USOF’s units are traded on the American Stock Exchange.AMEX. The price of
units fluctuates in response to USOF’s NAV and the supply and demand
pressures of the Exchange.AMEX. Because of certain arbitrage opportunities, the
General Partner believes the price of USOF’s units traded on the
Daily Changes in USOF’s NAV Are Expected to Correlate Closely With
Futures Contract
The General Partner endeavors to invest USOF’s assets as fully as
possible in Oil Futures Contracts and Other Oil Interests so that the
changes in the NAV closely correlate with changes in the price of the
Benchmark Oil Futures Contract.
Daily Changes in the Price of the Benchmark Oil Futures
Contract Are Expected to Correlate Closely With Daily Changes
in the Spot Price of WTI Light, Sweet Crude Oil
The General Partner believes that changes in the price of the Benchmark
Oil Futures Contract will closely correlate with changes in the cash or
spot price of WTI light, sweet crude oil
The General Partner employs a “neutral” investment strategy in order to track changes in the spot price of WTI light, sweet crude oilthe Benchmark Oil Futures Contract regardless of whether the price of oil goes up or goes down. USOF’s “neutral” investment strategy is designed to permit investors generally to purchase and sell USOF’s units for the purpose of investing indirectly in oil in a cost-effective manner, and/or to permit participants in the oil or other industries to hedge the risk of losses in their crude oil-related transactions. Accordingly, depending on the investment objective of an individual investor, the risks generally associated with investing in crude oil and/or the risks involved in hedging may exist. In addition, an investment in USOF involves the risk that the changes in the price of USOF’s units will not accurately track the changes in the Benchmark Oil Futures Contract.
USOF’s total portfolio composition is disclosed each business day that the American Stock ExchangeAMEX is open for trading on USOF’s website at http://www.unitedstatesoilfund.com and through the American Stock Exchange’sAMEX’s website at http://www.amex.com. The website disclosure of portfolio holdings is made daily and includes, as applicable, the name and value of each oil interest, the specific types of Other Oil Interests and characteristics of such Other Oil Interests, Treasuries, and amount of the cash andand/or cash equivalents held in USOF’s portfolio. USOF’s website is publicly accessible at no charge. USOF’s assets are held in segregation pursuant to the Commodity Exchange Act (the "CEA") and CFTC regulations.
The units issued by USOF may be purchased only by Authorized Purchasers only in blocks of 100,000 units called Creation Baskets. The amount of the purchase payment for a Creation Basket is equal to the aggregate NAV of units in the Creation Basket. Similarly, Authorized Purchasers may redeem units only in blocks of 100,000 units called Redemption Baskets. The amount of the redemption proceeds for a Redemption Basket is equal to the aggregate NAV of units in the Redemption Basket. The purchase price for Creation Baskets and the redemption price for Redemption Baskets is the actual NAV calculated at the end of the business day when notice for a purchase or redemption is received by USOF. The American Stock ExchangeAMEX publishes an approximate intra-day NAV intra-day based on the prior day’s NAV and the current price of Benchmark Oil Futures Contracts, but the basket price is determined based on the actual NAV at the end of the dayday.
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What is USOF’s Investment Strategy?
In managing USOF’s assets, the General Partner does not use a technical trading system that issues buy and sell orders. The General Partner instead employs a quantitative methodology whereby each time a Creation Basket is purchased,sold, the General Partner purchases oil interests, such as an Oil Futures Contract for WTI light, sweet crude oil traded on the New York Mercantile Exchange,NYMEX, that have an aggregate face amount that approximates the amount of Treasuries andand/or cash received upon the issuance of one or morethe Creation Baskets.Basket.
As an example, assume that a Creation Basket purchase order is placed on January 2, 2007. If one were to assume USOF’s closing NAV per unit for January 2 is $63.76, USOF would receive $6,376,000 for the Creation Basket ($63.76 NAV per unit times 100,000 units, and ignoring the Creation Basket fee of $1,000). Assume that the price of an Oil Futures Contract for WTI light, sweet crude oil on January 3, 2007 is $63,770. Because the price of oil reflected in these near month futures contracts on January 3, 2007 is different (in this case, higher) than the price of oil reflected in USOF’s NAV calculated as of January 2, 2007 (the day the corresponding Creation Basket was sold), USOF cannot invest the entire purchase amount corresponding to the Creation Basket in futures contracts — i.e., it can only invest in 99 Oil Futures Contracts with an aggregate value of $6,313,230 ($63,770 per contract times 99 contracts). Assuming a margin equal to 10% of the value of the Oil Futures Contracts which would require $631,323 in Treasuries to be deposited as margin with the futures commission merchant through which the contract was purchased, the remainder of the purchase price for the Creation Basket, $5,744,677, would remain invested in Treasuries, cash and Treasuriesand/or cash equivalents as determined by the General Partner from time to time based on factors such as potential calls for margin or anticipated redemptions.
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The specific Oil Futures Contracts purchased depend on various factors, including a judgment by the General Partner as to the appropriate diversification of USOF’s investments in futures contracts with respect to the month of expiration, and the prevailing price volatility of particular contracts. While the General Partner has made significant investments in New York Mercantile ExchangeNYMEX Oil Futures Contracts, as USOF reaches certain position limits on the New York Mercantile Exchange,NYMEX, or for other reasons, it has also and may continue to invest in Oil Futures Contracts traded on other exchanges or invest in otherOther Oil Interests such as contracts in the “over-the-counter” market.
The General Partner does not anticipate letting its Oil Futures Contracts expire and taking delivery of the underlying oil. Instead, the General Partner will close existing positions when it is determined appropriate to do so and reinvest the proceeds in new Oil Futures Contracts. Positions may also be closed out to meet orders for Redemption Baskets.
By remaining invested as fully as possible in Oil Futures Contracts or Other Oil Interests, the General Partner believes that the changes in percentage terms in USOF’s NAV will continue to closely track the changes in percentage terms in the prices of the futures contracts in which USOF invests. The General Partner believes that certain arbitrage opportunities result in the price of the units traded on the American Stock ExchangeAMEX closely tracking the NAV of USOF. Additionally, as discussed above, the General Partner has conducted research that indicates that oil futures contracts traded on the New York Mercantile ExchangeNYMEX have closely tracked the spot price of the underlying oil. Based on these expected interrelationships, the General Partner believes that the changes in the price of USOF’s units as traded on the American Stock ExchangeAMEX will continue to closely track the changes in the spot price of WTI light, sweet crude oil.
What are Oil Futures Contracts?
Oil Futures Contracts are agreements between two parties. One party agrees to buy oil from the other party at a later date at a price and quantity agreed-uponagreed upon when the contract is made. Oil Futures Contracts are traded on futures exchanges, including the New York Mercantile Exchange.NYMEX. For example, the Benchmark Oil Futures Contracts tradeContract is traded on the NYMEX in units of 1,000 barrels. The price of crude oil futures contracts traded on the New York Mercantile ExchangeNYMEX are priced by floor brokers and other exchange members both through an “open outcry” of offers to purchase or sell the contracts and through an electronic, screen-based system that determines the price by matching electronically offers to purchase and sell.
Certain typical and significant characteristics of Oil Futures Contracts are discussed below. Additional risks of investing in Oil Futures Contracts are included in “What are the Risk Factors Involved with an Investment in USOF?”
Impact of Accountability Levels, Position Limits and Price Fluctuation Limits. Oil Futures Contracts include typical and significant characteristics. Most significantly, the CFTC and U.S. designated contract markets such as the New York Mercantile ExchangeNYMEX have established accountability levels and position limits on the maximum net long or net short Oil Futures Contractsfutures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which an investment in USOF is not) may hold, own or control. The net position is the difference between an individual or firm’s open long contracts and open short contracts in any one commodity. In addition, most U.S. futures exchanges, such as the New York Mercantile Exchange,NYMEX, limit the price fluctuation for Oil Futures Contracts.
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The accountability levels for the Benchmark Oil Futures Contract and other Oil Futures Contracts traded on the New York Mercantile ExchangeNYMEX are not a fixed ceiling, but rather a threshold above which the New York Mercantile ExchangeNYMEX may exercise greater scrutiny and control over an investor’s positions. The current accountability level for investments at any one time in Oil Futures Contracts (including investments in the Benchmark Oil Futures Contract)Contract is 20,000 contracts. If USOF exceeds this accountability level for investments in the Benchmark Oil Futures Contracts,Contract, the New York Mercantile ExchangeNYMEX will monitor USOF’s exposure and ask for further information on USOF’s activities, including the total size of all positions, investment and trading strategy, and the extent of USOF’s liquidity resources. If deemed necessary by the New York Mercantile Exchange,NYMEX, it could also order USOF to reduce its position back to the accountability level. As of December 31, 2006,2007, USOF held 12,8714,754 Oil Futures Contracts traded on the New York Mercantile ExchangeNYMEX and 300 Oil Futures Contracts traded on the ICE Futures.
If the New York Mercantile ExchangeNYMEX orders USOF to reduce its position back to the accountability level, or to an accountability level that the New York Mercantile ExchangeNYMEX deems appropriate for USOF, such an accountability level may impact the mix of investments in oil interests made by USOF. To illustrate, assume that the price of the Benchmark Oil Futures Contract and the unit price of USOF are each $10, and that the New York Mercantile ExchangeNYMEX has determined that USOF may not own more than 20,000 contracts inBenchmark Oil Futures Contracts. In such case, USOF could invest up to $2 billion of its daily net assets in the Benchmark Oil Futures Contract (i.e., $10 per contract multiplied by 1,000 (a Benchmark Oil Futures Contract is a contract for 1,000 barrels of oil multiplied by 20,000 contracts)) before reaching the accountability level imposed by the New York Mercantile Exchange.NYMEX. Once the daily net assets of the portfolio exceed $2 billion in the Benchmark Oil Futures Contract, the portfolio may not be able to make any further investments in the Benchmark Oil Futures Contract, depending on whether the New York Mercantile ExchangeNYMEX imposes limits. If the New York Mercantile ExchangeNYMEX does impose limits at the $2 billion level (or another level), USOF anticipates that it will invest the majority of its assets above that level in a mix of other Oil Futures Contracts or Other Oil Interests.
In addition to accountability levels, the New York Mercantile ExchangeNYMEX imposes position limits on contracts held in the last few days of trading in the near month contract to expire. It is unlikely that USOF will run up against such position limits because USOF’s investment strategy is to change or "roll" from the near month contract to expire to the next month contract over a four-day periodduring one day beginning two weeks from expiration of the contract.
U.S. futures exchanges, including the New York Mercantile Exchange,NYMEX, also limit the amount of price fluctuation for Oil Futures Contracts. For example, the New York Mercantile ExchangeNYMEX imposes a $10.00 per barrel ($10,000 per contract) price fluctuation limit for Benchmark Oil Futures Contracts. This limit is initially based off the previous trading day’s settlement price. If any Benchmark Oil Futures Contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, it begins at the point where the limit was imposed and the limit is reset to be $10.00 per barrel in either direction of that point. If another halt were triggered, the market would continue to be expanded by $10.00 per barrel in either direction after each successive five-minute trading halt. There is no maximum price fluctuation limit during any one trading session.
USOF anticipates that to the extent it invests in Oil Futures Contracts other than WTI light, sweet crude oil contracts (such as futures contracts for Brent crude oil, natural gas, heating oil, and gasoline) and Other Oil Interests, it will invest in various non-exchange-traded derivative contracts to hedge the short-term price movements of such Oil Futures Contracts and Other Oil Interests against the current Benchmark Oil Futures Contract.
| Futures Contract | ||||
Levels and Limits | Maximum Daily Price Fluctuation | |||
| Any one month/all months: 20,000 net futures, but not to exceed | $10.00 per barrel ($10,000 per contract) for all months. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $10.00 per barrel in either direction. If another halt were triggered, the market would continue to be expanded by $10.00 per barrel in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session. | |||
| ICE Futures Brent Crude Futures | There are no position limits. | There is no maximum daily price fluctuation limit. | ||
| ICE WTI Crude Futures | There are no position limits. | There is no maximum daily price |
| Any one month/all months: 7,000 | $0.25 per gallon ($10,500 per contract) for all months. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $0.25 per gallon in either direction. If another halt were triggered, the market would continue to be expanded by $0.25 per gallon in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session. | |||
| NYMEX Gasoline | Any one month/all months: 7,000 net futures, but not to exceed 1,000 contracts in the last three days of trading in the spot month. | $0.25 per gallon ($10,500 per contract) for all months. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $0.25 per gallon in either direction. If another halt were triggered, the market would continue to be expanded by $0.25 per gallon in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session. | ||
| Any one month/all months: | $ |
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Price Volatility. Despite daily price limits, the price volatility of Oil Futures Contracts generally has been historically greater than that for traditional securities such as stocks and bonds. Price volatility often is greater day-to-day as opposed to intra-day. Oil Futures Contracts tend to be more volatile than stocks and bonds because price movements for barrels ofcrude oil are more currently and directly influenced by economic factors for which current data is available and are traded by oil futures traders throughout the day. These economic factors includeinclude; changes in interest rates; governmental, agricultural, trade, fiscal, monetary and exchange control programs and policies; weather and climate conditions; changing supply and demand relationships; changes in balances of payments and trade; U.S. and international rates of inflation; currency devaluations and revaluations; U.S. and international political and economic events; and changes in philosophies and emotions of market participants. Because USOF invests a significant portion of its assets in Oil Futures Contracts, the assets of USOF, and therefore the prices of USOF units, may be subject to greater volatility than traditional securities.
Marking-to-Market Futures Positions. Oil Futures Contracts are marked to market at the end of each trading day and the margin required with respect to such contracts is adjusted accordingly. This process of marking-to-market is designed to prevent losses from accumulating in any futures account. Therefore, if USOF’s futures positions have declined in value, USOF may be required to post additional variation margin to cover this decline. Alternatively, if USOF futures positions have increased in value, this increase will be credited to USOF’s account.
What is the Crude Oil Market and the Petroleum-Based Fuel Market?
Light, Sweet Crude Oil. Light, sweet crudes are preferred by refiners because of their low sulfur content and relatively high yields of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel. The price of WTI light, sweet crude oil has historically exhibited periods of significant volatility.
Demand for petroleum products by consumers, as well as agricultural, manufacturing and transportation industries, determines demand for crude oil by refiners. Since the precursors of product demand are linked to economic activity, crude oil demand will tend to reflect economic conditions. However, other factors such as weather also influence product and crude oil demand.
Crude oil supply is determined by both economic and political factors. Oil prices (along with drilling costs, availability of attractive prospects for drilling, taxes and technology, among other factors) determine exploration and development spending, which influence output capacity with a lag. In the short run, production decisions by OPECthe Organization of Petroleum Exporting Countries ("OPEC") also affect supply and prices. Oil export embargoes and the current conflict in Iraq represent other routes through which political developments move the market. It is not possible to predict the aggregate effect of all or any combination of these factors.
In Europe, Brent crude oil is the standard for futures contracts traded on the ICE Futures, an electronic marketplace for energy trading and price discovery. Brent crude oil is the price reference for two-thirds of the world’s traded oil.
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Heating Oil. Heating oil, also known as No. 2 fuel oil, accounts for 25% of the yield of a barrel of crude oil, the second largest “cut” from oil after gasoline. The heating oil futures contract, listed and traded on the New York Mercantile Exchange,NYMEX, trades in units of 42,000 gallons (1,000 barrels) and is based on delivery in the New York harbor, the principal cash market center. The price of heating oil has historically been volatile.
Gasoline. Gasoline is the largest single volume refined product sold in the U.S. and accounts for almost half of national oil consumption. The gasoline futures contract, listed and traded on the NYMEX, trades in units of 42,000 gallons (1,000 barrels) and is based on delivery at petroleum products terminals in the New York harbor, the major East Coast trading center for imports and domestic shipments from refineries in the New York harbor area or from the Gulf Coast refining centers. The price of gasoline has historically been volatile.
Natural Gas. Natural gas accounts for almost a quarter of U.S. energy consumption. The natural gas futures contract, listed and traded on the New York Mercantile Exchange,NYMEX, trades in units of 10,000 million British thermal units (mmBtu) and is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border. The price of natural gas has historically been volatile.
Why Does USOF Purchase and Sell Oil Futures Contracts?
USOF’s investment objective is forto have the changes in percentage terms of the units’ NAV to reflect the changes in percentage terms of the spot price of WTI light, sweet crude oil delivered to Cushing, Oklahoma,Benchmark Oil Futures Contract, less USOF’s expenses. USOF invests primarily in Oil Futures Contracts. USOF seeks to have its aggregate NAV approximate at all times the aggregate face amount of the Oil Futures Contracts (or Other Oil Interests) USOF holds.
Other than investing in Oil Futures Contracts and Other Oil Interests, USOF only invests in assets to support these investments in oil interests. At any given time, a significant majoritymost of USOF’s investments will be in Treasuries, cash and/or cash equivalents that serve as segregated assets supporting USOF’s positions in Oil Futures Contracts and Other Oil Interests. For example, the purchase of an Oil Futures Contract with a stated value of $10 million would not require USOF to pay $10 million upon entering into the contract; rather, only a margin deposit, generally of 5%-10% to 10% of the stated value of the Oil Futures Contract, would be required. To secure its Oil Futures Contract obligations, USOF would then deposit the required margin with the futures commission merchant and hold, through its Custodian, Treasuries, cash andand/or cash equivalents in an amount equal to the balance of the current market value of the contract, which at the contract’s inception would be $10 million minus the amount of the margin deposit, or $9.5 million (assuming a 5% margin).
As a result of the foregoing, typically only 5% to 10% of USOF’s assets are held as margin in segregated accounts with athe futures commission merchant. In addition to the Treasuries or cash it posts with the futures commission merchant for the Oil Futures Contracts it owns, USOF holds through the Custodian, Treasuries, cash andand/or cash equivalents that can be posted as margin or as collateral to support its over-the-counter contracts. USOF earns interest income from the Treasuries cash andand/or cash equivalents that it purchases, and on the cash it holds through the Custodian. It anticipates that the earned interest income will increase the NAV and limited partners’ capital contribution accounts. USOF reinvests the earned interest income, holds it in cash, or uses it to pay its expenses. If USOF reinvests the earned interest income, it will make investments that are consistent with its investment objectives.
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What is the Flow of Units?
What are the Trading Policies of USOF?
Liquidity
USOF invests only in Oil Futures Contracts and Other Oil Interests that are traded in sufficient volume to permit, in the opinion of the General Partner, ease of taking and liquidating positions in these financial interests.
Spot Commodities
While the oil contractsOil Futures Contracts traded on the New York Mercantile ExchangeNYMEX can be physically settled, USOF does not intend to take or make physical delivery. USOF may from time to time trade in Other Oil Interests, including contracts based on the spot price of crude oil.
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While USOF’s historical ratio of margin to total assets has generally ranged from 0% to 5%, the General Partner endeavors to have the value of USOF’s Treasuries, cash andand/or cash equivalents, whether held by USOF or posted as margin or collateral, at all times approximate the aggregate face value of USOF's obligations under its Oil Futures Contracts and Other Oil Interests.
Borrowings
Borrowings are not be used by USOF, unless USOF is required to borrow money in the event of physical delivery, if USOF trades in cash commodities, or for short-term needs created by unexpected redemptions. USOF expects to have the value of its Treasuries, cash and/or cash equivalents whether held by USOF or posted as margin or collateral, at all times approximate the aggregate face value of its obligations under its Oil Futures Contracts and Other Oil Interests. USOF has not established and does not plan to establish credit lines.
USOF has not and will not employ the technique, commonly known as pyramiding, in which the speculator uses unrealized profits on existing positions as variation margin for the purchase or sale of additional positions in the same or another commodity interest.
Who are the Service Providers?
USOF also employs ALPS Distributors, Inc. as a Marketing Agent. The General Partner pays ALPS Distributors, Inc.’s marketingthe Marketing Agent fee of $425,000 per annum plus an incentive fee as follows: 0.0%0.00% on USOF’s assets from $0-500 million; .04%0.04% on USOF’s assets from $500 million-$4 billion; .03%and 0.03% on USOF’s assets in excess of $4 billion; provided, however, that in no event may the aggregate compensation paid to the Marketing Agent and any affiliate of the General Partner for distribution-related services in connection with the offering of Unitsunits exceed ten percent (10%) of the gross proceeds of the offering.
UBS Securities LLC (“UBS Securities”) is USOF’s futures commission merchant. USOF and UBS Securities have entered into an Institutional Futures Client Account Agreement. This Agreement requires UBS Securities to provide services to USOF in connection with the purchase and sale of oil interests that may be purchased or sold by or through UBS Securities for USOF’s account. USOF pays the fees of UBS Securities.
UBS Securities’ principal business address is 677 Washington Blvd, Stamford, CT 06901. UBS Securities is a futures clearing broker for USOF. UBS Securities is registered in the U.S. with the National Association of Securities DealersFinancial Industry Regulatory Authority ("NASD"FINRA") as a broker-dealer and with the CFTC as a futures commission merchant. UBS Securities is a member of various U.S. futures and securities exchanges.
UBS Securities was involved in the 2003 Global Research Analyst Settlement. This settlement iswas part of the global settlement that UBS Securities and nine other firms have reached with the SEC, NASD,U.S. Securities and Exchange Commission (the "SEC"), FINRA, New York Stock Exchange (the "NYSE") and various state regulators. As part of the settlement, UBS Securities has agreed to pay $80,000,000 divided among retrospective relief, for procurement of independent research and for investor education. UBS Securities has also undertaken to adopt enhanced policies and procedures reasonably designed to address potential conflicts of interest arising from research practices.
On June 27, 2007, the Office of the Secretary of the Commonwealth of Massachusetts filed an administrative complaint (the “Complaint”) and notice of adjudicatory proceeding, captioned In The Matter of UBS Securities, LLC, Docket No. E-2007-0049, which alleges, in sum and substance, that UBS Securities has been violating the Massachusetts Uniform Securities Act (the “MUSA”) and related regulations by providing the advisers for certain hedge funds with gifts and gratuities in the form of below market office rents, personal loans with below market interest rates, event tickets and other perks, in order to induce those hedge fund advisers to increase or retain their level of prime brokerage fees paid to UBS Securities. The Secretary seeks to require UBS Securities to permanently cease and desist from conduct that violates the MUSA and regulations, to censure UBS Securities, to require UBS Securities to pay an administrative fine of an unspecified amount, and to find as fact the allegations of the Complaint.
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Further, UBS Securities, like most large, full service investment banks and broker-dealers, receives inquiries and is sometimes involved in investigations by the SEC, New York Stock ExchangeFINRA, NYSE and various other regulatory organizations, exchanges and government agencies. UBS Securities fully cooperates with the authorities in all such requests. UBS Securities regularly reportsdiscloses to the SEC on Form B-D investigations that result in orders.FINRA arbitration awards, disciplinary action and regulatory events. These reportsdisclosures are publicly available.available on FINRA’s website at www.finra.org. Actions with respect to UBS Securities’s futures commission merchant business are publicly available on the website of the NFA (www.nfa.futures.org/).
UBS Securities acts only as clearing broker for USOF and, as such, is paid commissions for executing and clearing trades on behalf of USOF. UBS Securities neither acts in any supervisory capacity with respect to the General Partner nor participates in the management of the General Partner or USOF.
Currently, the General Partner does not employ commoditiescommodity trading advisors. If, in the future, the General Partner does employ commoditiescommodity trading advisors, it will choose each advisor based on arms-length negotiations and will consider the advisor’s experience, fees and reputation.
Fees of USOF
Service Provider | Compensation Paid by the General Partner | |
Brown Brothers Harriman & Co., Custodian | Administrator | A |
| ALPS Distributors, Inc., Marketing Agent |
* The General Partner pays this compensation.
Service Provider | Compensation Paid by USOF | Fees paid during 2006 | |||||
| UBS Securities LLC, Futures Commission Merchant | Approximately $3.50 per buy or sell | $ | 478,713 | ||||
| Non-Affiliated Brokers | Approximately 0.16% of assets | $ | 0 | ||||
Assets | Management Fee | ||
| First $1,000,000,000 | |||
| After the first $1,000,000,000 |
Fees are to be calculated on a daily basis (accrued at 1/365 of the applicable percentage of NAV on that day) and to be paid on a quarterlymonthly basis.
Fees and Compensation Arrangements between USOF and Non-Affiliated Service Providers**
| Service Provider | Compensation Paid by USOF |
| UBS Securities LLC, Futures Commission Merchant | Approximately $3.50 per buy or sell |
| Non-Affiliated Brokers | Approximately 0.16% of assets |
**USOF pays this compensation.
New York Mercantile Exchange Licensing Fee***
| Assets | Licensing Fee |
| First $1,000,000,000 | 0.04% of NAV |
| After the first $1,000,000,000 | 0.02% of NAV |
| *** | Fees are calculated on a daily basis (accrued at 1/365 of the applicable percentage of NAV on that day) and paid on a monthly basis. USOF is responsible for its pro rata share of the assets held by USOF, USNG, US12OF and USG as well as other funds managed by the General Partner, including US12NG and USHO, when and if such funds commence operations. |
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Expenses Paid by USOF through December 31, 2007 in dollar terms:
| Expenses | Amount in Dollar Terms |
| Amount Paid to General Partner: | $3,622,613 |
| Amount Paid in Portfolio Brokerage Commissions: | $1,184,956 |
| Other Amounts Paid or Accrued: | $1,530,281 |
| Total Expenses Paid or Accrued: | $6,337,850 |
Expenses Paid by USOF through December 31, 2007 as a Percentage of Average Daily Net Assets:
Expenses | Amount as a Percentage of Average Daily Net Assets |
| General Partner | 0.50% annualized |
| Portfolio Brokerage Commissions | 0.16% annualized |
| Other Amounts Paid or Accrued | 0.21% annualized |
| Total Expense Ratio | 0.87% annualized |
Form of Units
Registered Form. Units are issued in registered form in accordance with the LP Agreement. The Administrator has been appointed registrar and transfer agent for the purpose of transferring units in certificated form. The Administrator keeps a record of all holders of the units in the registry (“Register”(the “Register”). The General Partner recognizes transfers of units in certificated form only if done in accordance with the LP Agreement. The beneficial interests in such units are held in book-entry form through participants and/or accountholders in the Depository Trust Company ("DTC").
Book Entry. Individual certificates are not issued for the units. Instead, units are represented by one or more global certificates, which are deposited by the Administrator with DTC and registered in the name of Cede & Co., as nominee for DTC. The global certificates evidence all of the units outstanding at any time. Unitholders are limited to (1) participants in DTC such as banks, brokers, dealers and trust companies ("DTC Participants"), (2) those who maintain, either directly or indirectly, a custodial relationship with a DTC Participant ("Indirect Participants"), and (3) those banks, brokers, dealers, trust companies and others who hold interests in the units through DTC Participants or Indirect Participants, in each case who satisfy the requirements for transfers of units. DTC participantsParticipants acting on behalf of investors holding units through such participants’ accounts in DTC will follow the delivery practice applicable to securities eligible for DTC’s Same-Day Funds Settlement System. Units are credited to DTC Participants’ securities accounts following confirmation of receipt of payment.
DTC. DTC is a limited purpose trust company organized under the laws of the State of New York and is a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended (“Exchange(the “Exchange Act”). DTC holds securities for DTC Participants and facilitates the clearance and settlement of transactiontransactions between DTC Participants through electronic book-entry changes in accounts of DTC Participants.
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Transfer of Units
Transfers of Units Only Through DTC. The units are only transferable through the book-entry system of DTC. Limited partners who are not DTC Participants may transfer their units through DTC by instructing the DTC Participant holding their units (or by instructing the Indirect Participant or other entity through which their units are held) to transfer the units. Transfers are made in accordance with standard securities industry practice.
Transfers of interests in units with DTC will be made in accordance with the usual rules and operating procedures of DTC and the nature of the transfer. DTC has established procedures to facilitate transfers among the participants and/or accountholders of DTC. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect Participants, the ability of a person or entity having an interest in a global certificate to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect of such interest, may be affected by the lack of a definitive security in respect of such interest.
DTC has advised us that it will take any action permitted to be taken by a unitholder (including, without limitation, the presentation of a global certificate for exchange) only at the direction of one or more DTC Participants in whose account with DTC interests in global certificates are credited and only in respect of such portion of the aggregate principal amount of the global certificate as to which such DTC Participant or Participants has or have given such direction.
Transfer/Application Requirements. All purchasers of USOF’s units, and potentially any purchasers of limited partner interestsunits in the future, who wish to become limited partners or other record holders and receive cash distributions, if any, or have certain other rights, must deliver an executed transfer application in which the purchaser or transferee must certify that, among other things, he, she or it agrees to be bound by USOF’s LP Agreement and is eligible to purchase USOF’s securities. Each purchaser of units must execute a transfer application and certification. The obligation to provide the form of transfer application will be imposed on the seller of units or, if a purchase of units is made through an exchange, the form may be obtained directly through USOF. Further, the General Partner may request each record holder to furnish certain information, including that holder’s nationality, citizenship or other related status. A record holder is a unitholder that is, or has applied to be, a limited partner. An investor who is not a U.S. resident may not be eligible to become a record holder or one of the USOF’s limited partners if that investor’s ownership would subject USOF to the risk of cancellation or forfeiture of any of USOF’s assets under any federal, state or local law or regulation. If the record holder fails to furnish the information or if the General Partner determines, on the basis of the information furnished by the holder in response to the request, that such holder is not qualified to become one of USOF’s limited partners, the General Partner may be substituted as a holder for the record holder, who will then be treated as a non-citizen assignee, and USOF will have the right to redeem those securities held by the record holder.
A transferee’s broker, agent or nominee may complete, execute and deliver a transfer application and certification. USOF may, at its discretion, treat the nominee holder of a unit as the absolute owner. In that case, the beneficial holder’s rights are limited solely to those that it has against the nominee holder as a result of any agreement between the beneficial owner and the nominee holder.
A person purchasing USOF’s existing units, who does not execute a transfer application and certify that the purchaser is eligible to purchase those securities acquires no rights in those securities other than the right to resell those securities. Whether or not a transfer application is received or the consent of the General Partner obtained, our units will be securities and will be transferable according to the laws governing transfers of securities.
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Any transfer of units will not be recorded by the transfer agent or recognized by the General Partner unless a completed transfer application is delivered to the General Partner or the Administrator. When acquiring units, the transferee of such units that complete a transfer application will:
· be an assignee until admitted as a substituted limited partner upon the consent and sole discretion of the General Partner and the recording of the assignment on the books and records of the partnership;
· automatically request admission as a substituted limited partner;
· agree to be bound by the terms and conditions of, and execute, our LP Agreement;
· represent that such transferee has the capacity and authority to enter into our LP Agreement;
· grant powers of attorney to our General Partner and any liquidator of us; and
· make the consents and waivers contained in our LP Agreement.
An assignee will become a limited partner in respect of the transferred units upon the consent of our General Partner and the recordation of the name of the assignee on our books and records. Such consent may be withheld in the sole discretion of our General Partner.
If consent of the General Partner is withheld, such transferee shall be an assignee. An assignee shall have an interest in the partnership equivalent to that of a limited partner with respect to allocations and distributions, including, without limitation, liquidating distributions, of the partnership. With respect to voting rights attributable to units that are held by assignees, the General Partner shall be deemed to be the limited partner with respect thereto and shall, in exercising the voting rights in respect of such units on any matter, vote such units at the written direction of the assignee who is the record holder of such units. If no such written direction is received, such units will not be voted. An assignee shall have no other rights of a limited partner.
Until a unit has been transferred on our books, we and the transfer agent may treat the record holder of the unit as the absolute owner for all purposes, except as otherwise required by law or stock exchange regulations.
Withdrawal of Limited Partners
As discussed in the LP Agreement, if the General Partner gives at least fifteen (15) days’ written notice to a limited partner, then the General Partner may for any reason, in its sole discretion, require any such limited partner to withdraw entirely from the partnership or to withdraw a portion of its partner capital account. If the General Partner does not give at least fifteen (15) days’ written notice to a limited partner, then it may only require withdrawal of all or any portion of the capital account of any limited partner in the following circumstances: (i) the unitholder made a misrepresentation to the General Partner in connection with its purchase of units; or (ii) the limited partner’s ownership of units would result in the violation of any law or regulations applicable to the partnership or a partner. In these circumstances, the General Partner without notice may require the withdrawal at any time, or retroactively. The limited partner thus designated shall withdraw from the partnership or withdraw that portion of its partner capital account specified, as the case may be, as of the close of business on such date as determined by the General Partner. The limited partner thus designated shall be deemed to have withdrawn from the partnership or to have made a partial withdrawal from its partner capital account, as the case may be, without further action on the part of the limited partner and the provisions of the LP Agreement shall apply.
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Calculating NAV
USOF’s NAV is calculated by:
· | Taking the current market value of its total assets |
· | Subtracting any liabilities |
The Administrator calculates the NAV of USOF once each trading day. The NAV for a particular trading day is released after 4:15 p.m. New York time. It calculates the NAV as of the earlier of the close of the New York Stock ExchangeNYSE or 4:00 p.m. New York time. Trading on the American Stock ExchangeAMEX typically closes at 4:15 p.m. New York time. USOF uses the New York Mercantile ExchangeNYMEX closing price (determined at the earlier of the close of that Exchangethe NYMEX or 2:30 p.m. New York time) for the contracts held on the New York Mercantile Exchange,NYMEX, but calculates or determines the value of all other USOF investments as of the earlier of the close of the New York Stock ExchangeNYSE or 4:00 p.m. New York time.
In addition, in order to provide updated information relating to USOF for use by investors and market professionals, the American Stock ExchangeAMEX calculates and disseminates throughout the trading day an updated indicative fund value. The indicative fund value is calculated by using the prior day’s closing NAV per unit of USOF as a base and updating that value throughout the trading day to reflect changes in the most recently reported trade price for the active WTI light, sweetBenchmark Oil Futures ContractContracts on the New York Mercantile Exchange.NYMEX. The prices reported for the active Benchmark Oil Futures Contract month are adjusted based on the prior day’s spread differential between settlement values for that contract and the spot month contract. In the event that the spot month contract is also the active contract, the last sale price for the active contract is not adjusted. The indicative fund value unit basis disseminated during American Stock ExchangeAMEX trading hours should not be viewed as an actual real time update of the NAV, because the NAV is calculated only once at the end of each trading day.
The indicative fund value is disseminated on a per unit basis every 15 seconds during regular American Stock ExchangeAMEX trading hours of 9:30 a.m. New York time to 4:15 p.m. New York time. The normal trading hours of the New York Mercantile ExchangeNYMEX are 10:00 a.m. New York time to 2:30 p.m. New York time. This means that there is a gap in time at the beginning and the end of each day during which USOF’s units are traded on the American Stock Exchange,AMEX, but real-time New York Mercantile ExchangeNYMEX trading prices for oil futures contracts traded on such Exchangethe NYMEX are not available. As a result, during those gaps there will be no update to the indicative fund value.
The American Stock ExchangeAMEX disseminates the indicative fund value through the facilities of CTA/CQ High Speed Lines. In addition, the indicative fund value is published on the American Stock Exchange’sAMEX’s website and is available through on-line information services such as Bloomberg and Reuters.
Dissemination of the indicative fund value provides additional information that is not otherwise available to the public and is useful to investors and market professionals in connection with the trading of USOF units on the American Stock Exchange.AMEX. Investors and market professionals are able throughout the trading day to compare the market price of USOF and the indicative fund value. If the market price of USOF units diverges significantly from the indicative fund value, market professionals will have an incentive to execute arbitrage trades. For example, if USOF appears to be trading at a discount compared to the indicative fund value, a market professional could buy USOF units on the American Stock ExchangeAMEX and sell short oil futurefutures contracts. Such arbitrage trades can tighten the tracking between the market price of USOF and the indicative fund value and thus can be beneficial to all market participants.
In addition, other Oil Futures Contracts, Other Oil Interests and Treasuries held by USOF are valued by the Administrator, using rates and points received from client approved third party vendors (such as Reuters and WM Company) and advisor quotes. These investments are not included in the indicative value. The indicative fund value is based on the prior day’s NAV and moves up and down according solely to changes in near monththe average of the prices of the Benchmark Oil Futures Contracts for WTI light, sweet oil traded on the New York Mercantile Exchange.Contract.
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Creation and Redemption of Units
USOF creates and redeems units from time to time, but only in one or more Creation Baskets or Redemption Baskets. The creation and redemption of baskets are only made in exchange for delivery to USOF or the distribution by USOF of the amount of Treasuries and any cash represented by the baskets being created or redeemed, the amount of which is based on the combined NAV of the number of units included in the baskets being created or redeemed determined as of 4:00 p.m. New York time on the day the order to create or redeem baskets is properly received.
Authorized Purchasers are the only persons that may place orders to create and redeem baskets. Authorized Purchasers must be (1) registered broker-dealers or other securities market participants, such as banks and other financial institutions, that are not required to register as broker-dealers to engage in securities transactions as described below, and (2) DTC Participants. To become an Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement with the General Partner. The Authorized Purchaser Agreement provides the procedures for the creation and redemption of baskets and for the delivery of the Treasuries and any cash required for such creations and redemptions. The Authorized Purchaser Agreement and the related procedures attached thereto may be amended by USOF, without the consent of any limited partner or unitholder or Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000 to USOF for each order they place to create or redeem one or more baskets. Authorized Purchasers who make deposits with USOF in exchange for baskets receive no fees, commissions or other form of compensation or inducement of any kind from either USOF or the General Partner, and no such person will have any obligation or responsibility to the General Partner or USOF to effect any sale or resale of units. As of December 31, 2006, 92007, 8 Authorized Purchasers had entered into agreements with USOF to purchase Creation BasketsBaskets.
Certain Authorized Purchasers are expected to have the facility to participate directly in the physical crude oil market and the crude oil futures market. In some cases, an Authorized Purchaser or its affiliates may from time to time acquire crude oil or sell crude oil and may profit in these instances. The General Partner believes that the size and operation of the crude oil market make it unlikely that an Authorized Purchaser’s direct activities in the crude oil or securities markets will impact the price of crude oil, Oil Futures Contracts, or the price of the units.
Each Authorized Purchaser is required to be registered as a broker-dealer under the Exchange Act and is a member in good standing with the NASD,FINRA, or exempt from being or otherwise not required to be licensed as a broker-dealer or a member of NASD,FINRA, and qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Certain Authorized Purchasers may also be regulated under federal and state banking laws and regulations. Each Authorized Purchaser has its own set of rules and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.
Under the Authorized Purchaser Agreement, the General Partner has agreed to indemnify the Authorized Purchasers against certain liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to the payments the Authorized Purchasers may be required to make in respect of those liabilities.
The following description of the procedures for the creation and redemption of baskets is only a summary and an investor should refer to the relevant provisions of the LP Agreement and the form of Authorized Purchaser Agreement for more detail, each of which is attached as an exhibit to this annual report on Form 10-K.
Creation Procedures
On any business day, an Authorized Purchaser may place an order with the Marketing Agent to create one or more baskets. For purposes of processing purchase and redemption orders, a “business day” means any day other than a day when any of the American Stock Exchange,AMEX, the New York Mercantile ExchangeNYMEX or the New York Stock ExchangeNYSE is closed for regular trading. Purchase orders must be placed by 12:00 p.m. New York time or the close of regular trading on the American Stock Exchange,AMEX, whichever is earlier; except in the case of the initial Authorized Purchaser’s or any other Authorized Purchaser’s initial order to purchase one or more Creation Baskets on the first day the baskets are to be offered and sold, when such orders shall be placed by 9:00 a.m. New York time on the day agreed to by the General Partner and the initial Authorized Purchaser. The day on which the Marketing Agent receives a valid purchase order is the purchase order date.
By placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries, with USOF,cash, or a combination of Treasuries and cash with USOF, as described below. Prior to the delivery of baskets for a purchase order, the Authorized Purchaser must also have wired to the Custodian the non-refundable transaction fee due for the purchase order. Authorized Purchasers may not withdraw a creation request.
Determination of Required Deposits
The total deposit required to create each basket (“Creation Basket Deposit”) is the amount of Treasuries and/or cash that is in the same proportion to the total assets of USOF (net of estimated accrued but unpaid fees, expenses and other liabilities) on the date the order to purchase is accepted as the number of units to be created under the purchase order is in proportion to the total number of units outstanding on the date the order is received. The General Partner determines, directly in its sole discretion or in consultation with the Administrator, the requirements for Treasuries and the amount of cash, including the maximum permitted remaining maturity of a Treasury and proportions of Treasury and cash that may be included in deposits to create baskets. The Marketing Agent publishes such requirements at the beginning of each business day. The amount of cash deposit required is the difference between the aggregate market value of the Treasuries required to be included in a Creation Basket Deposit as of 4:00 p.m. New York time on the date the order to purchase is properly received and the total required deposit.
Delivery of Required Deposits
An Authorized Purchaser who places a purchase order is responsible for transferring to USOF’s account with the Custodian the required amount of Treasuries and cash by the end of the third business day following the purchase order date. Upon receipt of the deposit amount, the Administrator directs DTC to credit the number of baskets ordered to the Authorized Purchaser’s DTC account on the third business day following the purchase order date. The expense and risk of delivery and ownership of Treasuries until such Treasuries have been received by the Custodian on behalf of USOF shall be borne solely by the Authorized Purchaser.
Because orders to purchase baskets must be placed by 12:00 p.m., New York time, but the total payment required to create a basket during the continuous offering period will not be determined until 4:00 p.m., New York time, on the date the purchase order is received, Authorized Purchasers will not know the total amount of the payment required to create a basket at the time they submit an irrevocable purchase order for the basket. USOF’s NAV and the total amount of the payment required to create a basket could rise or fall substantially between the time an irrevocable purchase order is submitted and the time the amount of the purchase price in respect thereof is determined.
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Rejection of Purchase Orders
The General Partner acting by itself or through the Marketing Agent may reject a purchase order or a Creation Basket Deposit if:
| · | it determines that the investment alternative available to USOF at that time will not enable it to meet its investment objective; |
| · | it determines that the purchase order or the Creation Basket Deposit is not in proper form; |
| · | it believes that the purchase order or the Creation Basket Deposit would have adverse tax consequences to USOF or its unitholders; |
| · | the acceptance or receipt of the Creation Basket Deposit would, in the opinion of counsel to the General Partner, be unlawful; or |
| · | circumstances outside the control of the General Partner, Marketing Agent or Custodian make it, for all practical purposes, not feasible to process creations of baskets. |
None of the General Partner, Marketing Agent or Custodian will be liable for the rejection of any purchase order or Creation Basket Deposit.
Redemption Procedures
The procedures by which an Authorized Purchaser can redeem one or more baskets mirror the procedures for the creation of baskets. On any business day, an Authorized Purchaser may place an order with the Marketing Agent to redeem one or more baskets. Redemption orders must be placed by 12:00 p.m. New York time or the close of regular trading on the American Stock Exchange,AMEX, whichever is earlier. A redemption order so received will be effective on the date it is received in satisfactory form by the Marketing Agent. The redemption procedures allow Authorized Purchasers to redeem baskets and do not entitle an individual unitholder to redeem any units in an amount less than a basket, or to redeem baskets other than through an Authorized Purchaser. By placing a redemption order, an Authorized Purchaser agrees to deliver the baskets to be redeemed through DTC’s book-entry system to USOF not later than 3:00 p.m. New York time on the third business day following the effective date of the redemption order. Prior to the delivery of the redemption distribution for a redemption order, the Authorized Purchaser must also have wired to USOF’s account at the Custodian the non-refundable transaction fee due for the redemption order. Authorized Purchasers may not withdraw a redemption request.
Determination of Redemption Distribution
The redemption distribution from USOF consists of a transfer to the redeeming Authorized Purchaser of an amount of Treasuries and/or cash that is in the same proportion to the total assets of USOF (net of estimated accrued but unpaid fees, expenses and other liabilities) on the date the order to redeem is properly received as the number of units to be redeemed under the redemption order is in proportion to the total number of units outstanding on the date the order is received. The General Partner, directly or in consultation with the Administrator, determines the requirements for Treasuries and the amounts of cash, including the maximum permitted remaining maturity of a Treasury, and the proportions of Treasuries and cash that may be included in distributions to redeem baskets. The Marketing Agent publishes such requirements as of 4:00 p.m. New York time on the redemption order date.
Delivery of Redemption Distribution
The redemption distribution due from USOF will be delivered to the Authorized Purchaser by 3:00 p.m. New York time on the third business day following the redemption order date if, by 3:00 p.m. New York time on such third business day, USOF’s DTC account has been credited with the baskets to be redeemed. If USOF’s DTC account has not been credited with all of the baskets to be redeemed by such time, the redemption distribution will be delivered to the extent of whole baskets received. Any remainder of the redemption distribution will be delivered on the next business day to the extent of remaining whole baskets received if USOF receives the fee applicable to the extension of the redemption distribution date which the General Partner may, from time to time, determine and the remaining baskets to be redeemed are credited to USOF’s DTC account by 3:00 p.m. New York time on such next business day. Any further outstanding amount of the redemption order shall be cancelled. Pursuant to information from the General Partner, the Custodian will also be authorized to deliver the redemption distribution notwithstanding that the baskets to be redeemed are not credited to USOF’s DTC account by 3:00 p.m. New York time on the third business day following the redemption order date if the Authorized Purchaser has collateralized its obligation to deliver the baskets through DTC’s book entry-system on such terms as the General Partner may from time to time determine.
Suspension or Rejection of Redemption Orders
The General Partner may, in its discretion, suspend the right of redemption, or postpone the redemption settlement date, (1) for any period during which the AMEX or the NYMEX is closed other than customary weekend or holiday closings, or trading on the AMEX or the NYMEX is suspended or restricted, (2) for any period during which an emergency exists as a result of which delivery, disposal or evaluation of Treasuries is not reasonably practicable, or (3) for such other period as the General Partner determines to be necessary for the protection of the limited partners. None of the General Partner, the Marketing Agent, the Administrator, or the Custodian will be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
The General Partner will reject a redemption order if the order is not in proper form as described in the Authorized Purchaser Agreement or if the fulfillment of the order, in the opinion of its counsel, might be unlawful.
Creation and Redemption Transaction Fee
To compensate USOF for its expenses in connection with the creation and redemption of baskets, an Authorized Purchaser is required to pay a transaction fee to USOF of $1,000 per order to create or redeem baskets. An order may include multiple baskets. The transaction fee may be reduced, increased or otherwise changed by the General Partner. The General Partner shall notify DTC of any change in the transaction fee and will not implement any increase in the fee for the redemption of baskets until 30 days after the date of the notice.
Tax Responsibility
Authorized Purchasers are responsible for any transfer tax, sales or use tax, stamp tax, recording tax, value added tax or similar tax or governmental charge applicable to the creation or redemption of baskets, regardless of whether or not such tax or charge is imposed directly on the Authorized Purchaser, and agree to indemnify the General Partner and USOF if they are required by law to pay any such tax, together with any applicable penalties, additions to tax or interest thereon.
Secondary Market Transactions
As noted, USOF will create and redeem units from time to time, but only in one or more Creation Baskets or Redemption Baskets. The creation and redemption of baskets will only be made in exchange for delivery to USOF or the distribution by USOF of the amount of Treasuries and cash represented by the baskets being created or redeemed, the amount of which will be based on the aggregate NAV of the number of units included in the baskets being created or redeemed determined on the day the order to create or redeem baskets is properly received.
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As discussed above, Authorized Purchasers are the only persons that may place orders to create and redeem baskets. Authorized Purchasers must be registered broker-dealers or other securities market participants, such as banks and other financial institutions that are not required to register as broker-dealers to engage in securities transactions. An Authorized Purchaser is under no obligation to create or redeem baskets, and an Authorized Purchaser is under no obligation to offer to the public units of any baskets it does create. Authorized Purchasers that do offer to the public units from the baskets they create will do so at per-unit offering prices that are expected to reflect, among other factors, the trading price of the units on the American Stock Exchange,AMEX, the NAV of USOF at the time the Authorized Purchaser purchased the Creation Baskets and the NAV of the units at the time of the offer of the units to the public, the supply of and demand for units at the time of sale, and the liquidity of the Oil Futures Contract market and the market for Other Oil Interests. The prices of units offered by Authorized Purchasers are expected to fall between USOF’s NAV and the trading price of the units on the American Stock ExchangeAMEX at the time of sale. Units initially comprising the same basket but offered by Authorized Purchasers to the public at different times may have different offering prices. An order for one or more baskets may be placed by an Authorized Purchaser on behalf of multiple clients. Authorized Purchasers who make deposits with USOF in exchange for baskets receive no fees, commissions or other form of compensation or inducement of any kind from either USOF or the General Partner, and no such person has any obligation or responsibility to the General Partner or USOF to effect any sale or resale of units. Units are expected to trade in the secondary market on the American Stock Exchange.AMEX. Units may trade in the secondary market at prices that are lower or higher relative to their NAV per unit. The amount of the discount or premium in the trading price relative to the NAV per unit may be influenced by various factors, including the number of investors who seek to purchase or sell units in the secondary market and the liquidity of the Oil Futures Contracts market and the market for Other Oil Interests. While the units trade on the American Stock ExchangeAMEX until 4:15 p.m. New York time, liquidity in the market for Oil Futures Contracts and Other Oil Interests may be reduced after the close of the New York Mercantile ExchangeNYMEX at 2:30 p.m. New York time. As a result, during this time, trading spreads, and the resulting premium or discount, on the units may widen.
Prior Performance of the General PartnerUSOF and Affiliates
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Experience in Raising and Investing in Funds through December 31, 20062007
| Dollar Amount Offered: | $ | 2,708,260,000 | $ | 7,094,860,000 |
| Dollar Amount Raised: | $ | 1,740,249,722 | $ | 6,142,801,105 |
| Organizational Expenses*: | ||||
| Offering Expenses*: | ||||
| SEC registration fee**: | $ | 111,362 | $ | 800,474 |
| AMEX Listing Fee**: | $ | 5,000 | ||
| FINRA fee**: | $ | 377,500 | ||
| AMEX Listing fee**: | $ | 5,000 | ||
| Auditor's fees and expenses**: | $ | 44,000 | $ | 59,000 |
| Legal fees and expenses**: | $ | 1,151,354 | $ | 1,249,109 |
| Printing expenses: | $ | 240,000 | $ | 241,977 |
| Length of Offering: | Continuous | Continuous | ||
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* Amounts are for organizational and offering expenses incurred in connection with the initial public offering onofferings from April 10, 2006.2006 through December 31, 2007.
| Name of Commodity Pool: | USOF | |||
| Type of Commodity Pool: | Exchange traded security | |||
| Inception of Trading: | April 10, 2006 | |||
| Aggregate Gross Capital Subscriptions (from inception through December 31, 2006): | $ | 1,740,249,722 | ||
| Total Net Assets as of December 31, 2006: | $ | 803,949,254 | * | |
| Initial NAV Per Unit as of Inception: | $ | 67.39 | ||
| NAV per Unit as of December 31, 2006: | $ | 51.87 | ||
| Worst Monthly Percentage Draw-down: | September 2006 (11.71 | %) | ||
| Worst Peak-to-Valley Draw-down: | June 2006-December 2006 (25.73 | %) | ||
| Total Rate of Return Since Inception: | (23.03 | %) | ||
| Name of Commodity Pool: | USOF | |||
| Type of Commodity Pool: | Exchange traded security | |||
| Inception of Trading: | April 10, 2006 | |||
| Aggregate Gross Capital Subscriptions (from inception through December 31, 2007): | $ | 6,142,801,105 | ||
| Total Net Assets as of December 31, 2007: | $ | 485,222,737 | * | |
| Initial NAV Per Unit as of Inception: | $ | 67.39 | ||
| NAV per Unit as of December 31, 2007: | $ | 75.82 | ||
| Worst Monthly Percentage Draw-down: | September 2006 (11.71 | %) | ||
| Worst Peak-to-Valley Draw-down: | June 2006-January 2007 (30.60 | %) | ||
| Total Rate of Return Since Inception: | 12.51 | % | ||
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* Inclusive of transactions recorded on a trade date + 1 basis.
Month | Rates of Return For the Year | |||
| January | (6.55 | %) | ||
| February | 5.63 | % | ||
| March | 4.61 | % | ||
| April | %) | |||
| May | ( | %) | ||
| June | % | |||
| July | % | |||
| August | ( | %) | ||
| September | % | |||
| October | % | |||
| November | %) | |||
| December | % | |||
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The General Partner is also currently the general partner of US12OF, USNG and USG. Each of the General Partner, USNG, US12OF and USG is located in California.
US12OF is a publicly traded limited partnership which seeks to have the changes in percentage terms of its units’ NAV track the changes in percentage terms of the price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the average of the prices of 12 futures contracts on crude oil traded on the NYMEX, consisting of the near month contract to expire and the contracts for the following 11 months for a total of 12 consecutive months’ contracts, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contracts that are the next month contract to expire and the contracts for the following 11 consecutive months, less US12OF’s expenses. US12OF invests in a mixture of listed crude oil futures contracts, other non-listed oil related investments, Treasuries, cash and cash equivalents. US12OF began trading on the AMEX on December 6, 2007 and is a continuous offering. As of December 31, 2007, the total amount of money raised by US12OF from Authorized Purchasers was $20,127,316; the total number of Authorized Purchasers was 2; the number of baskets purchased by Authorized Purchasers was 4; and the aggregate amount of units purchased was 400,000.
USNG is a publicly traded limited partnership which seeks to have the changes in percentage terms of its unit’s NAV track the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana as measured by the futures contract on natural gas traded on the NYMEX, less USNG's expenses. USNG invests in a mixture of listed natural gas futures contracts, other natural gas related investments, Treasuries, cash and cash equivalents. USNG began trading on the AMEX on April 18, 2007 and is a continuous offering. As of December 31, 2007, the total amount of money raised by USNG from Authorized Purchasers was $1,458,787,976; the total number of Authorized Purchasers was 4; the number of baskets purchased by Authorized Purchasers was 379; and the aggregate amount of units purchased was 37,900,000.
