The following discussion should be read in conjunction with the financial
statements and the notes thereto of
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 causeUSO's actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.USO believes these factors include, but are not limited to, the following: changes in inflation inthe United States , movements inU.S. and foreign currencies, market volatility in the crude oil markets and futures markets in part attributable to the COVID-19 pandemic inFebruary 2020 andRussia's invasion ofUkraine inFebruary 2022 . Forward-looking statements, which involve assumptions and describeUSO'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, andUSO 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, andUSO assumes no obligation to update any such forward-looking statements. AlthoughUSO 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 thatUSO may make directly to them or through reports thatUSO files in the future with theSecurities and Exchange Commission (the "SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K. 53 Table of Contents Introduction
USO , aDelaware limited partnership, is a commodity pool that issues shares that may be purchased and sold on the NYSE Arca. The investment objective ofUSO 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 toCushing, 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"), plus interest earned onUSO's collateral holdings, lessUSO'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.USO seeks to achieve its investment objective by investing so that the average daily percentage change inUSO's NAV for any period of 30 successive valuation days will be within plus/minus ten percent (10%) of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period. As described below,USO is currently unable to pursue its investment objective with the same high degree of success that it has in the past due to its limited ability to invest in the Benchmark Oil Futures Contract and certain other Oil Futures Contracts, as defined below, to the same extent it was able to before the market conditions and regulatory limitations imposed onUSO , which occurred in the Spring of 2020, and risk mitigation measures taken byUSO's FCMs as a result, as described herein, arose. As a result of such market conditions, the regulatory conditions that were and could again be imposed, and the risk mitigation measures imposed by its FCMs, there is still uncertainty as to whetherUSO will be able to achieve its investment objective within as narrow a percentage change difference in its NAV for any period of 30 successive valuation days and the average daily percentage change in the price of the Benchmark Oil Futures Contract as it typically had prior to the Spring of 2020 due to the foregoing factors.USO's investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil or any particular futures contract based on light, sweet crude oil, nor isUSO's investment objective for the percentage change in its NAV to reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one day. The general partner ofUSO ,United States Commodity Funds, LLC ("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 invests primarily in futures contracts for light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or otherU.S. and foreign exchanges (collectively, "Oil Futures Contracts") and to a lesser extent, in order to comply with regulatory requirements, risk mitigation measures, liquidity requirements, or in view of market conditions, other oil-related investments such as cash-settled options on Oil Futures Contracts, forward contracts for oil, cleared swap contracts and OTC swaps that are based on the price of oil, other petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing (collectively, "Other Oil-Related Investments"). For convenience and unless otherwise specified, Oil Futures Contracts and Other Oil-Related Investments collectively are referred to as "Oil Interests" in this annual report on Form 10-K. USCF believes that market arbitrage opportunities will cause daily changes inUSO's share price on the NYSE Arca on a percentage basis to closely track daily changes inUSO's per share NAV on a percentage basis but there can be no assurance of that. USCF further believes that daily changes in prices of the Benchmark Oil Futures Contract have historically closely tracked the daily changes in spot prices of light, sweet crude oil. USCF believes that the net effect of these relationships will be that the daily changes in the price ofUSO's shares on the NYSE Arca on a percentage basis will closely track the daily changes in the spot price of a barrel of light, sweet crude oil on a percentage basis, plus interest earned onUSO's collateral holdings, lessUSO's expenses. As noted above,USO seeks to achieve its investment objective by investing so that the average daily percentage change inUSO's NAV for any period of 30 successive valuation days will be within plus/minus ten percent (10%) of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period. Historically,USO has achieved its investment objective by primarily investing in the Benchmark Oil Futures Contract and Oil Futures Contracts for light, sweet crude oil traded on NYMEX and ICE Futures with the same maturity month as the Benchmark Oil Futures Contract Certain circumstances could cause and have caused, as discussed below,USO to invest in Oil Futures Contracts other than the Benchmark Oil Futures Contract and to invest in Other Oil-Related Investments, including OTC swaps. Such circumstances include: the need to comply with regulatory requirements (including, but not limited to, exchange accountability levels and position limits imposed by NYMEX discussed below); market conditions (including but not limited to those allowingUSO to obtain greater liquidity (i.e., liquidity requirements) or to execute transactions with more favorable pricing); and risk mitigation measures taken, or that could be taken in the future, by one ofUSO's FCMs. 54
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As a result of market and regulatory conditions, including significant market volatility, large numbers ofUSO shares purchased during a short period of time, and applicable regulatory accountability levels and position limits on oil futures contracts that were imposed onUSO in 2020, including as a result of the COVID-19 pandemic and the state of crude oil markets,USO has invested in Oil Futures Contracts (as defined above) in months other than the Benchmark Oil Futures Contract and in Other Oil-Related Investments, such as OTC swaps. The foregoing has impacted the performance ofUSO and its ability meet its investment objective within as narrow a percentage difference between the average daily percentage change inUSO's NAV for any period of 30 successive valuation days and the average daily percentage change in the price of the Benchmark Oil Futures Contract as it typically had prior to the Spring of 2020.USO's investment in Oil Futures Contracts in months other than the Benchmark Oil Futures Contract, other Oil Futures Contracts and Other Oil- Related Investments, is intended to be temporary but may continue indefinitely if the aforementioned market and regulatory conditions do not abate. Until such time asUSO is able to return to investing in the Benchmark Oil Futures Contract, its performance and ability to meet its investment objective will continue to be impacted. The following chart shows, for the period endingDecember 31, 2022 , the rolling 30-day average difference betweenUSO's NAV and the Benchmark Oil Futures Contract. This is measured by subtracting the return of the Benchmark Oil Futures Contract from the return onUSO's NAV for each of the last thirty business days, and then averaging those thirty differences. The calculation
is repeated daily. [[Image Removed: Graphic]] In 2020, significant market volatility occurred in the crude oil markets and the oil futures markets. Such volatility was attributable to the COVID-19 pandemic, related supply chain disruptions and ongoing disputes among oil-producing countries over the potential limits on the production of crude oil, and a corresponding collapse in demand for crude oil and a lack of on-land storage for crude oil. These conditions, together with the prospect that such conditions could reoccur, severely limited and continue to significantly limitUSO's ability to have a substantial portion of its assets invested in the Benchmark Oil Futures Contract and certain other Oil Futures Contracts of the same month, such as cash-settled, but substantially similar, oil futures contracts traded on ICE Futures (the "ICE WTI Contract"). Specifically:
In 2020, NYMEX and ICE Futures imposed accountability levels and position
limits on
WTI Contract, respectively. While those limits no longer apply, NYMEX's current
? accountability level for any one month in the Benchmark Oil Futures Contract is
10,000 contracts, and the accountability level for all months is 20,000 net
futures contracts for light sweet crude oil, do apply. In addition, the ICE WTI Contract is subject 55 Table of Contents
to spot month and all-months-combined position limits established under the
the
accountability levels and position limits on the ICE WTI Contract. Investors
should note that the foregoing accountability levels and position limits are
subject to change and could change the amount and type of permitted investments
in which
Limits and Price Fluctuation Limits" below.
In 2020, RBC imposed risk mitigation measures that constrained
invest in the Benchmark Oil Futures Contract and other Oil Futures Contracts.
RBC, which at the time was
not hold positions in the June Benchmark Oil Futures Contract expiring on May
19, 2020. At the time it imposed this restriction, RBC continued to trade and
clear other Oil Futures Contracts for
and rebalances of its portfolio. RBC also advised
? forward, it may only purchase additional Benchmark Oil Futures Contracts and
other Oil Futures Contracts through RBC for rolls and rebalances of
portfolio and not as investments for the proceeds of new Creation Baskets. The
limits on positions imposed by RBC on holdings in
regardless of whether the Oil Futures Contracts purchased would be within the
accountability levels and position limits permitted by NYMEX and ICE. RBC has
since informed
investment of the proceeds from Creation Baskets.
Subsequent to RBC's imposition of risk mitigation measures in 2020,
into agreements with RCG, MCM and MFUSA to become additional FCMs for
These FCMs have not precluded
proceeds from the purchases of Creation Baskets in Oil Futures Contracts,
? including the Benchmark Oil Futures Contract consistent with
investment strategy.
impose limitations on its holding certain positions in Oil Future Contracts at
any time.
whether or when it will enter into such agreements.
? A large number of
time in March and
Commencement of investing in investments other than the Benchmark Futures Contract. The foregoing events significantly limitedUSO's ability to have a substantial portion of its assets invested in the Benchmark Oil Futures Contract and, during the Spring of 2020, in other Oil Futures Contracts. During that time,USO had to invest in other permitted Oil Futures Contracts and had to more frequently rebalance and adjust the types of holdings in its portfolio than it has in the past. In addition, the limitations imposed by the exchanges and FCMs, especially during the Spring of 2020, limitedUSO's ability to invest in certain Oil Futures Contracts, including the Benchmark Oil Futures Contract. As a result,USO has and may be required to invest in other permitted investments including Other Oil-Related Investments, including OTC swaps, and may hold larger amounts of Treasuries, cash and cash equivalents, which could further impairUSO's ability to meet its investment objective.USO continues to invest in other Oil Futures Contracts and Other Oil- Related Investments, which may impactUSO's ability to pursue its investment objective with the same high degree of success as it had prior to the Spring of 2020. Current Investment Parameters. As noted above,USO has had the ability to invest in Oil Futures Contracts beyond the Benchmark Oil Futures Contract and in Other Oil-Related Investments but, until the market and other events occurring in 2020 described herein,USO's need to exercise this ability to make such investments had been limited. Certain circumstances including market conditions, regulatory requirements and risk mitigation measures imposed by FCMs, counterparties or other market participants, have required and continue to requireUSO to exercise greater discretion in investing than in the past. The current parameters for the decision-making regarding the permitted investmentsUSO will hold and the intended order of priority it will consider in selecting investments to be held inUSO's portfolio are set forth and discussed in greater detail below. The application of these parameters requiresUSO to exercise its discretion. If, due to market conditions (including liquidity requirements), regulatory requirements, risk mitigation measures, or other factors,USO is not able to invest in accordance with such parameters and the intended order of priority, such methodology may change. The type and percentages of investments to be held byUSO at the end of the monthly roll period as well as for any rebalances are published onUSO's website at www.uscfinvestments.com. Accordingly, for the foreseeable future, to address and comply with the market conditions (including liquidity requirements), regulatory requirements, risk mitigation measures or other factors that have influenced, and may continue to influence, its investment decisions,USO intends to buy or sell the following permitted investments taking into account the order, or waterfall, set forth below whenUSO increases or decreases either its portfolio overall or its holdings of particular investments:
The current or front month ("first month") Oil Futures Contracts based on the
price of the light, sweet crude oil known as West Texas Intermediate ("WTI")
1. or, which are priced off of the oil futures contracts based on WTI as traded
on the NYMEX including the Benchmark Oil Futures Contracts and the ICE WTI
Contract ("WTI Oil Futures Contracts"); then 56 Table of Contents
The first month, the next or following month ("second month", with months
2. thereafter being numerically designated, i.e., the third month, the fourth
month, the fifth month, etc.) and the third month WTI Oil Futures Contracts;
then
The first through the sixth month WTI Oil Futures Contracts, plus the next
3. nearest June WTI Oil Futures Contracts or the next nearest December WTI Oil
Futures Contracts that is not included in the first through sixth months; then
4. The first through the twelfth month WTI Oil Futures Contracts; then
The first through the twelfth month WTI Oil Futures Contracts plus the second
5. through thirteenth month Oil Futures Contracts based on Brent Crude Oil traded
on ICE Futures ("Brent Oil Futures Contracts"); then
The first through the twelfth month WTI Oil Futures Contracts plus the second
6. through thirteenth month Brent Oil Futures Contracts plus the first through
the twelfth month Oil Futures Contracts based on Ultra Low Sulfur Diesel Oil
Futures Contract traded on NYMEX ("USDL Oil Futures Contract"); then
The first through the twelfth month WTI Oil Futures Contracts plus the second
through thirteenth month Brent Oil Futures Contracts plus the first through
7. the twelfth month USDL Oil Futures Contracts plus the first through the
twelfth month RBOB Gasoline Oil Futures Contracts ("Gasoline Futures Contract"); then
Contacts or other types of crude oil traded on the
8.
liquidity to meaningfully contribute to
addition to the foregoing investments; then, finally,
9. Other Oil-Related Investments, in addition to the foregoing investments.
USO will progress through the stages of the above-described waterfall of permitted investments as it approaches regulatory or other limits or as necessary to address market conditions (including liquidity requirements), regulatory requirements, risk mitigation measures, or other factors, including additional investments inUSO , requiring consideration of particular levels of the waterfall. Generally,USO will invest in each stage of the waterfall in the order described above. However,USO , in its sole discretion, may proceed to invest in a further stage of the waterfall (i.e., skipping over a particular stage) if it determines it may exceed position limits in the immediately following stage of the above waterfall within the next month or due to other regulatory requirements, risk mitigation measures, market conditions, liquidity requirements or other factors. If, due to market conditions (including liquidity requirements), regulatory requirements, risk mitigation measures, or other factors,USO is not able to invest in a particular month contract described above, then it will adjust the methodology incrementally beginning from the nearest month contract available to it that it is reasonable or feasible to hold in light of such factors.USO uses OTC swaps or other instruments, to provide exposure to one or more of the same above-described permitted investments in varying months or contracts.USO also anticipates that to the extent it invests in Oil Futures Contracts other than WTI Oil Futures Contacts and Other Oil- Related Investments, it may enter into various non-exchange-traded derivative contracts to hedge the short-term price movements of such Oil Futures Contracts and Other Oil-Related Investments against the current Benchmark Oil Futures Contract. The progression from one stage of permitted investments described in the above waterfall to the next stage, including the specific target weights for the particular portfolio investments to be held byUSO , will take into account, to the extent applicable, the relative levels of open interest, position limits, and other factors. The specific permitted investments and the identified target weights for such investments, consistent with progression from one stage of the above-described waterfall to the next stage, will be published on the website the day before the start of (i) any monthly roll/rebalance period for the end of such roll/rebalance period, and (ii) any rebalancing to be done outside of the monthly roll period due to market conditions, regulatory requirements or other factors described herein. In extreme circumstances, changes may need to be made intraday. In such circumstances, the changes will be published on the website at the end of the day.USO will attempt to execute rebalances required over several days to minimize market impact. However, it may be necessary to execute these risk measures rapidly and with minimal notice. Published portfolio changes will be implemented byUSO over the course of the roll/rebalance period as indicated on the website or over the course of another day or period with respect to a particular change outside of the roll. The investment intention announced byUSO could change as a result of any or all of the following: evolving market conditions (including liquidity requirements), a change in regulator accountability levels and position limits imposed onUSO with respect to its investment in Oil Futures Contracts, additional or different risk mitigation measures taken, or that could be taken, by market participants, generally, includingUSO , with respect toUSO acquiring additional Oil Futures contracts, orUSO selling additional sharesUSO's ability to invest in the Benchmark Oil Futures Contract could be limited by any of these occurrences. In addition, while determining the 57
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appropriate investments forUSO's portfolio in accordance with its current intention, or to address the foregoing changes in market conditions (including liquidity requirements), regulatory requirements or risk mitigation measures,USO may need to hold significant portions of its portfolio in cash beyond what it has historically held in order to satisfy potential margin requirements. USCF may not be able to fully investUSO's assets in Benchmark Oil Futures Contracts or other Oil Futures Contracts having an aggregate notional amount exactly equal toUSO's NAV. For example, as standardized contracts, the Benchmark Oil Futures Contracts and other Oil Futures Contracts are for a specified amount of a particular commodity, andUSO's NAV and the proceeds from the sale of a Creation Basket are unlikely to be an exact multiple of the amounts of those contracts. As a result, in such circumstances,USO may be better able to achieve the exact amount of exposure to changes in price of the Benchmark Oil Futures Contract and other Oil Futures Contracts through the use of Other Oil-Related Investments, such as OTC contracts (e.g., swaps) that have better correlation with changes in price of the Benchmark Oil Futures Contract. USCF does not anticipate lettingUSO's Oil Futures Contracts expire and taking delivery of the underlying commodity. Instead, USCF will close existing positions, e.g., when it changes the Benchmark Oil Futures Contracts or Other Oil-Related Investments or it otherwise determines it would be appropriate to do so and reinvests the proceeds in new Oil Futures Contracts or Other Oil-Related Investments. Positions may also be closed out to meet orders for Redemption Baskets and in such case proceeds for such baskets will not be reinvested. As a result of market conditions and the regulatory response that occurred in the Spring of 2020 and thereafter, large numbers ofUSO shares that were purchased during a short period of time, and regulatory accountability levels and position limits on oil futures contracts that were imposed onUSO , and risk mitigation measures imposed by its FCMs,USO invested, and continues to invest, in Oil Futures Contracts in months other than the Benchmark Oil Futures Contracts as well as Other Oil Interests. While it isUSO's expectation that at some point in the future it will return to primarily investing in the Benchmark Oil Futures Contract, there can be no guarantee of when, if ever, that will occur. In addition, because of the limitations imposed onUSO for example, by its regulators and its FCMs, or other conditions,USO may be limited in investing in other Oil Futures Contracts in addition to the Benchmark Oil Futures Contract. Limitations onUSO may negatively impact the ability ofUSO (i) to reallocate its investments to more favorably meet its investment objective or (ii) in connection with the purchase of Creation Baskets, to invest the proceeds of such purchases in Oil Futures Contracts. Investors inUSO should expectUSO's ability to invest in the Benchmark Oil Futures Contract and other Oil Futures Contracts may be limited andUSO may be required to invest in Other Oil-Related Investments. The foregoing has impacted the performance ofUSO and its ability meet its investment objective within as narrow a percentage difference between the average daily percentage change inUSO's NAV for any period of 30 successive valuation days and the average daily percentage change in the price of the Benchmark Oil Futures Contract as it typically has prior to the Spring of 2020.USO's investment in Oil Futures Contracts in months other than the Benchmark Oil Futures Contract, other Oil Futures Contracts and Other-Oil Related Investments, is intended to be temporary but may continue indefinitely if the developments resulting from the aforementioned market and regulatory conditions do not abate. Until such time asUSO is able to return to investing in the Benchmark Oil Futures Contract, its performance and ability to meet its investment objective will continue to be impacted.USO has not leveraged, and does not intend to leverage, its assets through borrowings or otherwise, and makes its investments accordingly. Consistent with the foregoing,USO's announced investment intentions, and any changes thereto, will take into account the need forUSO to make permitted investments that also allow it to maintain adequate liquidity to meet its margin and collateral requirements and to avoid, to the extent reasonably possible,USO becoming leveraged. If market conditions require it, these risk reduction procedures may occur on short notice if they occur other than during a roll or rebalance period.
Regulatory Disclosure
The regulation of commodity interest trading inthe United States and other countries is an evolving area of the law. Below are certain key regulatory requirements that are, or may be, relevant toUSO . The various statements made in this summary are subject to modification by legislative action and changes in the rules and regulations of theSEC ,Financial Industry Regulatory Authority ("FINRA"), CFTC, 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 impactUSO are discussed in "Item 1. Business" in this annual report on Form 10-K. Exchange Accountability Levels, Position Limits and Price Fluctuation Limits. Designated contract markets ("DCMs"), such as the NYMEX and ICE Futures, have established accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which an investment byUSO is not) may hold, own or control. These levels and position limits apply to the futures contracts thatUSO invests in to meet its investment objective. In addition to accountability levels and position limits, the NYMEX and ICE Futures also set daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of a
futures 58 Table of Contents contract may vary either up or down from the previous day's settlement price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit. The accountability levels for the Benchmark Oil Futures Contract and other Oil Futures Contracts traded onU.S. -based futures exchanges, such as the NYMEX, are not a fixed ceiling, but rather a threshold above which the NYMEX may exercise greater scrutiny and control over an investor's positions. The current accountability level for investments for any one month in the Benchmark Oil Futures Contract is 10,000 contracts. In addition, the NYMEX imposes an accountability level for all months of 20,000 net futures contracts for light, sweet crude oil. In addition, the ICE Futures maintains the same accountability levels, position limits and monitoring authority for its light, sweet crude oil contract as the NYMEX. IfUSO and the other Related Public Funds exceed these accountability levels for investments in the futures contracts for light, sweet crude oil, the NYMEX and ICE Futures will monitor such exposure and may ask for further information on their activities including the total size of all positions, investment and trading strategy, and the extent of liquidity resources ofUSO and the other Related Public Funds. If deemed necessary by the NYMEX and/or ICE Futures,USO could be ordered to reduce its Crude Oil Futures CL contracts to below the 10,000 single month and/or 20,000 all month accountability level. As ofDecember 31, 2022 ,USO held 21,034 NYMEX WTI Crude Oil Futures CL contracts and did not hold any ICE WTI Crude Oil Futures contracts.USO exceeded accountability levels of the NYMEX during the year endedDecember 31, 2022 , including when it held a maximum of 34,632 Crude Oil Futures CL contracts on the NYMEX, exceeding the "any" month limit. No action was taken by the NYMEX andUSO did not have to reduce the number of positions held. Position limits differ from accountability levels in that they represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow such limits to be exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that may apply at any time, the NYMEX and ICE Futures impose position limits on contracts held in the last few days of trading in the near month contract to expire. For the year endedDecember 31, 2022 ,USO did not exceed any position limits imposed by the NYMEX and ICE Futures. The foregoing accountability levels and position limits are subject to change. Due to evolving market conditions, remaining within relevant accountability levels and position limits, and, any additional or different risk mitigation measures taken byUSO's FCMs in the future with respect toUSO acquiring additional Oil Futures contracts,USO has invested and intends to invest in other permitted investments, beyond the Benchmark Oil Futures Contract. Commencing with the monthly roll that occurred inMay 2020 ,USO's positions in Oil Futures Contracts and Other Oil Related Investments roll over a ten-day period, whereas previouslyUSO's positions would roll over a four-day period. As ofMay 1, 2020 , the type and percentages of investments to be held byUSO at the end of the monthly roll period as well as for any rebalances are published on its website www.uscfinvestments.com.
Federal Position Limits
InOctober 2020 , the CFTC adopted a rule to establish federal position limits for 25 core referenced futures contracts (comprised of agricultural, energy and metals futures contracts), futures and options linked to the core referenced futures contracts, and swaps that are economically equivalent to the core referenced futures contracts (the "Position Limits Rule"). The limits for futures contracts are currently in effect; the limits for economically equivalent swaps will become effective in 2023. The Benchmark Oil Futures Contract is subject to position limits under the Position Limits Rule, andUSO's trading does not qualify for an exemption therefrom. Accordingly, the Position Limits Rule could negatively impact the ability ofUSO to meet its investment objective by inhibiting USCF's ability to effectively invest the proceeds from sales of Creation Baskets ofUSO in particular amounts and types of its permitted investments.
Margin for OTC Swaps
Rules put in place byU.S. federal banking regulators, the CFTC and theSEC require the daily exchange of variation margin and initial margin for swaps between swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants ("Swap Entities") and swaps between Swap Entities and their counterparties that are "financial end-users" (such rules, the "Margin Rules"). The Margin Rules require Swap Entities to exchange variation margin with all of their counterparties who are financial end-users. The minimum variation margin amount is the daily mark-to-market change in the value of the swap, taking into account the amount of variation margin previously posted or collected. Swap Entities are required to exchange initial margin with their financial end-users who have "material swaps exposure" (i.e., an average daily aggregate notional of$8 billion or more in non-cleared swaps calculated in accordance with the Margin Rules). The Margin Rules specify the types of collateral that may be posted or collected as initial margin or variation margin (generally cash, certain government, government-sponsored enterprise securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold) and sets forth haircuts for certain collateral asset classes. 59 Table of ContentsUSO is not a Swap Entity under the Margin Rules, but it is a financial end-user. Accordingly,USO will be subject to the variation margin requirements of the Margin Rules for any swaps that it enters into. However,USO does not have material swaps exposure and, accordingly,USO will not be subject to the initial margin requirements of the Margin Rules.
Mandatory Trading and Clearing of Swaps
CFTC regulations require that certain swap transactions be executed on organized exchanges or "swap execution facilities" and cleared through regulated clearing organizations ("derivative clearing organizations" ("DCOs")), if the CFTC mandates the central clearing of a particular class of swap and such swap is "made available to trade" on a swap execution facility. Currently, swap dealers, major swap participants, commodity pools, certain private funds and entities predominantly engaged in activities that are financial in nature are required to execute on a swap execution facility, and clear, certain interest rate swaps and index-based credit default swaps. As a result, ifUSO enters into an interest rate or index-based credit default swap that is subject to these requirements, such swap will be required to be executed on a swap execution facility and centrally cleared. Mandatory clearing and "made available to trade" determinations with respect to additional types of swaps may be issued in the future, and, when finalized, could requireUSO to electronically execute and centrally clear certain OTC instruments presently entered into and settled on a bi-lateral basis. If a swap is required to be cleared, initial and variation margin requirements are set by the relevant clearing organization, subject to certain regulatory requirements and guidelines. Additional margin may be required and held byUSO's FCMs.
Other Requirements for Swaps
In addition to the margin requirements described above, swaps that are not required to be cleared and executed on a SEF but that are executed bilaterally are also subject to various requirements pursuant to CFTC regulations, including, among other things, reporting and recordkeeping requirements and, depending on the status of the counterparties, trading documentation requirements and dispute resolution requirements.
Derivatives Regulations in Non-
In addition toU.S. laws and regulations,USO may be subject to non-U.S. derivatives laws and regulations if it engages in futures and/or swap transactions with non-U.S. persons. For example,USO may be impacted by European laws and regulations to the extent that it engages in futures transactions on European exchanges or derivatives transactions with European entities. Other jurisdictions impose requirements applicable to futures and derivatives that are similar to those imposed by theU.S. , including position limits, margin, clearing and trade execution requirements. The CFTC is generally prohibited by statute from regulating trading on non-U.S. futures exchanges and markets. The CFTC, however, has adopted regulations relating to the marketing of non-U.S. futures contracts inthe United States . These regulations permit certain contracts on non-U.S. exchanges to be offered and sold inthe United States . In a rising rate environment,USO may not be able to fully invest at prevailing rates until any current investments in Treasury Bills mature in order to avoid selling those investments at a loss. When interest rates rise, the value of fixed income securities typically falls. In a rising interest rate environment,USO may not be able to fully invest at prevailing rates until any current investments in Treasury Bills mature in order to avoid selling those investments at a 28 loss. Interest rate risk is generally lower for shorter term investments and higher for longer term investments. The risk toUSO of rising interest rates may be greater in the future due to the end of a long period of historically low rates, the effect of potential monetary policy initiatives, including actions taken by theU.S. Federal Reserve and other foreign equivalents to curb inflation, and resulting market reaction to those initiatives. When interest rates fall,USO may be required to reinvest the proceeds from the sale, redemption or early prepayment of a Treasury Bill or money market security at a lower interest rate.
USO invests in government money market funds. Although such government money market funds seek to preserve the value of an investment at$1.00 per share, there is no guarantee that they will be able to do so andUSO may lose money by investing in a government money market fund. An investment in a government money market fund is not insured or guaranteed by theFederal Deposit Insurance Corporation , referred to herein as theFDIC , or any other government agency. The share price of a government money market fund can fall below the$1.00 share price.USO cannot rely on or expect a government money market fund's adviser or its affiliates to enter into support agreements or take other actions to maintain the government money market fund's$1.00 share price. The credit quality of a government money market fund's holdings can change rapidly in certain markets, and the default of a single holding could have an adverse impact on the government money market fund's share price. Due to fluctuations in interest rates, the market value of securities 60
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held by a government money market fund may vary. A government money market fund's share price can also be negatively affected during periods of high redemption pressures and/or illiquid markets
Price Movements
Crude oil futures prices were volatile during the year endedDecember 31, 2022 . The price of the Benchmark Oil Futures Contract started the year at$75.21 per barrel. The high of the year was onMarch 8, 2022 when the price reached$121.68 per barrel. The low for the year was onDecember 9, 2022 , which was$71.13 per barrel. The year ended with the Benchmark Oil Futures Contract at$80.26 per barrel, an increase of approximately 6.71% over the year.USO's per share NAV began the year at$54.18 and ended the year at$70.05 onDecember 31, 2022 , an increase of approximately 29.29% over the year. The Benchmark Oil Futures Contract prices listed above began with theFebruary 2022 contracts and ended with theFebruary 2023 contracts. The increase of approximately 6.71% 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 simulate such a result. Furthermore, the change in the nominal price of these differing Oil Futures Contracts, measured from the start of the year to the end of the year, does not represent the actual benchmark results thatUSO seeks to track, which are more fully described below in the section titled "Tracking USO's Benchmark." During the year endedDecember 31, 2022 , the crude oil futures market experienced states of both contango and backwardation. On days when the market was in contango the price of the near month crude Oil Futures Contract was lower than the price of the next month crude Oil Futures Contract, or contracts further away from expiration. On days when the market was in backwardation, the price of the near month crude Oil Futures Contract was higher than the price of the next month crude Oil Futures Contract or contracts further away from expiration. 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 ofUSO's shares is calculated once each NYSE Arca trading day. The per share NAV for a particular trading day is released after4:00 p.m. New York time. Trading during the core trading session on the NYSE Arca typically closes at4:00 p.m. New York time.USO's Administrator uses the settlement price determined by NYMEX at2:30 p.m. Eastern time for the Oil Futures Contracts held on the NYMEX and the settlement price determined by ICE Futures at2:30 p.m. Eastern time for the Oil Futures Contracts held on ICE Futures, but calculates or determines the value of all otherUSO investments, other futures contracts, as of the earlier of the close of the NYSE Arca or4:00 p.m. New York time.
Results of Operations and the Crude Oil Market
Results of Operations. OnApril 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 Participant,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 ceased trading on the AMEX and commenced trading on the NYSE Arca onNovember 25, 2008 . As ofDecember 31, 2022 ,USO had issued 4,718,700,000 shares, 28,223,603 of which were outstanding. As ofDecember 31, 2022 , there were 908,300,000 shares registered but not yet issued.USO has registered 5,627,000,000 shares since inception. OnApril 28, 2020 , after the close of trading on the NYSE Arca,USO effected a 1-for-8 reverse share split and post-split shares ofUSO began trading onApril 29, 2020 . As a result of the reverse share split, every eight pre-split shares ofUSO were automatically exchanged for one post-split share. Immediately prior to the reverse split, there were 1,482,900,000 shares ofUSO issued and outstanding, representing a per share NAV of$2.04 . Immediately after the effect of the reverse share split, the number of issued and outstanding shares ofUSO decreased to 185,362,500, not accounting for fractional shares, and the per share NAV increased to$16.35 . In connection with the reverse share split, the CUSIP number forUSO's shares changed to 91232N207.USO's ticker symbol, "USO ," remained the same. The accompanying unaudited financial statements have been adjusted to reflect the effect of the reverse share split on a retroactive basis. More shares may have been issued byUSO than are outstanding due to the redemption of shares. Unlike funds that are registered under the 1940 Act, shares that have been redeemed byUSO cannot be resold byUSO . As a result,USO contemplates that additional offerings of its shares may be registered with theSEC in the future in anticipation of additional issuances and redemptions. As ofDecember 31, 2022 ,USO had the following Authorized Participants: ABN Amro,BNP Paribas Securities Corp. ,Citadel Securities LLC ,Citigroup Global Markets Inc. ,Credit Suisse Securities USA LLC ,Goldman Sachs & Company ,JP Morgan Securities LLC ,Merrill Lynch Professional Clearing Corp. ,Morgan Stanley & Company Inc. ,Nomura Securities International Inc. ,RBC Capital Markets LLC ,SG Americas Securities LLC ,UBS Securities LLC andVirtu Americas LLC . 61
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For the Year EndedDecember 31, 2022 Compared to the Year EndedDecember 31, 2021 Year ended Year endedDecember 31, 2022 December 31, 2021
Per share net asset value, end of year $ 70.05 $ 54.18 Average daily total net assets$ 2,564,979,187 $ 2,974,068,031 Dividend and interest income earned on Treasuries, cash and/or cash equivalents$ 31,464,238 $ 1,301,816 Annualized yield based on average daily total net assets 1.23 % 0.04 % Management fee$ 11,542,406 $ 13,383,302 Total fees and other expenses excluding management fees $ 3,929,191$ 10,570,119 Fees and expenses related the registration or offering of additional shares $ - $ 1,260,041 Total commissions accrued to brokers $ 807,322 $ 1,123,971 Total commissions as annualized percentage of average total net assets 0.03 % 0.04 % Commissions accrued as a result of rebalancing $ 519,680 $ 858,171 Percentage of commissions accrued as a result of rebalancing 64.37 % 76.35 % Commissions accrued as a result of creation and redemption activity $ 287,642 $ 265,800 Percentage of commissions accrued as a result of creation and redemption activity 35.63 % 23.65 % Portfolio Expenses.USO's expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, registration fees, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements. The management fee thatUSO pays to USCF is calculated as a percentage of the total net assets ofUSO . The fee is accrued daily and paid monthly. The increase in the per share NAV for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was due primarily to higher prices for WTI crude oil and the related increase in the value of the Oil Futures Contracts and other Oil Interests in whichUSO held and traded. Average interest rates earned on short-term investments held byUSO , including cash, cash equivalents and Treasuries, were higher during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . As a result, the amount of income earned byUSO as a percentage of average daily total net assets was higher during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . To the degree that the aggregate yield is higher, the net expense ratio, inclusive of income, will be lower. The decrease in total fees and other expenses excluding management fees for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 was due primarily to decrease in tax reporting and professional fees. The decrease in total commissions accrued to brokers for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was due primarily to a lower number of Oil Futures Contracts being held and traded.
Tracking
USCF seeks to manageUSO's portfolio such that changes in its average daily per share NAV, on a percentage basis, closely track the daily changes in the average price of the Benchmark Oil Futures Contract, also on a percentage basis. Specifically, USCF seeks to manage the portfolio such that over any rolling period of 30-valuation days, the average daily change inUSO's per share NAV is within a range of 90% to 110% (0.9 to 1.1) of the average daily change in the price of the Benchmark Oil Futures Contract. As an example, if the average daily movement of the price of the Benchmark Oil Futures Contract for a particular 30-valuation day time period was 0.50% per day, USCF would attempt to manage the portfolio such that the average daily movement of the per share NAV during that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of the benchmark's results).USO's portfolio management goals do not include trying to make the nominal price ofUSO's per share NAV equal to the nominal price of the current Benchmark Oil Futures Contract or the spot price for light, sweet crude oil. 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. For the 30-valuation days endedDecember 31, 2022 , the average daily change in the Benchmark Oil Futures Contract was (0.172)%, while the average daily change in the per share NAV ofUSO over the same time period was (0.083)%. The average daily difference 62 Table of Contents
was 0.089% (or 8.9 basis points, where 1 basis point equals 1/100 of 1%),
meaning that over this time period
Since the commencement of the offering ofUSO's shares to the public onApril 10, 2006 toDecember 31, 2022 , the average daily change in the Benchmark Oil Futures Contract was 0.001%, while the average daily change in the per share NAV ofUSO over the same time period was (0.015)%. The average daily difference was (0.016)% (or (1.6) basis points, where 1 basis point equals 1/100 of 1%), meaning that over this time periodUSO's NAV performed within the plus or minus 10% range established as its benchmark tracking goal. The following two graphs demonstrate the correlation between the changes inUSO's NAV and the changes in the Benchmark Oil Futures Contract. The first graph exhibits the daily changes in the last 30 valuation days endedDecember 31, 2022 . The second graph measures monthly changes sinceDecember 31, 2017 throughDecember 31, 2022 . *PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS [[Image Removed: Graphic]] 63 Table of Contents *PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS [[Image Removed: Graphic]]
An alternative tracking measurement of the return performance ofUSO versus the return of its Benchmark Oil Futures Contract can be calculated by comparing the actual return ofUSO , measured by changes in its per share NAV, versus the expected changes in its per share NAV under the assumption thatUSO's returns had been exactly the same as the daily changes in its Benchmark Oil Futures Contract. For the year endedDecember 31, 2022 , the actual total return ofUSO as measured by changes in its per share NAV was 29.29%. This is based on an initial per share NAV of$54.18 as ofDecember 31, 2021 and an ending per share NAV as ofDecember 31, 2022 of$70.05 . During this time period,USO made no distributions to its shareholders. However, ifUSO's daily changes in its per share NAV had instead exactly tracked the changes in the daily total return of the Benchmark Oil Futures Contract,USO would have had an estimated per share NAV of$68.18 as ofDecember 31, 2021 , for a total return over the relevant time period of 25.84%. The difference between the actual per share NAV total return ofUSO of 29.29% and the expected total return based on the Benchmark Oil Futures Contract of 25.84% was a difference over the time period of 3.45%, which is to say thatUSO's actual total return outperformed its benchmark by that percentage.USO incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive or negative execution, and net the difference in returns betweenUSO's current holdings and the Benchmark Futures contract tended to cause daily changes in the per share NAV ofUSO to track slightly lower than daily changes in the price of the Benchmark Oil Futures Contract. By comparison, for the year endedDecember 31, 2021 , the actual total return ofUSO as measured by changes in its per share NAV was 63.83%. This is based on an initial per share NAV of$33.07 as ofDecember 31, 2020 and an ending per share NAV as ofDecember 31, 2021 of$54.18 . During this time period,USO made no distributions to its shareholders. However, ifUSO's daily changes in its per share NAV had instead exactly tracked the changes in the daily total return of the Benchmark Oil Futures Contract,USO would have had an estimated per share NAV of$53.75 as ofDecember 31, 2021 , for a total return over the relevant time period of 62.53%. The difference between the actual per share NAV total return ofUSO of 63.83% and the expected total return based on the Benchmark Oil Futures Contract of 62.53% was a difference over the time period of 1.30%, which is to say thatUSO's actual total return outperformed its benchmark by that percentage.USO incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend income, and net of positive or negative execution, tended to cause daily changes in the per share NAV ofUSO to track slightly lower or higher than daily changes in the price of the Benchmark Oil Futures Contract. 64
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As a result of market conditions and the regulatory response that occurred inMarch 2020 and thereafter, large numbers ofUSO shares that were purchased during a short period of time, and regulatory accountability levels and position limits on oil futures contracts that were imposed onUSO , and risk mitigation measures imposed by its FCMs,USO invested in Oil Futures Contracts in months other than the Benchmark Oil Futures Contracts. While it isUSO's expectation that at some point in the future it will return to primarily investing in the Benchmark Oil Futures Contract and related ICE Futures contracts or other similar futures contracts of the same tenor based on light, sweet crude oil, there can be no guarantee of when, if ever, that will occur. As a result, investors inUSO should expect thatUSO will continue to invest in other permitted investments and that there have been and could be wider deviations between the performance ofUSO's investments and the Benchmark Oil Futures Contract than prior to the Spring of 2020, and changes inUSO's share price may not be able to track changes in the price of Benchmark Oil Futures Contract within as narrow a percentage change difference for any period of successive valuation days as it typically has prior to the Spring of 2020. During the fourth quarter of 2022 the rolling 30 day average daily difference between the return ofUSO's NAV and the Benchmark Futures Contract was 0.089% (or 8.9 basis points).
There are three factors that typically have impacted or are most likely to
impact
First,USO may buy or sell its holdings in the then current Benchmark Oil Futures Contract at a price other than the settlement price of that contract on the day during whichUSO executes the trade. In that case,USO may pay a price that is higher, or lower, than the closing settlement price of the Benchmark Oil Futures Contract, which could cause the changes in the daily per share NAV ofUSO to either be too high or too low relative to the daily changes in the Benchmark Oil Futures Contract. During the year endedDecember 31, 2022 , USCF attempted to minimize the effect of these transactions by seeking to execute its purchase or sale of Oil Futures Contracts at, or as close as possible to, the end of the day settlement price. However, it may not always be possible forUSO to obtain the settlement price and there is no assurance that failure to obtain the closing settlement price in the future will not adversely impactUSO's attempt to track the Benchmark Oil Futures Contract. Second,USO incurs expenses primarily composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The impact of these expenses tends to cause daily changes in the per share NAV ofUSO to track slightly lower than daily changes in the price of the Benchmark Oil Futures Contract. At the same time,USO earns dividend and interest income on its cash, cash equivalents and Treasuries.USO is not required to distribute any portion of its income to its shareholders and did not make any distributions to shareholders during the year endedDecember 31, 2022 . Interest payments, and any other income, were retained within the portfolio and added toUSO's NAV. When this income exceeds the level ofUSO's expenses for its management fee, brokerage commissions and other expenses (including ongoing registration fees, licensing fees and the fees and expenses of the independent directors of USCF),USO will realize a net yield that will tend to cause daily changes in the per share NAV ofUSO to track slightly higher than daily changes in the Benchmark Oil Futures Contract. If short-term interest rates rise above these levels, the level of deviation created by the yield would increase. Conversely, if short-term interest rates were to decline, the amount of error created by the yield would decrease. When short-term yields drop to a level lower than the combined expenses of the management fee and the brokerage commissions, then the tracking error becomes a negative number and would tend to cause the daily returns of the per share NAV to underperform the daily returns of the Benchmark Oil Futures Contract. USCF anticipates that interest rates may continue to rise over the near future from historical lows. It is anticipated that fees and expenses paid byUSO may continue to be lower than interest earned byUSO . As such, USCF anticipates thatUSO could possibly outperform its benchmark so long as interest earned is higher than the fees and expenses paid byUSO . Third,USO may hold Other Oil-Related Investments in its portfolio that may fail to closely track the Benchmark Oil Futures Contract's total return movements. In that case, the error in tracking the Benchmark Oil Futures Contract could result in daily changes in the per share NAV ofUSO that are either too high, or too low, relative to the daily changes in the Benchmark Oil Futures Contract. During the year endedDecember 31, 2022 ,USO held OTC swaps, which are considered Other Oil-Related Investments. IfUSO increases in size, and due to its obligations to comply with market conditions, regulatory limits, and risk mitigation measures imposed by its FCMs,USO may invest in additional Other Oil-Related Investments, such as OTC swaps, which may have the effect of increasing transaction related expenses and may result in increased tracking error. OTC swaps increase transaction-related expenses due to the fact thatUSO must pay to the swap counterparty certain fees thatUSO does not have to pay for transactions executed on an exchange. 65 Table of Contents
Term Structure of Crude Oil Futures Prices and the Impact on Total Returns. Several factors determine the total return from investing in futures contracts. One factor arises from "rolling" futures contracts that will expire at the end of the current month (the "near" or "front" month contract) forward each month prior to expiration. For a strategy that entails holding the near month contract, the price relationship between that futures contract and the next month futures contract will impact returns. For example, if the price of the near month futures contract is higher than the next futures month contract (a situation referred to as "backwardation"), then absent any other change, the price of a next month futures contract tends to rise in value as it becomes the near month futures contract and approaches expiration. Conversely, if the price of a near month futures contract is lower than the next month futures contract (a situation referred to as "contango"), then absent any other change, the price of a next month futures contract tends to decline in value as it becomes the near month futures contract and approaches expiration. As an example, assume that the price of crude oil for immediate delivery, is$50 per barrel, and the value of a position in the near month futures contract is also$50 . Over time, the price of crude oil will fluctuate based on a number of market factors, including demand for oil relative to supply. The value of the near month futures contract will likewise fluctuate in reaction to a number of market factors. If an investor seeks to maintain a position in a near month futures contract and not take delivery of physical barrels of crude oil, the investor must sell the current near month futures contract as it approaches expiration and invest in the next month futures contract. In order to continue holding a position in the current near month futures contract, this "roll" forward of the futures contract must be executed every month. Contango and backwardation are natural market forces that have impacted the total return on an investment inUSO's shares during the past year relative to a hypothetical direct investment in crude oil. In the future, it is likely that the relationship between the market price ofUSO's shares and changes in the spot prices of light, sweet crude oil will continue to be impacted by contango and backwardation. It is important to note that this comparison ignores the potential costs associated with physically owning and storing crude oil, which could be substantial. If the futures market is in backwardation, e.g., when the price of the near month futures contract is higher than the price of the next month futures contract, the investor would buy a next month futures contract for a lower price than the current near month futures contract. Assuming the price of the next month futures contract was$49 per barrel, or 2% cheaper than the$50 near month futures contract, then, hypothetically, and assuming no other changes (e.g., to either prevailing crude oil prices or the price relationship between the spot price, the near month contract and the next month contract, and, ignoring the impact of commission costs and the income earned on cash and/or cash equivalents), the value of the$49 next month futures contract would rise to$50 as it approaches expiration. In this example, the value of an investment in the next month futures contract would tend to outperform the spot price of crude oil. As a result, it would be possible for the new near month futures contract to rise 12% while the spot price of crude oil may have risen a lower amount, e.g., only 10%. Similarly, the spot price of crude oil could have fallen 10% while the value of an investment in the futures contract might have fallen another amount, e.g., only 8%. Over time, if backwardation remained constant, this difference between the spot price and the futures contract price would continue to increase. If the futures market is in contango, an investor would be buying a next month futures contract for a higher price than the current near month futures contract. Again, assuming the near month futures contract is$50 per barrel, the price of the next month futures contract might be$51 per barrel, or 2% more expensive than the front month futures contract. Hypothetically, and assuming no other changes, the value of the$51 next month futures contract would fall to$50 as it approaches expiration. In this example, the value of an investment in the second month would tend to underperform the spot price of crude oil. As a result, it would be possible for the new near month futures contract to rise only 10% while the spot price of crude oil may have risen a higher amount, e.g., 12%. Similarly, the spot price of crude oil could have fallen 10% while the value of an investment in the second month futures contract might have fallen another amount, e.g., 12%. Over time, if contango remained constant, this difference between the spot price and the futures contract price would continue to increase. 66 Table of Contents The chart below compares the daily price of the near month crude oil futures contract to the price of 13th month crude oil futures contract (i.e., a contract one year forward) over the last 10 years. When the price of the near month futures contract is higher than the price of the 13th month futures contract, the market would be described as being in backwardation. When the price of the near month futures contract is lower than the 13th month futures contract, the market would be described as being in contango. Although the price of the near month futures contract and the price of the 13th month futures contract tend to move together, it can be seen that at times the near month futures contract prices are higher than the 13th month futures contract prices (backwardation) and, at other times, the near month futures contract prices are lower than the 13th month futures contract prices (contango). *PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS [[Image Removed: Graphic]] 67 Table of Contents
An alternative way to view the same data is to subtract the dollar price of the 13th month crude oil futures contract from the dollar price of the near month crude oil futures contract, as shown in the chart below. When the difference is positive, the market is in backwardation. When the difference is negative, the market is in contango. The crude oil market spent time in both backwardation and contango during the last ten years.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
[[Image Removed: Graphic]] An investment in a portfolio that owned only the near month crude oil futures contract would likely produce a different result than an investment in a portfolio that owned an equal number of each of the near 12 months of crude oil futures contracts. Generally speaking, when the crude oil futures market is in backwardation, a portfolio of only the near month crude oil futures contract may tend to have a higher total return than a portfolio of 12 months of the crude oil futures contract. Conversely, if the crude oil futures market was in contango, the portfolio containing only 12 months of crude oil futures contracts may tend to outperform the portfolio holding only the near month crude oil
futures contract. 68 Table of Contents Historically, the crude oil futures markets have experienced periods of contango and backwardation, with backwardation being in place somewhat less often than contango since oil futures trading started in 1983. Following the global financial crisis in the fourth quarter of 2008, the crude oil market moved into contango and remained in contango for a period of several years. During parts of 2009, the level of contango was unusually steep as a combination of slackU.S. and global demand for crude oil and issues involving the physical transportation and storage of crude oil atCushing, Oklahoma , the primary pricing point for oil traded in theU.S. , led to unusually high inventories of crude oil. A combination of improved transportation and storage capacity, along with growing demand for crude oil globally, moderated the inventory build-up and led to reduced levels of contango by 2011. However, at the end ofNovember 2014 , global crude oil inventories grew rapidly afterOPEC voted to defend its market share againstU.S. shale-oil producers, resulting in another period during which the crude oil market remained primarily in contango. This period of contango continued throughDecember 31, 2017 . Declining global crude oil inventories caused the market to flip into backwardation at the beginning of 2018 through lateOctober 2018 , at which point ongoing supply growth in theU.S. , combined with increasedOPEC production, once again led market participants to fear another global glut of crude oil. The crude oil market was primarily in contango the first half of 2019 and in backwardation during the second half of 2019. Crude oil flipped back into contango inJanuary 2020 and remained predominantly in contango throughout 2020. InMarch 2020 , contango dramatically increased and reached historic levels during the economic crisis arising from the COVID-19 pandemic, related supply chain disruptions and disputes among oil producing countries over the potential limits on the production of crude oil, and a corresponding collapse in demand for crude oil and a lack of on-land storage for crude oil. This level of contango was due to significant market volatility that occurred in crude oil markets as well as oil futures markets. Crude oil prices collapsed in the wake of the COVID-19 demand shock, which reduced global petroleum consumption, and the price war launched bySaudi Arabia at the beginning ofMarch 2020 in response toRussia's unwillingness to participate in extending previously agreed upon supply cuts. An estimated twenty million barrels a day of crude demand evaporated as a result of quarantines and massive drops in industrial and manufacturing activity. Eventually,the United States ,OPEC ,Russia , and other oil producers around the world agreed to a historic 9.7 million barrel per day cut to crude supply. The supply cut along with the partial reopening of economies during the third quarter of 2020 reduced some of the unprecedented volatility oil markets experienced in the spring of 2020. Likewise, contango returned to moderate levels inMay 2020 . During the twelve months endedDecember 31, 2021 , the crude oil futures market was primarily in a state of backwardation as measured by the difference between the front month and the second month contract. As a result of market and regulatory conditions, including significant market volatility, large numbers ofUSO shares purchased during a short period of time, applicable regulatory accountability levels and position limits on oil futures contracts, and FCM risk mitigation measures that were imposed onUSO , in 2020,USO invested in Oil Futures Contracts in months other than the Benchmark Oil Futures Contracts and was limited in its investments in the Benchmark Oil Futures Contract. In order to continue to meet its investment objective,USO has chosen from its permitted investments types and amounts of Oil Futures Contracts allowed by its current regulatory requirements and under the risk mitigation efforts of its FCMs and other market participants, including those Oil Futures Contracts with expiration dates for months later than that of the Benchmark Oil Futures Contract. Continued holdings in these later month contracts may allowUSO to experience lesser effects from contango than would be the case ifUSO's holdings were primarily in Oil Futures Contracts in the first month or second month. Likewise, continued holdings in these later month contracts also could causeUSO to experience lesser effects from backwardation than would be the case ifUSO's holdings were primarily in Oil Futures Contracts in the first month or second month. WhileUSO continues to invest in later month contracts, there is no assurance that this will continue and ifUSO returns to primarily investing in the Benchmark Oil Futures Contract it will be subject to greater effects of contango and backwardation.
Crude Oil Market. During the year ended
The simultaneous demand and supply shocks from the COVID-19 pandemic and Saudi-Russia price war precipitated unparalleled risk and volatility in crude oil markets during the first half of 2020. Global demand for crude oil plummeted by as much as 30% in the spring of 2020 as workers around the world stopped driving, airlines cut flight schedules, and companies suspended operations. Meanwhile,U.S. crude oil supply reached 13 million barrels per day (mbd), capping a period of almost continuous growth since 2016. To offset the seemingly unstoppableU.S. production juggernaut, OPEC+ (a loose coalition betweenOPEC and non-member nations such asRussia andMexico ) had maintained an uneasy series of agreements to curtail their crude oil output in order to support crude oil prices. However, in early March of 2020,Russia refusedSaudi Arabia's proposal to extend cuts in response to the COVID-19 demand shock. The kingdom retaliated with a massive production increase, launching an all-out price war in the middle of a pandemic. Although the members of OPEC+ reached a record-shattering agreement in mid-April of 2020, the implementation of new supply cuts came too late to prevent crude oil prices from plummeting to historic lows, culminating in a drop into negative territory for the May WTI crude oil futures contract onApril 20, 2020 . 69
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During the second quarter of 2020, theInternational Energy Agency (IEA) reported that crude oil demand fell an average of 16.4 mbd while global crude oil supply declined by an average of 13.7 mbd. Demand evaporated as a result of quarantines and massive drops in industrial and manufacturing activity. Supply declined largely due to the historic agreement in April of 2020 betweenthe United States ,OPEC ,Russia , and other oil producers. The bulk of the supply decline came from voluntary OPEC+ cuts while 2.8 mbd resulted from market driven cuts inthe United States . As ofJune 30, 2020 ,U.S. production had dropped over 15%, rapidly falling back to 11 mbd. Oil producing rigs inthe United States fell to 180 from over 670 at the start of the year, a massive decline that will likely seeU.S. supply fall further. Finally, in late June of 2020 storage in theU.S. spiked to 541 million barrels while global storage reached 3.351 billion barrels.
The unprecedented twin crises described above caused unparalleled effects on oil futures markets during 2020.
First, front month WTI Oil Futures Contract prices dipped below$20 for the first time since 2002 and hit an all-time closing low of$(37.63) . Multiple record-breaking returns occurred between March and May of 2020. The price of the front month WTI Oil Futures Contract averaged$28 during the second quarter of 2020 compared to$46 during the first quarter of 2020 and$57 during calendar year 2019. Second, crude oil price volatility went off-the-charts. For example, the 30-day annualized volatility of front month WTI crude oil futures prices reached 984% inMay 2020 after averaging 35% in 2019 and 25% in the first two months of 2020. (If May crude oil futures had not gone negative onApril 20, 2020 , volatility would "only" have reached 416%.) Third, futures curves, which can exhibit conditions known as "contango" and "backwardation" as discussed above, moved into a condition that some market experts referred to as "super contango." This was a result of extreme bearishness at the front of the futures curve due to rapidly filling storage facilities in theU.S. and around the world. Specifically, the price of the front month WTI Oil Futures Contract detached from the rest of the futures curve and fell to an extreme position relative to futures contracts with expiration dates in later months. On a percentage basis, the difference in price between the front month WTI Oil Futures Contract and the second month WTI Oil Futures Contract was more than double the previous record. This divergence caused the price of WTI Oil Futures Contracts with different expiration dates to move in different directions. For example, the price of the front month WTI Oil Futures Contract and second month WTI Oil Futures Contract typically move together (i.e., increase or decrease) about 99% of the time. However, in late April of 2020, the correlation of the price of the front and second month WTI Oil Futures Contracts was (24)%, meaning that these contracts were moving in opposite directions. Fourth,USO , among other market participants, diversified its portfolio away from the front of the futures curve in favor of deferred contract months, as discussed in this Form 10-Q. The move byUSO and other market participants to deferred contract months caused a historic change during 2020 to relative levels of open interest among the different futures contracts. For example, open interest in the front month futures contract fell an average of 40% during April, May, and June of 2020 compared to the average level of open interest during those same calendar months during the previous five years. As economies reopened and OPEC+ supply cuts were absorbed by the market, WTI crude oil prices rose from all-time lows in the spring of 2020 to an average of$68.00 per barrel during calendar year 2021. WTI crude oil inventories inthe United States fell from a modern record of 541 mb inJune 2020 to 418 mb by the end of the fourth quarter of 2021. Crude oil production inthe United States fell below 10 mbd twice in 2020 and once in early 2021 after peaking at 13.1 mbd in March of 2020.U.S. production rose to 11.8 mbd byDecember 31, 2021 . Similarly,OPEC production declined from over 30 mbd pre-COVID-19 to a pandemic low of 22.5 mbd before gradually recovering to 28.1 mbd byDecember 31, 2021 . While the impact of the COVID-19 pandemic appears to have decreased, elevated risk from the pandemic remains in the oil markets until the current and future COVID-19 pandemic mitigation measures have fully subsided. Bullish fundamentals for crude oil prices were in place whenRussia invadedUkraine in February of 2022, causingthe United States and other countries and certain international organizations to impose broad-ranging economic sanctions onRussia and certain Russian individuals, banking entities and corporations as a response. The war inUkraine , sanctions and the corresponding disruption in the supply of Russian oil, resulted in significant volatility in the oil markets, particularly in early March when WTI crude oil briefly rose to over$123.70 per barrel onMarch 8, 2022 then fell back to$95.04 per barrel onMarch 16, 2022 , before rising and the falling again to end the first quarter of 2022 at$100.28 per barrel. A bullish trend for crude oil emerged from mid-April through earlyJune 2022 when WTI crude oil again topped$120 per barrel before, once again, giving up gains to end the fourth quarter at$80.26 . During the fourth quarter of 2022, crude oil prices exhibited multiple reversals, in contrast to strong gains during the first half of the year and a steady decline during the third quarter of 2022. In 2022,U.S. production rose to a peak of 12.2 mbd whileOPEC production peaked at 29.95 mbd. Despite increased demand and tighter supply (theU.S. ,Russia , andOPEC have still not returned to pre-pandemic production levels), bearish factors weighed on crude prices during the second half of 2022, including a record drawdown inthe United States Strategic Petroleum Reserve,OPEC supply cuts, consumer responses to inflation, rising interest rates, a strong dollar, and 70
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concerns about global economic growth. These factors continue to affect crude prices. Conversely, the ongoing demand recovery for crude oil during a time when supply is lower could lead to higher prices over time. Supply constraints, worker shortages, infrastructure and manufacturing energy usage, the war inUkraine , and other geopolitical tensions, are factors that could contribute to future increases in crude oil prices. Between competing bullish and bearish factors, crude could stay range bound or could exhibit significant movement up or down over the next few quarters. The war inUkraine and the potential for further supply disruptions and sanctions could lead to further volatility. However, if a resolution to the conflict were to occur, volatility could decrease and prices could decline somewhat in a short period of time. Conversely, crude oil prices may be highly reactive to developments as global buyers and sellers of crude reposition their relationships. Crude Oil Price Movements in Comparison toOther Energy Commodities and Investment Categories. USCF believes that investors frequently measure the degree to which prices or total returns of one investment or asset class move up or down in value in concert with another investment or asset class. Statistically, such a measure is usually done by measuring the correlation of the price movements of the two different investments or asset classes over some period of time. The correlation is scaled between 1 and -1, where 1 indicates that the two investment options move up or down in price or value together, known as "positive correlation," and -1 indicates that they move in completely opposite directions, known as "negative correlation." A correlation of 0 would mean that the movements of the two are neither positively nor negatively correlated, known as "non-correlation." That is, the investment options sometimes move up and down together and other times move in opposite directions. For the ten-year time period betweenDecember 31, 2012 andDecember 31, 2022 , the table below compares the monthly movements of crude oil prices versus the monthly movements of the prices of several other energy commodities, such as natural gas, diesel-heating oil, and unleaded gasoline, as well as several major non-commodity investment asset classes, such as large capU.S. equities,U.S. government bonds and global equities.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Crude Oil - 10 Years Large US Global Cap US Gov't Equities Equities Bonds (FTSE (S&P (BEUSG4 World Unleaded Heating Natural Crude Correlation Matrix 10 Years 500) Index) Index) Gasoline Oil Gas OilLarge Cap US Equities (S&P 500) 1.000 (0.015) 0.974 0.464 0.220 0.188 0.378 US Gov't Bonds (BEUSG4 Index) 1.000 0.000 (0.266) (0.422) (0.044) (0.278)Global Equities (FTSE World Index) 1.000 0.508 0.272 0.157 0.430 Unleaded Gasoline 1.000 0.658 0.120 0.765 Heating Oil 1.000 0.105 0.743 Natural Gas 1.000 0.054 Crude Oil 1.000 Source: Bloomberg, NYMEX 71 Table of Contents
The table below covers a more recent, but much shorter, range of dates than the above table.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Crude Oil - 1 Year Large US Global Cap US Gov't Equities Equities Bonds (FTSE (S&P (BEUSG4 World Unleaded Heating Natural Crude Correlation Matrix 1 Year 500) Index) Index) Gasoline Oil Gas Oil Large Cap US Equities (S&P 500) 1.000 0.611 0.988 0.176 (0.029) 0.393 0.176 US Gov't Bonds (BEUSG4 Index) 1.000 0.664 (0.086) (0.567) 0.134 (0.035) Global Equities (FTSE World Index) 1.000
0.155 (0.073) 0.355 0.184 Unleaded Gasoline 1.000 0.533 0.136 0.875 Heating Oil 1.000 0.204 0.591 Natural Gas 1.000 0.157 Crude Oil 1.000 Source: Bloomberg, NYMEX Investors are cautioned that the historical price relationships between crude oil and various other energy commodities, as well as other investment asset classes, as measured by correlation may not be reliable predictors of future price movements and correlation results. The results pictured above would have been different if a different range of dates had been selected. USCF believes that crude oil has historically not demonstrated a strong correlation with equities or bonds over long periods of time. However, USCF also believes that in the future it is possible that crude oil could have long term correlation results that indicate prices of crude oil more closely track the movements of equities or bonds. In addition, USCF believes that, when measured over time periods shorter than ten years, there will always be some periods where the correlation of crude oil to equities and bonds will be either more strongly positively correlated or more strongly negatively correlated than the long term historical results suggest. The correlations between crude oil, natural gas, diesel-heating oil and gasoline are relevant because USCF endeavors to investUSO's assets in Oil Futures Contracts and Other Oil-Related Investments so that daily changes in percentage terms inUSO's per share NAV correlate as closely as possible with daily changes in percentage terms in the price of the Benchmark Oil Futures Contract. If certain other fuel-based commodity futures contracts do not closely correlate with the crude-oil futures contract, then their use could lead to greater tracking error. As noted above, USCF also believes that the changes in percentage terms in the price of the Benchmark Oil Futures Contract will closely correlate with changes in percentage terms in the spot price of light, sweet crude oil.
For the Year Ended
The comparison of the fiscal years endedDecember 31, 2021 and 2020 can be found inUSO's annual report on Form 10-K for the fiscal year endedDecember 31, 2021 located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is incorporated by reference herein.
Critical Accounting Policies
Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted inthe United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates.USO's application of these policies involves judgments and actual results may differ from the estimates used. USCF has evaluated the nature and types of estimates that it makes in preparingUSO's financial statements and related disclosures and has determined that the valuation of its investments, which are not traded on aUnited States or internationally recognized futures exchange (such as forward contracts and OTC swaps) involves a critical accounting policy. The values which are used byUSO for its Oil Futures Contracts are provided by its commodity broker who uses market prices when available, while OTC swaps are valued based on the present value of estimated future cash flows that would be received from or paid to a third party in settlement of these derivative contracts prior to their delivery date and valued on a daily basis. In addition,USO estimates interest and dividend income on a daily basis using prevailing rates earned on its cash and cash equivalents. These estimates are adjusted to the actual amount received on a monthly basis and the difference, if any, is not considered material. 72
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Liquidity and Capital Resources
USO has not made, and does not anticipate making, use of borrowings or other lines of credit to meet its obligations.USO has met, and it is anticipated thatUSO will continue to meet, its liquidity needs in the normal course of business from the proceeds of the sale of its investments, or from the Treasuries, cash and/or cash equivalents that it intends to hold at all times.USO's liquidity needs include: redeeming shares, providing margin deposits for its existing Oil Futures Contracts or the purchase of additional Oil Futures Contracts and posting collateral for its OTC swaps, if applicable, and payment of its expenses, summarized below under "Contractual Obligations."USO currently generates cash primarily from: (i) the sale of baskets consisting of 100,000 shares ("Creation Baskets") and (ii) income earned on Treasuries, cash and/or cash equivalents.USO has allocated substantially all of its net assets to trading in Oil Interests.USO 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-Related Investments. A significant portion ofUSO's NAV is held in cash and cash equivalents that are used as margin and as collateral for its trading in Oil Interests. The balance of the assets is held inUSO's account at its custodian bank and in investments in money market funds and Treasuries at the FCMs. Income received fromUSO's investments in money market funds and Treasuries is paid toUSO . During the year endedDecember 31, 2022 ,USO's expenses did not exceeded the incomeUSO earned and the cash earned from the sale of Creation Baskets and the redemption of Redemption Baskets. During the year endedDecember 31, 2021 ,USO's expenses exceeded the incomeUSO earned and the cash earned from the sale of Creation Baskets and the redemption of Redemption Baskets. During the year endedDecember 31, 2022 ,USO did not use other assets to pay expenses, post expense waiver. To the extent income exceed expenses,USO's NAV will be positively impacted. USCF endeavors to have the value ofUSO's Treasuries, cash and cash equivalents, whether held byUSO or posted as margin or other collateral, at all times approximate the aggregate market value of its obligations for its investments in Oil Interests. Commodity pools' trading positions in futures contracts or other related investments are typically required to be secured by the deposit of margin funds that represent only a small percentage of a futures contract's (or other commodity interest's) entire market value. While USCF has not and does not intend to leverageUSO's assets, it is not prohibited from doing so under the LP Agreement.USO has not and does not intend to leverage its assets and makes its investments accordingly. Consistent with the foregoing,USO's investments will take into account the need forUSO to make permitted investments that also allow it to maintain adequate liquidity to meet its margin and collateral requirements and to avoid, to the extent reasonably possible,USO becoming leveraged. If market conditions require it, these risk reduction procedures may occur on short notice if they occur other than during a roll or rebalance period.USO's investments in Oil Interests may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, most commodity exchanges limit the fluctuations in futures contracts prices during a single day by regulations referred to as "daily limits." During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract has increased or decreased by an amount equal to the daily limit, positions in the contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the specified daily limit. Such market conditions could preventUSO from promptly liquidating its positions in Futures Contracts. During the year endedDecember 31, 2022 ,USO did not purchase or liquidate any of its positions while daily limits were in effect; however,USO cannot predict whether such an event may occur in the future. SinceMarch 23, 2007 ,USO has been responsible for expenses relating to: (i) management fees, (ii) brokerage fees and commissions, (iii) licensing fees for the use of intellectual property, (iv) ongoing registration expenses in connection with offers and sales of its shares subsequent to the initial offering, (v) other expenses, including tax reporting costs, (vi) fees and expenses of the independent directors of USCF and (vii) other extraordinary expenses not in the ordinary course of business.USO may terminate at any time, regardless of whetherUSO has incurred losses, subject to the terms of the LP Agreement. In particular, unforeseen circumstances, including, but not limited to, (i) market conditions, regulatory requirements, risk mitigation measures taken byUSO or third parties or otherwise that would leadUSO to determine that it could no longer foreseeably meet its investment objective or thatUSO's aggregate net assets in relation to its operating expenses or its margin or collateral requirements make the continued operation ofUSO unreasonable or imprudent, or (ii) adjudication of incompetence, bankruptcy, dissolution, withdrawal or removal of USCF as the general partner ofUSO could causeUSO to terminate unless a majority interest of the limited partners within 90 days of the event elects to continue the partnership and appoints a successor general partner, or the affirmative vote of a majority in interest of the limited partners subject to certain conditions. However, no level of losses will requireUSO to terminateUSO .USO's termination would cause the liquidation and potential loss of an investor's investment. Termination could also negatively affect the overall maturity and timing of an investor's investment portfolio. 73 Table of Contents Market Risk
Trading in Oil Futures Contracts and Other Oil-Related Investments, such as forwards, involvesUSO entering into contractual commitments to purchase or sell oil at a specified date in the future. The aggregate market value of the contracts will significantly exceedUSO's future cash requirements sinceUSO intends to close out its open positions prior to settlement. As a result,USO is generally only subject to the risk of loss arising from the change in value of the contracts.USO considers the "fair value" of its derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated withUSO's commitments to purchase oil is limited to the aggregate market value of the contracts held. However, shouldUSO enter into a contractual commitment to sell oil, it would be required to make delivery of the oil at the contract price, repurchase the contract at prevailing prices or settle in cash. Since there are no limits on the future price of oil, the market risk toUSO could be unlimited.USO's exposure to market risk depends on a number of factors, including the markets for oil, the volatility of interest rates and foreign exchange rates, the liquidity of the Oil Futures Contracts and Other Oil-Related Investments markets and the relationships among the contracts held byUSO . Drastic market occurrences could ultimately lead to the loss of all or substantially all of an investor's capital. Credit Risk WhenUSO enters into Oil Futures Contracts and Other Oil-Related Investments, it is exposed to the credit risk that the counterparty will not be able to meet its obligations. The counterparty for the Oil Futures Contracts traded on the NYMEX and on most other futures exchanges is the clearinghouse associated with the particular exchange. In general, in addition to margin required to be posted by the clearinghouse in connection with cleared trades, clearinghouses are backed by their members who may be required to share in the financial burden resulting from the nonperformance of one of their members and, therefore, this additional member support should significantly reduce credit risk.USO is not currently a member of any clearinghouse. Some foreign exchanges are not backed by their clearinghouse members but may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearinghouse, or their members or their financial backers will satisfy their obligations toUSO in such circumstances. USCF attempts to manage the credit risk ofUSO by following various trading limitations and policies. In particular,USO generally posts margin and/or holds liquid assets that are approximately equal to the market value of its obligations to counterparties under the Oil Futures Contracts and Other Oil-Related Investments it holds. USCF has implemented procedures that include, but are not limited to, executing and clearing trades only with creditworthy parties and/or requiring the posting of collateral or margin by such parties for the benefit ofUSO to limit its credit exposure. An FCM, when acting on behalf ofUSO in accepting orders to purchase or sell Oil Futures Contracts onUnited States exchanges, is required by CFTC regulations to separately account for and segregate as belonging toUSO , all assets ofUSO relating to domestic Oil Futures Contracts trading. These FCMs are not allowed to commingleUSO's assets with their other assets. In addition, the CFTC requires FCMs to hold in a secure accountUSO's assets related to foreign Oil Futures Contracts and, in some cases, to cleared swaps executed through the FCMs. Similarly, under its current OTC agreements,USO requires that collateral it posts or receives be posted with its custodian, and under agreements among the custodian,USO and its counterparties, such collateral is segregated.USO may purchase OTC swaps in the future periods, see "Item 3. Quantitative and Qualitative Disclosures About Market Risk" in this annual report on Form 10-K for a discussion of OTC swaps. As ofDecember 31, 2022 ,USO held cash deposits and investments in Treasuries and money market funds in the amount of$1,953,896,501 with the custodian and FCMs. Some or all of these amounts held by a custodian or an FCM, as applicable, may be subject to loss shouldUSO's custodian or FCMs, as applicable, cease operations.
Off Balance Sheet Financing
As ofDecember 31, 2022 ,USO had no loan guarantee, credit support or other off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions relating to certain risks that service providers undertake in performing services which are in the best interests ofUSO . WhileUSO's exposure under these indemnification provisions cannot be estimated, they are not expected to have a material impact onUSO's financial position.
Redemption Basket Obligation
In order to meet its investment objective and pay its contractual obligations described below,USO requires liquidity to redeem shares, which redemptions must be in blocks of 100,000 shares called "Redemption Baskets."USO has to date satisfied this obligation by paying from the cash or cash equivalents it holds or through the sale of its Treasuries in an amount proportionate to the number of shares being redeemed. 74 Table of Contents Contractual ObligationsUSO's primary contractual obligations are with USCF. In return for its services, USCF is entitled to a management fee calculated daily and paid monthly as a fixed percentage ofUSO's NAV, currently 0.45% of NAV on its average daily total net assets. USCF agreed to pay the start-up costs associated with the formation ofUSO , primarily its legal, accounting and other costs in connection with USCF's registration with the CFTC as a CPO and the registration and listing ofUSO and its shares with theSEC ,FINRA and NYSE Arca (formerly, AMEX), respectively. However, sinceUSO's initial offering of shares, offering costs incurred in connection with registering and listing additional shares ofUSO have been directly borne on an ongoing basis byUSO , and not by USCF. USCF pays the fees of the Marketing Agent as well as BNY Mellon's fees for performing administrative, custodial, and transfer agency services. BNY Mellon's fees for performing administrative services include those in connection with the preparation ofUSO's financial statements and itsSEC , NFA and CFTC reports. USCF andUSO have also entered into a licensing agreement with the NYMEX pursuant to whichUSO and the other Related Public Funds, other than BNO, USCI and CPER, pay a licensing fee to the NYMEX.USO also pays the fees and expenses associated with its tax accounting and reporting requirements. USCF paid BBH&Co.'s fees for performing administrative services, including those in connection with the preparation ofUSO's financial statements and itsSEC , NFA and CFTC reports throughMay 31, 2020 . In addition to USCF's management fee,USO pays its brokerage fees (including fees to FCMs), OTC dealer spreads, any licensing fees for the use of intellectual property, and, subsequent to the initial offering, registration and other fees paid to theSEC ,FINRA , or other regulatory agencies in connection with the offer and sale of shares, as well as legal, printing, accounting and other expenses associated therewith, and extraordinary expenses. The latter are expenses not incurred in the ordinary course ofUSO's business, including expenses relating to the indemnification of any person against liabilities and obligations to the extent permitted by law and under the LP Agreement, the bringing or defending of actions in law or in equity or otherwise conducting litigation and incurring legal expenses and the settlement of claims and litigation. Commission payments to FCMs are on a contract-by-contract, or round turn, basis.USO also pays a portion of the fees and expenses of the independent directors of USCF. See Note 3 to the Notes to Financial Statements in Item 8 of this annual report on Form 10-K. The parties cannot anticipate the amount of payments that will be required under these arrangements for future periods, asUSO's per share NAVs and trading levels to meet its investment objective will not be known until a future date. These agreements are effective for a specific term agreed upon by the parties with an option to renew, or, in some cases, are in effect for the duration ofUSO's existence. Either party may terminate these agreements earlier for certain reasons described in the agreements.
As of
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Commodity Price Risk.
USO is exposed to commodity price risk. In particular,USO is exposed to crude oil price risk through its holdings of Oil Futures Contracts together with any other derivatives in which it may invest, which are discussed below. As a result, fluctuations in the value of the Oil Futures Contracts thatUSO holds in its portfolio, as described in "Contractual Obligations" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" above, are expected to directly affect the value ofUSO's shares.
OTC Contract Risk
USO may enter into certain transactions where an OTC component is exchanged for a corresponding futures contract ("Exchange for Related Position" or "EFRP" transactions). In the most common type of EFRP transaction entered into byUSO , the OTC component is the purchase or sale of one or more baskets ofUSO shares. These EFRP transactions may exposeUSO to counterparty risk during the interim period between the execution of the OTC component and the exchange for a corresponding futures contract. Generally, the counterparty risk from the EFRP transaction will exist only on the day of execution. 75
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Swap transactions, like other financial transactions, involve a variety of significant risks. The specific risks presented by a particular swap transaction necessarily depend upon the terms and circumstances of the transaction. In general, however, all swap transactions involve some combination of market risk, credit risk, counterparty credit risk, funding risk, liquidity risk and operational risk. Highly customized swap transactions in particular may increase liquidity risk, which may result in a suspension of redemptions. Highly leveraged transactions may experience substantial gains or losses in value as a result of relatively small changes in the value or level of an underlying or related market factor. In evaluating the risks and contractual obligations associated with a particular swap transaction, it is important to consider that a swap transaction may be modified or terminated only by mutual consent of the original parties and subject to agreement on individually negotiated terms. Therefore, it may not be possible for USCF to modify, terminate or offsetUSO's obligations or its exposure to the risks associated with a transaction prior to its scheduled termination date. To reduce the credit risk that arises in connection with such contracts,USO will generally enter into an agreement with each counterparty based on the Master Agreement published by theInternational Swaps and Derivatives Association that provides for the netting of its overall exposure to its counterparty, if the counterparty is unable to meet its obligations toUSO due to the occurrence of a specified event, such as the insolvency of the counterparty. USCF assesses or reviews, as appropriate, the creditworthiness of each potential or existing counterparty to an OTC swap pursuant to guidelines approved by USCF's board of directors (the "Board"). Furthermore, USCF on behalf ofUSO only enters into OTC swaps with counterparties who are, or are affiliates of, (a) banks regulated by aUnited States federal bank regulator, (b) broker-dealers regulated by theSEC , (c) insurance companies domiciled inthe United States , or (d) producers, users or traders of energy, whether or not regulated by the CFTC. Any entity acting as a counterparty shall be regulated in eitherthe United States or theUnited Kingdom unless otherwise approved by the Board after consultation with its legal counsel. Existing counterparties are also reviewed periodically by USCF.USO will also require that the counterparty be highly rated and/or provide collateral or other credit support. Even if collateral is used to reduce counterparty credit risk, sudden changes in the value of OTC transactions may leave a party open to financial risk due to a counterparty default since the collateral held may not cover a party's exposure on the transaction in such situations. In general, valuing OTC derivatives is less certain than valuing actively traded financial instruments such as exchange-traded futures contracts and securities or cleared swaps because the price and terms on which such OTC derivatives are entered into or can be terminated are individually negotiated, and those prices and terms may not reflect the best price or terms available from other sources. In addition, while market makers and dealers generally quote indicative prices or terms for entering into or terminating OTC swaps, they typically are not contractually obligated to do so, particularly if they are not a party to the transaction. As a result, it may be difficult to obtain an independent value for an outstanding OTC derivatives transaction.
During the reporting period of this annual report on Form 10-K,
USO anticipates that the use of Other Oil-Related Investments together with its investments in Oil Futures Contracts will produce price and total return results that closely track the investment goals ofUSO . However, there can be no assurance of this. OTC swaps may result in higher transaction-related expenses than the brokerage commissions paid in connection with the purchase of Oil Futures Contracts, which may impactUSO's ability to successfully track the Benchmark Oil Futures Contracts. 76
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Item 8. Financial Statements and Supplementary Data.
United States Oil Fund, LP Index to Financial Statements Documents Page Management's Annual Report on Internal Control Over Financial
78
Reporting.
Report of Independent Registered Public Accounting Firm. (PCAOB ID
79
349)
Statements of Financial Condition at
81
Schedules of Investments atDecember 31, 2022 and 2021.
82
Statements of Operations for the years ended
84
and 2020.
Statements of Changes in Partners' Capital for the years ended
85
Statements of Cash Flows for the years ended
86
and 2020.
Notes to Financial Statements for the years ended
87 2021 and 2020. 77 Table of Contents
Management's Annual Report on Internal Control Over Financial Reporting.
USCF assessed the effectiveness ofUSO's internal control over financial reporting as ofDecember 31, 2022 . In making this assessment, it used the criteria set forth by theCommittee of Sponsoring Organizations of theTreadway Commission in Internal Control Integrated Framework (2013). Based on the assessment, USCF believes that, as ofDecember 31, 2022 ,USO's internal control over financial reporting is effective. 78 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying statements of financial condition ofUnited States Oil Fund, LP (the "Fund") as ofDecember 31, 2022 and 2021, including the schedule of investments as ofDecember 31, 2022 and 2021, and the related statements of operations, changes in partners' capital and cash flows for each of the years in the three-year period endedDecember 31, 2022 , and the related notes (collectively referred to as the "financial statements"). We also have audited the Fund's internal control over financial reporting as ofDecember 31, 2022 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission ("COSO"). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position ofUnited States Oil Fund, LP as ofDecember 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period endedDecember 31, 2022 , in conformity with accounting principles generally accepted inthe United States of America . Also, in our opinion, the Fund maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2022 based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinion The Fund's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Fund's financial statements and an opinion on the Fund's internal control over financial reporting based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Fund in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A Fund's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Fund's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Fund; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Fund are being made only in accordance with authorizations of management and directors of the Fund; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Fund's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 79 Table of Contents Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are
no critical audit matters. /s/Spicer Jeffries LLP
We have served as the Fund's auditor since 2005.
Denver, Colorado February 27, 2023 80 Table of ContentsUnited States Oil Fund, LP Statements of Financial Condition AtDecember 31, 2022 andDecember 31, 2021 December 31, 2022 December 31, 2021 Assets Cash and cash equivalents (at cost$856,400,000 and$1,565,100,289 , respectively) (Notes 2 and 5)$ 856,400,000 $ 1,565,100,289 Equity in trading accounts: Cash and cash equivalents (at cost$1,097,496,501 and$699,318,107 , respectively) 1,097,496,501 699,318,107 Unrealized gain (loss) on open commodity futures contracts 22,185,936 114,437,224 Unrealized gain (loss) on open swap contracts (4,145) - Dividends receivable 3,913,421 33,715 Interest receivable 2,827,515 53,541 Prepaid insurance* 141,644 144,695 Total Assets$ 1,982,960,872 $ 2,379,087,571 Liabilities and Partners' Capital Payable due to Broker $ 1,387,987 $ - General Partner management fees payable (Note 3) 848,801 938,440 Professional fees payable 2,442,050 3,616,000 Due to custody 1,012,851 - Brokerage commissions payable 107,462 200,588 Directors' fees payable* 42,213 44,337 License fees payable 104,170 128,940 Total Liabilities 5,945,534 4,928,305
Commitments and Contingencies (Notes 3, 4 & 5)
Partners' Capital General Partners - - Limited Partners 1,977,015,338 2,374,159,266Total Partners' Capital
1,977,015,338 2,374,159,266
Total Liabilities and Partners' Capital $
1,982,960,872
Limited Partners' shares outstanding 28,223,603 43,823,603 Net asset value per share $ 70.05 $ 54.18 Market value per share $ 70.11 $ 54.36
* Certain prior year amounts have been reclassified for consistency with the current presentation.
See accompanying notes to financial statements.
81 Table of ContentsUnited States Oil Fund, LP Schedule of Investments At December 31, 2022 Fair Value/ Unrealized Gain (Loss) on Open % of Notional Number of Commodity Partners' Amount Contracts Contracts Capital Open Commodity Futures Contracts - Long United States Contracts NYMEX WTI Crude Oil Futures CL February 2023 contracts, expiring January 2023$ 341,970,347 4,194$ (5,359,907) (0.27) NYMEX WTI Crude Oil Futures CLMarch 2023 contracts, expiring February 2023 329,163,995 4,184 7,438,805 0.38 NYMEX WTI Crude Oil Futures CLApril 2023 contracts, expiring March 2023 251,701,260 3,136 840,820 0.04 NYMEX WTI Crude Oil Futures CLMay 2023 contracts, expiring April 2023 236,993,670 3,138 15,458,430 0.78 NYMEX WTI Crude Oil Futures CLJune 2023 contracts, expiring May 2023 256,607,266 3,149 (4,057,466) (0.21) NYMEX WTI Crude Oil Futures CLJuly 2023 contracts, expiring June 2023 78,271,590 1,055 5,949,060 0.30 NYMEX WTI Crude Oil Futures CL December 2023 contracts, expiring November 2023 166,464,986 2,178 1,916,194 0.10 Total Open Futures Contracts*$ 1,661,173,114 21,034
$ 22,185,936 1.12 Shares/Principal % of Partners' Amount Market Value Capital Cash Equivalents United States Money Market Funds Morgan Stanley Institutional Liquidity Funds - Government Portfolio - Institutional Shares, 4.12%# 856,400,000$ 856,400,000 43.32 Total United States Money Market Funds$ 856,400,000 43.32
Open OTC Commodity Swap Contracts
Unrealized Fair Gain (Loss) Value/Open on Fund Receives Commodity Upfront Commodity from Fund Pays Payment
Expiration Notional Swap Payments/(Premiums Swap
Counterparty Counterparty Counterparty Frequency
Date Amount Contracts Received) Contracts(a) MQCP361E Index(b) 0.26 Macquarie Bank Ltd. monthly 01/20/2023 169,821,721 169,819,302 - (2,419) SGIXCWTI Index(b) 0.25 Societe Generale monthly 06/30/2023 124,272,076 124,270,350 - (1,726) Total Open OTC Commodity Swap ContractsÙ 294,093,797 294,089,652 - (4,145)
(a) Reflects the value at reset date of
(b) Custom index comprised of a basket of underlying instruments.
#Reflects the 7-day yield at
ÙCollateral amounted to
*Collateral amounted to
See accompanying notes to financial statements.
82 Table of ContentsUnited States Oil Fund, LP Schedule of Investments At December 31, 2021 Fair Value/ Unrealized Gain (Loss) on Open Notional Number of Commodity % of Partners' Amount Contracts Contracts Capital Open Commodity Futures Contracts - Long United States Contracts NYMEX WTI Crude Oil FuturesFebruary 2022 contracts, expiring January 2022$ 450,997,278 6,313$ 23,803,452 1.00 NYMEX WTI Crude Oil FuturesMarch 2022 contracts, expiring February 2022 447,523,600 6,341 27,290,480 1.15 NYMEX WTI Crude Oil Futures CL April 2022 contracts, expiring March 2022 353,136,644 4,783 2,957,706 0.13 NYMEX WTI Crude Oil FuturesMay 2022 contracts, expiring April 2022 338,534,160 4,816 17,560,880 0.74 NYMEX WTI Crude Oil Futures June 2022 contracts, expiring May 2022 317,665,641 4,853 38,398,969 1.62 NYMEX WTI Crude Oil Futures July 2022 contracts, expiring June 2022 111,497,360 1,631 7,206,820 0.30 NYMEX WTI Crude Oil FuturesDecember 2022 contracts, expiring November 2022 240,133,253 3,399 (2,781,083) (0.12) Total Open Futures Contracts*$ 2,259,487,936 32,136 $
114,437,224 4.82 Shares/Principal Market % of Partners' Amount Value Capital Cash Equivalents United States Money Market FundsGoldman Sachs Financial Square Government Fund - Institutional Shares, 0.03%# 31,002,000$ 31,002,000 1.31 Morgan Stanley Institutional Liquidity Funds - Government Portfolio - Institutional Shares, 0.03%# 1,079,000,000 1,079,000,000 45.45RBC U.S. Government Money Market Fund - Institutional Shares, 0.03%# 434,532,000 434,532,000 18.30 Total United States Money Market Funds$ 1,544,534,000 65.06 # Reflects the 7-day yield atDecember 31, 2021 . * Collateral amounted to$699,318,107 on open commodity futures contracts.
See accompanying notes to financial statements.
83 Table of ContentsUnited States Oil Fund, LP Statements of Operations For the years endedDecember 31, 2022 , 2021 and 2020 Year ended Year ended Year ended December 31, 2022 December 31, 2021 December 31, 2020 Income Gain (loss) on trading of commodity futures and swap contracts: Realized gain (loss) on closed commodity futures contracts$ 874,875,947 $ 1,911,763,583 $ (2,251,576,260) Realized gain (loss) on swap contracts (13,603,878) - - Change in unrealized gain (loss) on open commodity futures contracts (92,251,288) (287,006,734) 363,923,391 Change in unrealized gain (loss) on open OTC commodity swap contracts (4,145)
- - Dividend income 17,656,102 431,883 1,949,571 Interest income* 13,808,136 869,933 8,528,581 ETF transaction fees 231,000 169,000 289,546 Total Income (Loss)$ 800,711,874 $
1,626,227,665
Expenses
13,383,302$ 15,388,313 Professional fees 1,908,299 6,994,549 2,694,975 Brokerage commissions 807,322 1,123,971 6,104,865
Directors' fees and insurance 828,823
745,448 391,372 License fees 384,747 446,110 512,944 Registration fees - 1,260,041 3,203,939 Total Expenses$ 15,471,597 $ 23,953,421 $ 28,296,408 Net Income (Loss)$ 785,240,277 $ 1,602,274,244 $ (1,905,181,579) Net Income (Loss) per limited partner share $ 15.87 $ 21.11 $ (69.20) Net Income (Loss) per weighted average limited partner share $ 22.26 $ 24.54 $ (16.61) Weighted average limited partner shares outstanding 35,283,055 65,289,630 114,667,411
* Interest income does not exceed paid in kind of 5%.
See accompanying notes to financial statements.
84 Table of ContentsUnited States Oil Fund, LP Statement of Changes in Partners' Capital For the years endedDecember 31, 2022 , 2021 and 2020 Limited Partners* Year ended Year ended Year ended December 31, December 31, December 31, 2022 2021 2020 Balances at beginning of year$ 2,374,159,266 $ 3,625,217,746 $ 1,170,976,258 Addition of 48,500,000, 26,000,000 and 207,062,500 partnership shares, respectively 3,508,243,142 1,239,249,023 8,030,979,653 Redemption of (64,100,000), (91,800,000) and (108,888,897) partnership shares, respectively (4,690,627,347) (4,092,581,747) (3,671,556,586) Net income (loss) 785,240,277
1,602,274,244 (1,905,181,579)
Balances at end of year$ 1,977,015,338 $
2,374,159,266
*
See accompanying notes to financial statements.
85 Table of ContentsUnited States Oil Fund, LP Statements of Cash Flows For the years endedDecember 31, 2022 , 2021 and 2020 Year ended Year ended Year ended December 31, 2022 December 31, 2021 December 31, 2020 Cash Flows from Operating Activities: Net income (loss)$ 785,240,277 $ 1,602,274,244 $ (1,905,181,579) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Change in unrealized (gain) loss on open commodity futures contracts 92,251,288 287,006,734 (363,923,391) Change in unrealized (gain) loss on open swap contracts 4,145 - - (Increase) decrease in dividends receivable (3,879,706) (30,032) 2,200 (Increase) decrease in interest receivable (2,773,974) 107,416 (132,758) (Increase) decrease in prepaid insurance* 3,051 (106,243) 817 (Increase) decrease in prepaid registration fees - 1,260,041 (1,185,800) (Increase) decrease in ETF transaction fees receivable - 2,000 - Increase (decrease) payable due to custody 1,012,851 - - Increase (decrease) in payable due to Broker 1,387,987 (23,667,355) 14,846,706 Increase (decrease) in General Partner management fees payable (89,639) (469,125) 939,671 Increase (decrease) in professional fees payable (1,173,950) 1,712,827 449,177 Increase (decrease) in brokerage commissions payable (93,126) (123,270) 233,897 Increase (decrease) in directors'fees payable* (2,124) (7,712) 8,661 Increase (decrease) in license fees payable (24,770) (40,723) 129,894 Net cash provided by (used in) operating activities 871,862,310
1,867,918,802 (2,253,812,505)
Cash Flows from Financing Activities: Addition of partnership shares 3,508,243,142 1,239,249,023 8,030,979,653 Redemption of partnership shares (4,690,627,347) (4,151,987,568) (3,644,174,420) Net cash provided by (used in) financing activities (1,182,384,205)
(2,912,738,545) 4,386,805,233
Net Increase (Decrease) in Cash and Cash Equivalents (310,521,895)
(1,044,819,743) 2,132,992,728
Total Cash, Cash Equivalents and Equity in Trading Accounts, beginning of year 2,264,418,396 3,309,238,139 1,176,245,411 Total Cash, Cash Equivalents and Equity in Trading Accounts, end of year$ 1,953,896,501 $
2,264,418,396
Components of Cash and Cash Equivalents: Cash and cash equivalents$ 856,400,000 $ 1,565,100,289 $ 2,585,466,700 Equity in Trading Accounts: Cash and cash equivalents 1,097,496,501 699,318,107 723,771,439 Total Cash, Cash Equivalents and Equity in Trading Accounts$ 1,953,896,501 $
2,264,418,396
*Certain prior year amounts have been reclassified for consistency with the current presentation.
See accompanying notes to financial statements.
86 Table of ContentsUnited States Oil Fund, LP Notes to Financial Statements For the years endedDecember 31, 2022 , 2021 and 2020
NOTE 1 - ORGANIZATION AND BUSINESS
TheUnited States Oil Fund, LP ("USO") was organized as a limited partnership under the laws of the state ofDelaware onMay 12, 2005 .USO is a commodity pool that issues limited partnership interests ("shares") that may be purchased and sold on theNYSE Arca, Inc. (the "NYSE Arca"). Prior toNovember 25, 2008 ,USO's shares traded on theAmerican Stock Exchange (the "AMEX").USO will continue in perpetuity, unless terminated sooner upon the occurrence of one or more events as described in its Seventh Amended and Restated Agreement of Limited Partnership dated as ofDecember 15, 2017 (the "LP Agreement"), which grants full management control to its general partner,United States Commodity Funds LLC ("USCF"). The investment objective ofUSO is for the daily changes in percentage terms of its shares' per share net asset value ("NAV") to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered toCushing, Oklahoma , as measured by the daily changes in the price of the Benchmark Oil Futures Contract, plus interest earned onUSO's collateral holdings, lessUSO's expenses. The Benchmark Oil Futures Contract is the futures contract for light, sweet crude oil as traded on theNew York Mercantile Exchange (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. Specifically,USO seeks to achieve its investment objective by investing so that the average daily percentage change inUSO's NAV for any period of 30 successive valuation days will be within plus/minus ten percent (10)% of the average daily percentage change in the price of the Benchmark Oil Futures Contract over the same period.USO is currently unable to pursue its investment objective with the same high degree of success that it has in the past due to its limited ability to invest in the Benchmark Oil Futures Contract and certain other Oil Futures Contracts, as defined below, to the same extent it was able to before the market conditions that occurred in 2020, as described herein, and the resulting regulatory requirements imposed onUSO , and risk mitigation measures taken, including those taken byUSO's FCMs. As a result of such market conditions, the regulatory conditions that were and could again be imposed and the risk mitigation measures described below, there is still uncertainty as to whetherUSO will be able to achieve its investment objective within as narrow a percentage change difference in its NAV for any period of 30 successive valuation days and the average daily percentage change in the price of the Benchmark Oil Futures Contract as it typically had prior to the Spring of 2020 due to the foregoing factors. Investors should be aware thatUSO's investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil or any particular futures contract based on light, sweet crude oil, nor isUSO's investment objective for the percentage change in its NAV to reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one day. This is because natural market forces called contango and backwardation have impacted the total return on an investment inUSO's shares relative to a hypothetical direct investment in crude oil and, in the future, it is likely that the relationship between the market price ofUSO's shares and changes in the spot prices of light, sweet crude oil will continue to be so impacted by contango and backwardation. WhileUSO's shares may be impacted by contango and backwardation, the potential costs associated with physically owning and storing crude oil, could be substantial. USCF believes that it is not practical to manage the portfolio to achieve the foregoing investment objective when investing in Oil Futures Contracts (as defined below) and Other Oil-Related Investments (as defined below).USO accomplishes its objective through investments in futures contracts for light, sweet crude oil and other types of crude oil, diesel-heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or otherU.S. and foreign exchanges (collectively, "Oil Futures Contracts") and other oil-related investments such as cash-settled options on Oil Futures Contracts, forward contracts for oil, cleared swap contracts and over-the-counter ("OTC") transactions that are based on the price of crude oil, diesel-heating oil, gasoline, natural gas and other petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing (collectively, "Other Oil-Related Investments"). As ofDecember 31, 2022 ,USO held 21,034 Oil Futures Contracts for light, sweet crude oil traded on the NYMEX and did not hold any Oil Futures Contracts for light, sweet crude oil traded on theICE Futures Europe .USO commenced investment operations onApril 10, 2006 and has a fiscal year ending onDecember 31 . USCF is a member of theNational Futures Association (the "NFA") and became registered as a commodity pool operator with theCommodity Futures Trading Commission (the "CFTC") effectiveDecember 1, 2005 and a swaps firm onAugust 8, 2013 . 87 Table of Contents
USCF is also the general partner of the United States Natural Gas Fund, LP ("UNG"), the United States 12 Month Oil Fund, LP ("USL") and theUnited States Gasoline Fund, LP ("UGA"), which listed their limited partnership shares on the AMEX under the ticker symbols "UNG" onApril 18, 2007 , "USL" onDecember 6, 2007 and "UGA" onFebruary 26, 2008 , respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each of UNG's, USL's and UGA's shares commenced trading on the NYSE Arca onNovember 25, 2008 . USCF is also the general partner of the United States 12 Month Natural Gas Fund, LP ("UNL") and the United States Brent Oil Fund, LP ("BNO"), which listed their limited partnership shares on the NYSE Arca under the ticker symbols "UNL" onNovember 18, 2009 and "BNO" onJune 2, 2010 , respectively. USCF is also the sponsor of the United States Commodity Index Funds Trust ("USCIFT"), aDelaware statutory trust and each of its series: the United States Commodity Index Fund ("USCI") and theUnited States Copper Index Fund ("CPER"). USCI and CPER listed their shares on the NYSE Arca under the ticker symbols "USCI" onAugust 10, 2010 and "CPER" onNovember 15, 2011 , respectively.
USO issues shares to certain authorized purchasers ("Authorized Participants") by offering baskets consisting of 100,000 shares ("Creation Baskets") throughALPS Distributors, Inc. , as the marketing agent (the "Marketing Agent"). The purchase price for a Creation Basket is based upon the NAV of a share calculated shortly after the close of the core trading session on the NYSE Arca on the day the order to create the basket is properly received. Authorized Participants payUSO a transaction fee of$1,000 for each order placed to create one or more Creation Baskets or to redeem one or more baskets ("Redemption Baskets"), consisting of 100,000 shares. Shares may be purchased or sold on a nationally recognized securities exchange in smaller increments than a Creation Basket or Redemption Basket. Shares purchased or sold on a nationally recognized securities exchange are not purchased or sold at the per share NAV ofUSO but rather at market prices quoted on such exchange. OnApril 28, 2020 , after the close of trading on the NYSE Arca,USO effected a 1-for-8 reverse share split and post-split shares ofUSO began trading onApril 29, 2020 . As a result of the reverse share split, every eight pre-split shares ofUSO were automatically exchanged for one post-split share. Immediately prior to the reverse split, there were 1,482,900,000 shares ofUSO issued and outstanding, representing a per share NAV of$2.04 . Immediately after the effect of the reverse share split, the number of issued and outstanding shares ofUSO decreased to 185,362,500, not accounting for fractional shares, and the per share NAV increased to$16.35 . In connection with the reverse share split, the CUSIP number forUSO's shares changed to 91232N207.USO's ticker symbol, "USO ," remains the same. The accompanying financial statements have been adjusted to reflect the effect of the reverse share split on a retroactive basis. InApril 2006 ,USO initially registered 17,000,000 shares on Form S-1 with theU.S. Securities and Exchange Commission (the "SEC"). OnApril 10, 2006 ,USO listed its shares on the AMEX under the ticker symbol "USO" and switched to trading on the NYSE Arca under the same ticker symbol onNovember 25, 2008 . On that day,USO established its initial per share NAV by setting the price at$67.39 and issued 200,000 shares in exchange for$13,479,000 .USO also commenced investment operations onApril 10, 2006 , by purchasing Oil Futures Contracts traded on the NYMEX based on light, sweet crude oil. As ofDecember 31, 2022 ,USO had registered a total of 5,627,000,000 shares.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared in conformity with
Revenue Recognition
Commodity futures contracts, swap and forward contracts, physical commodities and related options are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized gains or losses on open contracts are reflected in the statements of financial condition and represent the difference between the original contract amount and the market value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for swap and forward contracts, physical commodities, and their related options) as of the last business day of the year or as of the last date of the financial statements. Changes in the unrealized gains or losses between periods are reflected in the statements of operations.USO earns income on funds held at the custodian or futures commission merchants ("FCMs") at prevailing market rates earned on such investments. 88 Table of Contents Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
In accordance withU.S. GAAP,USO is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any tax related appeals or litigation processes, based on the technical merits of the position.USO files an income tax return in theU.S. federal jurisdiction and may file income tax returns in variousU.S. states.USO is not subject to income tax return examinations by major taxing authorities for years before 2019. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results inUSO recording a tax liability that reduces net assets. However,USO's conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analysis of and changes to tax laws, regulations and interpretations thereof.USO recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the year endedDecember 31, 2022 .
Creations and Redemptions
Authorized Participants may purchase Creation Baskets or redeem Redemption Baskets only in blocks of 100,000 shares at a price equal to the NAV of the shares calculated shortly after the close of the core trading session on the NYSE Arca on the day the order is placed.
USO receives or pays the proceeds from shares sold or redeemed within two business days after the trade date of the purchase or redemption. The amounts due from Authorized Participants are reflected inUSO's statements of financial condition as receivable for shares sold and amounts payable to Authorized Participants upon redemption are reflected as payable for shares redeemed.
Authorized Participants pay
Profit or loss shall be allocated among the partners of
Calculation of Per Share NAV
USO's per share NAV is calculated on each NYSE Arca trading day by taking the current market value of its total assets, subtracting any liabilities and dividing that amount by the total number of shares outstanding.USO uses the closing price for the contracts on the relevant exchange on that day to determine the value of contracts held on such exchange.
Net Income (Loss) Per Share
Net income (loss) per share is the difference between the per share NAV at the beginning of each period and at the end of each period. The weighted average number of shares outstanding was computed for purposes of disclosing net income (loss) per weighted average share. The weighted average shares are equal to the number of shares outstanding at the end of the period, adjusted proportionately for shares added and redeemed based on the amount of time the shares were outstanding during such period. There were no shares held by USCF atDecember 31, 2022 .
Offering Costs
Offering costs incurred in connection with the registration of additional shares after the initial registration of shares are borne byUSO . These costs include registration fees paid to regulatory agencies and all legal, accounting, printing and other expenses associated with such offerings. These costs are accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or a shorter period if warranted. 89 Table of Contents Cash Equivalents
Cash equivalents include money market funds and overnight deposits or time deposits with original maturity dates of six months or less.
Reclassification
Certain amounts in the accompanying financial statements were reclassified to conform to the current presentation.
Use of Estimates
The preparation of financial statements in conformity withU.S. GAAP requires USCF to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
NOTE 3 - FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS
USCF Management Fee
Under the LP Agreement, USCF is responsible for investing the assets of
Ongoing Registration Fees and Other Offering Expenses
USO pays all costs and expenses associated with the ongoing registration of its shares subsequent to the initial offering. These costs include registration or other fees paid to regulatory agencies in connection with the offer and sale of shares, and all legal, accounting, printing and other expenses associated with such offer and sale. For the year endedDecember 31, 2022 ,USO did not incur in registration fees and other offering expenses. For the years endedDecember 31, 2022 , 2021 and 2020,USO incurred$0 ,$1,260,041 and$3,203,939 respectively, in registration fees and other offering expenses.
Independent Directors' and Officers' Expenses
USO is responsible for paying its portion of the directors' and officers' liability insurance forUSO and the other Related Public Funds and the fees and expenses of the independent directors who also serve as audit committee members ofUSO and the other Related Public Funds.USO shares the fees and expenses on a pro rata basis with each otherRelated Public Fund , as described above, based on the relative assets of eachRelated Public Fund computed on a daily basis. These fees and expenses for the year endingDecember 31, 2022 totaled$828,823 forUSO and, in the aggregate forUSO and the other Related Public Funds, approximately$1,258,000 . For the year endingDecember 31, 2021 these fees and expenses were$745,448 forUSO and, in the aggregate forUSO and the Related Public Funds,$1,081,963 . For the year endedDecember 31, 2020 , these fees and expenses were$585,896 forUSO and the Related Public Funds.USO's portion of such fees and expenses for the year endedDecember 31, 2020 was$391,372 .
Licensing Fees
As discussed in Note 4 below,
Investor Tax Reporting Cost
The fees and expenses associated withUSO's audit expenses and tax accounting and reporting requirements are paid byUSO . These costs were estimated to be$1,779,300 for the year endingDecember 31, 2022 . For the years endingDecember 31, 2021 , and 2020USO's investor reporting costs totaled$6,671,000 and$2,694,975 respectively. Tax reporting costs fluctuate between years due to the number of shareholders during any given year. 90 Table of Contents Other Expenses and Fees In addition to the fees described above,USO pays all brokerage fees and other expenses in connection with the operation ofUSO , excluding costs and expenses paid by USCF as outlined in Note 4 - Contracts and Agreements below.
NOTE 4 - CONTRACTS AND AGREEMENTS
Marketing Agent Agreement
USO is party to a marketing agent agreement, dated as ofMarch 13, 2006 , as amended from time to time, with the Marketing Agent and USCF, whereby the Marketing Agent provides certain marketing services forUSO as outlined in the agreement. The fees of the Marketing Agent, which are borne by USCF, include a marketing fee of$425,000 per annum plus the following incentive fee: 0.00% onUSO's assets from$0 -$500 million ; 0.04% onUSO's assets from$500 million -$4 billion and 0.03% onUSO's assets in excess of$4 billion . The agreement with the Marketing Agent has been amended and, commencingOctober 1, 2022 , the fee of the Marketing Agent, which is calculated daily and payable monthly by USCF, is equal to 0.025% ofUSO's total net assets. In no event may the aggregate compensation paid to the Marketing Agent and any affiliate of USCF for distribution-related services exceed 10% of the gross proceeds ofUSO's offering.
The above fee does not include website construction and development, which are also borne by USCF.
Custody,
USCF engaged The Bank of New York Mellon, aNew York corporation authorized to conduct a banking business ("BNY Mellon"), to provideUSO and each of the other Related Public Funds with certain custodial, administrative and accounting, and transfer agency services, pursuant to the following agreements with BNY Mellon dated as ofMarch 20, 2020 (together, the "BNY Mellon Agreements"), which were effective as ofApril 1, 2020 : (i) a Custody Agreement; (ii) aFund Administration and Accounting Agreement; and (iii) aTransfer Agency and Service Agreement. USCF pays the fees of BNY Mellon for its services under the BNY Mellon Agreements and such fees are determined by the parties from time to time.
Brokerage and Futures Commission Merchant Agreements
USO entered into a brokerage agreement withRBC Capital Markets LLC ("RBC") to serve asUSO's FCM effectiveOctober 10, 2013 .USO has engaged each ofRCG Division of Marex Spectron ("RCG"),E D & F Man Capital Markets Inc. ("MCM") andMacquarie Futures USA LLC ("MFUSA") to serve as additional FCMs toUSO effective onMay 28, 2020 ,June 5, 2020 , andDecember 3, 2020 , respectively. The agreements withUSO's FCMs require the FCMs to provide services toUSO in connection with the purchase and sale of Oil Futures Contracts and Other Oil-Related Investments that may be purchased and sold by or through the applicable FCM forUSO's account. In accordance with the FCM agreements,USO pays each FCM commissions of approximately$7 to$8 per round-turn trade, including applicable exchange, clearing and NFA fees for Oil Futures Contracts and options on Oil Futures Contracts. Such fees include those incurred when purchasing Oil Futures Contracts and options on Oil Futures Contracts whenUSO issues shares as a result of a Creation Basket, as well as fees incurred when selling Oil Futures Contracts and options on Oil Futures Contracts whenUSO redeems shares as a result of a Redemption Basket. Such fees are also incurred when Oil Futures Contracts and options on Oil Futures Contracts are purchased or redeemed for the purpose of rebalancing the portfolio.USO also incurs commissions to brokers for the purchase and sale of Oil Futures Contracts, Other Oil-Related Investments or short-term obligations ofthe United States of two years or less ("Treasuries"). Year ended Year ended Year ended December 31, 2022 December 31, 2021 December 31, 2020 Total commissions accrued to brokers $ 807,322 $ 1,123,971 $ 6,104,865 Total commissions as annualized percentage of average total net assets 0.03 % 0.04 % 0.18 % Commissions accrued as a result of rebalancing $ 519,680 $ 858,171 $ 5,072,915 Percentage of commissions accrued as a result of rebalancing 64.37 % 76.35 % 83.10 % Commissions accrued as a result of creation and redemption activity $ 287,642 $ 265,800 $ 1,031,950 Percentage of commissions accrued as a result of creation and redemption activity 35.63 % 23.65 % 16.90 % 91 Table of Contents The decrease in total commissions accrued to brokers for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was due primarily to a lower number of crude oil futures contracts being held and traded.
Swap Dealer Agreements
USO entered into ISDA 2002 Master Agreements with each ofMacquarie Bank Limited the ("Macquarie ISDA") and Société Générale ("Société Générale ISDA") onNovember 30, 2021 andJune 13, 2022 , respectively, pursuant to which each ofMacquarie Bank Limited and Société Générale has agreed to serve as an over-the-counter ("OTC") swap counterparty forUSO . The Macquarie ISDA and the Société Générale ISDA each provideUSO with the ability to invest in OTC swaps in furtherance ofUSO's investment objective by providing it with investment flexibility in light of market conditions, liquidity, regulatory requirements, and risk diversification.USO may enter into OTC swap transactions under each of the Macquarie ISDA and Société Générale ISDA in light of the foregoing. Any OTC swap transactions ofUSO that are outstanding under the Macquarie ISDA and the Société Générale ISDA, along withUSO's other holdings, will be published onUSO's webpage, www.uscfinvestments.com. In accordance with each of the swap agreements described above,USO pays each swap dealer a flat fee in a range between 0.20% and 0.30% on the daily notional value of each OTC swap transaction.
NYMEX Licensing Agreement
USO and the NYMEX entered into a licensing agreement onApril 10, 2006 , as amended onOctober 20, 2011 , wherebyUSO was granted a non-exclusive license to use certain of the NYMEX's settlement prices and service marks. Under the licensing agreement,USO and the other Related Public Funds, other than BNO, USCI, and CPER, pay the NYMEX an asset-based fee for the license, the terms of which are described in Note 3.USO expressly disclaims any association with the NYMEX or endorsement ofUSO by the NYMEX and acknowledges that "NYMEX" and "New York Mercantile Exchange " are registered trademarks of the NYMEX.
NOTE 5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES
USO may engage in the trading of futures contracts, options on futures contracts, cleared swaps and OTC swaps (collectively, "derivatives").USO is exposed to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the risk of failure by another party to perform according to the terms of a contract.USO may enter into futures contracts, options on futures contracts, cleared swaps, and OTC-swaps to gain exposure to changes in the value of an underlying commodity. A futures contract obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity at a specified time and place. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery. Cleared swaps are agreements that are eligible to be cleared by a clearinghouse, e.g.,ICE Clear Europe , and provide the efficiencies and benefits that centralized clearing on an exchange offers to traders of futures contracts, including credit risk intermediation and the ability to offset positions initiated with different counterparties. OTC swaps are entered into between two parties in private contracts. In an OTC swap, each party bears credit risk to the other party, i.e., the risk that the other party may not be able to perform its obligations under the OTC swap. The purchase and sale of futures contracts, options on futures contracts and cleared swaps require margin deposits with an FCM. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires FCMs to segregate all customer transactions and assets from the FCM's proprietary transactions and assets. To reduce the credit risk that arises in connection with OTC swaps,USO will generally enter into an agreement with each counterparty based on the Master Agreement published by theInternational Swaps and Derivatives Association, Inc. , which provides for the netting of its overall exposure to its counterparty. The Master Agreement is negotiated as between the parties and would address, among other things, the exchange of margin between the parties. Futures contracts, options on futures contracts and cleared swaps involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss in excess of the amount of variation margin. The face or contract amounts reflect the extent of the total exposureUSO has in the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of an illiquid market for a futures contract. Buying and selling options on futures contracts exposes investors to the risks of purchasing or selling futures contracts.
As to OTC swaps, valuing OTC derivatives is less certain than valuing actively traded financial instruments such as exchange-traded futures contracts and securities or cleared swaps, because the price and terms on which such OTC derivatives are entered into or can be
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terminated are individually negotiated, and those prices and terms may not reflect the best price or terms available from other sources. In addition, while market makers and dealers generally quote indicative prices or terms for entering into or terminating OTC contracts, they typically are not contractually obligated to do so, particularly if they are not a party to the transaction. As a result, it may be difficult to obtain an independent value for an outstanding OTC derivatives transaction. Significant market volatility has recently occurred in the crude oil markets and the crude oil futures markets. Such volatility is attributable in part to the COVID-19 pandemic, related supply chain disruptions, war, including the war inUkraine , and continuing disputes among oil-producing countries. These factors could cause continuing or increased volatility in the future, which may affect the value, pricing and liquidity of some investments or other assets, including those held by or invested in byUSO and the impact of which could limitUSO's ability to have a substantial portion of its assets invested in the Futures Contracts and/or Other Oil-Related Investments. All of the futures contracts held byUSO throughDecember 31, 2022 were exchange-traded. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with OTC swaps since, in OTC swaps, a party must rely solely on the credit of its respective individual counterparties.USO entered OTC swaps during the period endedMarch 31, 2022 . These OTC swaps are subject to the credit risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments is the net unrealized gain, if any, on the transaction.USO also has credit risk to the sole counterparty to all domestic and foreign futures contracts, the clearinghouse for the exchange on which the relevant contracts are traded. In addition,USO bears the risk of financial failure by the clearing broker.USO's cash and other property, such as Treasuries, deposited with its FCMs are considered commingled with all other customer funds, subject to such FCM's segregation requirements. In the event of an FCM's insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total of cash and other property deposited. The insolvency of an FCM could result in the complete loss ofUSO's assets posted with that FCM; however, the majority ofUSO's assets are held in investments in Treasuries, cash and/or cash equivalents withUSO's custodian and would not be impacted by the insolvency of an FCM. The failure or insolvency ofUSO's custodian, however, could result in a substantial loss ofUSO's assets. USCF invests a portion ofUSO's cash in money market funds that seek to maintain a stable per share NAV.USO is exposed to any risk of loss associated with an investment in such money market funds. As ofDecember 31, 2022 andDecember 31, 2021 ,USO held investments in money market funds in the amounts of$856,400,000 and$1,544,534,000 , respectively.USO also holds cash deposits with its custodian. As ofDecember 31, 2022 andDecember 31, 2021 ,USO held cash deposits and investments in Treasuries in the amounts of$1,097,496,501 and$719,884,396 respectively, with the custodian and FCMs. Some or all of these amounts may be subject to loss shouldUSO's custodian and/or FCMs cease operations. For derivatives, risks arise from changes in the market value of the contracts. Theoretically,USO is exposed to market risk equal to the value of futures contracts purchased and unlimited liability on such contracts sold short or that the value of the futures contract could fall below zero. As both a buyer and a seller of options,USO pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option.USO's policy is to continuously monitor its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting controls and procedures. In addition,USO has a policy of requiring review of the credit standing of each broker or counterparty with which it conducts business.
The financial instruments held by
Optimum Strategies Action OnApril 6, 2022 ,USO and USCF were named as defendants in an action filed byOptimum Strategies Fund I, LP , a purported investor in call option contracts onUSO (the "Optimum Strategies Action"). The action is pending in theU.S. District Court for the District of Connecticut at Civil Action No. 3:22-cv-00511. The Optimum Strategies Action asserts claims under the Securities Exchange Act of 1934, as amended (the "1934 Act"), Rule 10b-5 thereunder, and theConnecticut Uniform Securities Act. It purports to challenge statements in registration statements that became effective inFebruary 2020 ,March 2020 , and onApril 20, 2020 , as well as public statements betweenFebruary 2020 andMay 2020 , in connection with certain extraordinary market conditions and the attendant risks that caused the demand for oil to fall precipitously, including the COVID-19 global pandemic and theSaudi Arabia -Russia oil price war. The complaint seeks damages, interest, costs, attorney's fees, and equitable relief. 93
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USCF and
Settlement of
OnNovember 8, 2021 , USCF andUSO announced a resolution with each of theSEC and the CFTC relating to matters set forth in certain Wells Notices issued by the staffs of each of theSEC and CFTC as more fully described below. OnAugust 17, 2020 , USCF,USO , andJohn Love received a "Wells Notice" from the staff of theSEC (the "SEC Wells Notice"). The SEC Wells Notice stated that theSEC staff made a preliminary determination to recommend that theSEC file an enforcement action against USCF,USO , andMr. Love alleging violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, as amended (the "1933 Act"), and Section 10(b) of the 1934 Act, and Rule 10b-5 thereunder. Subsequently, onAugust 19, 2020 , USCF,USO , andMr. Love received a Wells Notice from the staff of the CFTC (the "CFTC Wells Notice"). The CFTC Wells Notice stated that the CFTC staff made a preliminary determination to recommend that the CFTC file an enforcement action against USCF,USO , andMr. Love alleging violations of Sections 4o(1)(A) and (B) and 6(c)(1) of the Commodity Exchange Act of 1936, as amended (the "CEA"), 7 U.S.C. §§ 6o(1)(A) and (B) and 9(1) (2018), and CFTC Regulations 4.26, 4.41, and 180.1(a), 17 C.F.R. §§ 4.26, 4.41, 180.1(a) (2019). OnNovember 8, 2021 , acting pursuant to an offer of settlement submitted by USCF andUSO , theSEC issued an order instituting cease-and-desist proceedings, making findings, and imposing a cease-and-desist order pursuant to Section 8A of the 1933 Act, directing USCF andUSO to cease and desist from committing or causing any violations of Section 17(a)(3) of the 1933 Act, 15 U.S.C. § 77q(a)(3) (the "SEC Order"). In the SEC Order, theSEC made findings that, fromApril 24, 2020 toMay 21, 2020 , USCF andUSO violated Section 17(a)(3) of 1933 Act, which provides that it is "unlawful for any person in the offer or sale of any securities to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." USCF andUSO consented to entry of the SEC Order without admitting or denying the findings contained therein, except as to jurisdiction. Separately, onNovember 8, 2021 , acting pursuant to an offer of settlement submitted by USCF, the CFTC issued an order instituting cease-and-desist proceedings, making findings, and imposing a cease-and-desist order pursuant to Section 6(c) and (d) of the CEA, directing USCF to cease and desist from committing or causing any violations of Section 4o(1)(B) of the CEA, 7 U.S.C. § 6o(1) (B), and CFTC Regulation 4.41(a)(2), 17 C.F.R. § 4.41(a)(2) (the "CFTC Order"). In the CFTC Order, the CFTC made findings that, from on or aboutApril 22, 2020 toJune 12, 2020 , USCF violated Section 4o(1)(B) of the CEA and CFTC Regulation 4.41(a)(2), which make it unlawful for any commodity pool operator ("CPO") to engage in "any transaction, practice, or course of business which operates as a fraud or deceit upon any client or participant or prospective client or participant" and prohibit a CPO from advertising in a manner which "operates as a fraud or deceit upon any client or participant or prospective client or participant," respectively. USCF consented to entry of the CFTC Order without admitting or denying the findings contained therein, except as to jurisdiction. Pursuant to the SEC Order and the CFTC Order, in addition to the command to cease and desist from committing or causing any violations of Section 17(a)(3) of the 1933 Act, Section 4o(1)(B) of the CEA, and CFTC Regulation 4.14(a)(2), civil monetary penalties totaling two million five hundred thousand dollars ($2,500,000 ) in the aggregate were required to be paid to theSEC and CFTC, of which one milliontwo hundred fifty thousand dollars ($1,250,000 ) was paid by USCF to each of theSEC and the CFTC, respectively, pursuant to the offsets permitted under the orders.
In re:
OnJune 19, 2020 , USCF,USO ,John P. Love , andStuart P. Crumbaugh were named as defendants in a putative class action filed by purported shareholderRobert Lucas (the "Lucas Class Action"). The Court thereafter consolidated the Lucas Class Action with two related putative class actions filed onJuly 31, 2020 andAugust 13, 2020 , and appointed a lead plaintiff. The consolidated class action is pending in theU.S. District Court for the Southern District of New York under the caption In re:United States Oil Fund , LP Securities Litigation, Civil Action No. 1:20-cv-04740. OnNovember 30, 2020 , the lead plaintiff filed an amended complaint (the "Amended Lucas Class Complaint"). The Amended Lucas Class Complaint asserts claims under the 1933 Act, the Exchange Act, and Rule 10b-5. The Amended Lucas Class Complaint challenges statements in registration statements that became effective onFebruary 25, 2020 andMarch 23, 2020 as well as subsequent public statements throughApril 2020 concerning certain extraordinary market conditions and the attendant risks that caused the demand for oil to fall precipitously, including the COVID-19 global pandemic and theSaudi Arabia -Russia oil price war. The Amended Lucas Class Complaint purports to have been brought by an investor inUSO on behalf of a class of similarly-situated shareholders who purchasedUSO securities betweenFebruary 25, 2020 andApril 28, 2020 and pursuant to the challenged registration statements. The AmendedLucas Class Complaint seeks to certify a class and to award the class compensatory damages at an amount to be determined at trial as 94
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well as costs and attorney's fees. The Amended Lucas Class Complaint named as defendants USCF,USO ,John P. Love ,Stuart P. Crumbaugh ,Nicholas D. Gerber , Andrew F Ngim,Robert L. Nguyen ,Peter M. Robinson ,Gordon L. Ellis , and Malcolm R. Fobes III, as well as the marketing agent,ALPS Distributors, Inc. , and the Authorized Participants: ABN Amro,BNP Paribas Securities Corporation ,Citadel Securities LLC ,Citigroup Global Markets, Inc. ,Credit Suisse Securities USA LLC ,Deutsche Bank Securities Inc. ,Goldman Sachs & Company ,J.P. Morgan Securities Inc. ,Merrill Lynch Professional Clearing Corporation , Morgan Stanley & Company Inc.,Nomura Securities International Inc. ,RBC Capital Markets LLC ,SG Americas Securities LLC ,UBS Securities LLC , andVirtu Financial BD LLC . The lead plaintiff has filed a notice of voluntary dismissal of its claims againstBNP Paribas Securities Corporation ,Citadel Securities LLC ,Citigroup Global Markets Inc. ,Credit Suisse Securities USA LLC ,Deutsche Bank Securities Inc. ,Morgan Stanley & Company, Inc. ,Nomura Securities International, Inc. ,RBC Capital Markets, LLC ,SG Americas Securities LLC , andUBS Securities LLC . USCF,USO , and the individual defendants in In re:United States Oil Fund, LP Securities Litigation intend to vigorously contest such claims and have moved for their dismissal.Wang Class Action OnJuly 10, 2020 , purported shareholderMomo Wang filed a putative class action complaint, individually and on behalf of others similarly situated, against defendantsUSO , USCF,John P. Love ,Stuart P. Crumbaugh ,Nicholas D. Gerber , Andrew F Ngim,Robert L. Nguyen ,Peter M. Robinson ,Gordon L. Ellis ,Malcolm R. Fobes , III, ABN Amro,BNP Paribas Securities Corp. ,Citadel Securities LLC ,Citigroup Global Markets Inc. ,Credit Suisse Securities USA LLC ,Deutsche Bank Securities Inc. ,Goldman Sachs & Company ,JP Morgan Securities Inc. ,Merrill Lynch Professional Clearing Corp. ,Morgan Stanley & Company Inc. ,Nomura Securities International Inc. ,RBC Capital Markets LLC ,SG Americas Securities LLC ,UBS Securities LLC , andVirtu Financial BD LLC , in theU.S. District Court for the Northern District of California as Civil Action No. 3:20-cv-4596 (the "Wang Class Action"). The Wang Class Action asserted federal securities claims under the 1933 Act, challenging disclosures in aMarch 19, 2020 registration statement. It alleged that the defendants failed to disclose to investors inUSO certain extraordinary market conditions and the attendant risks that caused the demand for oil to fall precipitously, including the COVID-19 global pandemic and theSaudi Arabia -Russia oil price war. The Wang Class Action was voluntarily dismissed onAugust 4, 2020 .Mehan Action
OnAugust 10, 2020 , purported shareholderDarshan Mehan filed a derivative action on behalf of nominal defendantUSO , against defendants USCF,John P. Love ,Stuart P. Crumbaugh ,Nicholas D. Gerber , Andrew F Ngim,Robert L. Nguyen ,Peter M. Robinson ,Gordon L. Ellis , andMalcolm R. Fobes , III (the "Mehan Action"). The action is pending in theSuperior Court of the State of California for the County ofAlameda as Case No. RG20070732. The Mehan Action alleges that the defendants breached their fiduciary duties toUSO and failed to act in good faith in connection with aMarch 19, 2020 registration statement and offering and disclosures regarding certain extraordinary market conditions that caused demand for oil to fall precipitously, including the COVID-19 global pandemic and theSaudi Arabia -Russia oil price war. The complaint seeks, on behalf ofUSO , compensatory damages, restitution, equitable relief, attorney's fees, and costs. All proceedings in the Mehan Action are stayed pending disposition of the motion(s) to dismiss in In re:United States Oil Fund , LP Securities Litigation.
USCF,
In re
OnAugust 27, 2020 , purported shareholdersMichael Cantrell and AML Pharm. Inc.DBA Golden International filed two separate derivative actions on behalf of nominal defendantUSO , against defendants USCF,John P. Love ,Stuart P. Crumbaugh , Andrew F Ngim,Gordon L. Ellis ,Malcolm R. Fobes , III,Nicholas D. Gerber ,Robert L. Nguyen , andPeter M. Robinson in theU.S. District Court for the Southern District of New York at Civil Action No. 1:20-cv-06974 (the "Cantrell Action") and Civil Action No. 1:20-cv-06981 (the "AML Action"), respectively. The complaints in the Cantrell and AML Actions are nearly identical. They each allege violations of Sections 10(b), 20(a), and 21D of the Exchange Act, Rule 10b-5 thereunder, and common law claims of breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. These allegations stem fromUSO's disclosures and defendants' alleged actions in light of the extraordinary market conditions in 2020 that caused demand for oil to fall precipitously, including the COVID-19 global pandemic and theSaudi Arabia -Russia oil price war. The complaints seek, on behalf ofUSO , compensatory damages, restitution, 95
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equitable relief, attorney's fees, and costs. The plaintiffs in the Cantrell and AML Actions have marked their actions as related to the Lucas Class Action.
The Court consolidated the Cantrell and AML Actions under the caption In reUnited States Oil Fund , LP Derivative Litigation, Civil Action No. 1:20-cv-06974 and appointed co-lead counsel. All proceedings in In reUnited States Oil Fund , LP Derivative Litigation are stayed pending disposition of the motion(s) to dismiss in In re:United States Oil Fund , LP Securities Litigation.
USCF,
NOTE 6 - FINANCIAL HIGHLIGHTS
The following table presents per share performance data and other supplemental financial data for the years endedDecember 31, 2022 , 2021 and 2020 for the shareholders. This information has been derived from information presented
in the financial statements. Year ended Year ended Year ended December 31, 2022 December 31, 2021 December 31, 2020 Per Share Operating Performance: Net asset value, beginning of year $ 54.18 $
33.07 $ 102.27 Total income (loss) 16.31 21.48 (68.95) Total expenses (0.44) (0.37) (0.25) Net increase (decrease) in net asset value 15.87 21.11 (69.20) Net asset value, end of year $ 70.05 $
54.18 $ 33.07 Total Return 29.29 % 63.83 % (67.66) % Ratios to Average Net Assets Total income (loss) 31.22 % 54.68 % (54.88) % Management fees 0.45 % 0.45 % 0.45 % Total expenses excluding management fees 0.15 % 0.36 % 0.38 % Net income (loss) 30.61 % 53.87 % (55.71) % Total returns are calculated based on the change in value during the period. An individual shareholder's total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals fromUSO .
NOTE 7 - QUARTERLY FINANCIAL DATA (Unaudited)
The following summarized (unaudited) quarterly financial information presents
the results of operations and other data for the three-month periods ended
First Second Third Fourth Quarter Quarter Quarter Quarter 2022 2022 2022 2022 Total Income (Loss)$ 823,400,253 $ 251,754,802 $ (435,341,582) $ 160,898,401 Total Expenses 4,500,651 3,992,863 3,509,345 3,468,738 Net Income (Loss)$ 818,899,602 $ 247,761,939 $ (438,850,927) $ 157,429,663 Net Income (Loss) per Share$ 19.65 $ 6.38 $ (15.06) $ 4.90 First Second Third Fourth Quarter Quarter Quarter Quarter 2021 2021 2021 2021 Total Income (Loss)$ 727,913,736 $ 661,006,102 $ 140,294,965 $ 97,012,862 Total Expenses 6,444,629 6,768,609 5,628,576 5,111,607 Net Income (Loss)$ 721,469,107 $ 654,237,493 $ 134,666,389 $ 91,901,255 Net Income (Loss) per Share$ 7.33 $ 9.47 $ 2.78 $ 1.53 96 Table of Contents
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
USO values its investments in accordance with Accounting Standards Codification 820 - Fair Value Measurements and Disclosures ("ASC 820"). ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. The changes to past practice resulting from the application of ASC 820 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement. ASC 820 establishes a fair value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained from sources independent ofUSO (observable inputs) and (2)USO's own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the ASC 820 hierarchy are as follows:
Level I - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level II - Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Level III - Unobservable pricing input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available. In some instances, the inputs used to measure fair value might fall within different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in its entirety.
The following table summarizes the valuation of
At December 31, 2022 Total Level I Level II Level III Short-Term Investments$ 856,400,000 $ 856,400,000 $ - $ - Exchange-Traded Futures Contracts United States Contracts 22,185,936 22,185,936 - - OTC Commodity Swap Contracts (4,145) - (4,145) -
The following table summarizes the valuation of
At December 31, 2021 Total Level I Level II Level III Short-Term Investments$ 1,544,534,000 $ 1,544,534,000 $ - $ - Exchange-Traded Futures Contracts United States Contracts 114,437,224 114,437,224 - - EffectiveJanuary 1, 2009 ,USO adopted the provisions of Accounting Standards Codification 815 - Derivatives and Hedging, which require presentation of qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivatives.
Fair Value of Derivative Instruments
Statements of Fair Value Fair Value Financial at December 31, at December 31, Derivatives not Accounted for as Hedging Instruments Condition Location 2022 2021 Futures - Commodity Contracts Assets$ 22,185,936 $ 114,437,224 Swap - Commodity Contracts Liabilities $ (4,145) $ - 97 Table of Contents
The volume of open OTC swap positions relative to the net assets ofUSO at the date of this report is generally representative of open positions throughout the reporting period.
The Effect of Derivative Instruments on the Statements of Operations
For the year ended For the year ended For the year ended December 31, 2022 December 31, 2021 December 31, 2020 Change in Change in Change in Location of Realized Unrealized Realized Unrealized Realized Unrealized Derivatives not Gain (Loss) Gain (Loss) Gain (Loss) on Gain (Loss) Gain (Loss) on Gain (Loss) Gain (Loss) on Accounted for on Derivatives on Derivatives Derivatives in Derivatives Derivatives in Derivatives Derivatives as Hedging Recognized in Recognized in Recognized in Recognized in Recognized in Recognized in Recognized in Instruments Income Income Income Income Income Income Income Realized gain Futures - (loss) on Commodity closed Contracts positions$ 874,875,947 $ 1,911,763,583 $ (2,251,576,260) Change in unrealized gain (loss) on open positions$ (92,251,288) $ (287,006,734) $ 363,923,391 Realized gain OTC Swap - (loss) on Commodity closed Contracts positions$ (13,603,878) $ - $ - Change in unrealized gain (loss) on open positions$ (4,145) $ - $ - NOTE 9 - SUBSEQUENT EVENTS
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