Unassociated Document
As
filed with the Securities and Exchange Commission on May 1,
2007
File
No. 333-140117
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1 ON FORM S-3
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
United
States Oil Fund, LP
(Exact
name of registrant as specified in its charter)
Delaware
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20-2830691
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
Number)
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Nicholas
D. Gerber
3120
Harbor Bay Parkway, Suite 145
Alameda,
CA 94502
(510)
522-3336
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive Offices)
Copies
to:
W.
Thomas Conner, Esq.
James
M. Cain, Esq.
Sutherland,
Asbill & Brennan LLP
1275
Pennsylvania Avenue, N.W.
Washington,
DC 20004-2405
(202)
383-0590
(Name,
Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Agent for Service)
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If
the
only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box: o
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. o
If
this
Form is a post-effective amendment to a registration statement filed pursuant
to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check
the following box. o
PROSPECTUS
United
States Oil Fund, LP
54,600,000
Units
United
States Oil Fund, LP, a Delaware limited partnership, is a commodity pool
that
issues units that may be purchased and sold on the American Stock Exchange.
United States Oil Fund, LP is referred to as USOF throughout this document.
The
investment objective of USOF is for the changes in percentage terms of the
units’ net asset value to reflect the changes in percentage terms of the spot
price of West Texas Intermediate light, sweet crude oil delivered to Cushing,
Oklahoma, as measured by the changes in the price of the futures contract
on
West Texas Intermediate light, sweet crude oil as traded on the New York
Mercantile Exchange that is the near month contract to expire, except when
the
near month contract is within two weeks of expiration, in which case the
futures
contract will be the next month contract to expire, less USOF’s expenses. This
is a best efforts offering. USOF will continuously offer creation baskets
consisting of 100,000 units to authorized purchasers through ALPS Distributors,
Inc., which is the marketing agent. A list of USOF’s current authorized
purchasers is available from the marketing agent. Authorized purchasers will
pay
a transaction fee of $1,000 for each order placed to create one or more baskets.
There are no arrangements to place funds in an escrow, trust, or similar
account. This is a continuous offering and will not terminate until all of
the
registered units have been sold. As of April 26, 2007, approximately 41,500,000
units remain available for sale.
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Authorized
purchasers may purchase creation baskets of 100,000 units. The per
unit
price of units on a particular day will be the total net asset value
of
USOF calculated shortly after the close of the American Stock Exchange
on
that day divided by the number of issued and outstanding
units.
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Authorized
purchasers are the only persons that may place orders to create
and redeem
baskets. An authorized purchaser is under no obligation to create
or
redeem baskets, and an authorized purchaser is under no obligation
to
offer to the public units of any baskets it does create. Authorized
purchasers that do offer to the public units from the baskets they
create
will do so at per-unit offering prices that are expected to reflect,
among
other factors, the trading price of the units on the American Stock
Exchange, the net asset value of USOF at the time the authorized
purchaser
purchased the creation basket and the net asset value of the units
at the
time of the offer of the units to the public, the supply of and
demand for
units at the time of sale, and the liquidity of the oil futures
contract
market and the market for other oil interests. The prices of units
offered
by authorized purchasers are expected to fall between USOF’s net asset
value and the trading price of the units on the American Stock
Exchange at
the time of sale. The difference between the price paid by authorized
purchasers as underwriters and the price paid to such authorized
purchasers by investors will be deemed underwriting compensation.
Units
initially comprising the same basket but offered by authorized
purchasers
to the public at different times may have different offering prices.
Units
are expected to trade in the secondary market on the American Stock
Exchange. Units may trade in the secondary market at prices that
are lower
or higher relative to their net asset value per unit. The amount
of the
discount or premium in the trading price relative to the net asset
value
per unit may be influenced by various factors, including the number
of
investors who seek to purchase or sell units in the secondary market
and
the liquidity of the oil futures contract market and the market
for other
oil interests. Authorized purchasers are not required to sell any
specific
number or dollar amount of
units.
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USOF
is not a mutual fund registered under the Investment Company Act of 1940 and
is
not subject to regulation under such Act.
Some
of
the risks of investing in USOF include:
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Investing
in oil interests subjects USOF to the risks of the oil industry and
this
could result in large fluctuations in the price of USOF’s
units.
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If
certain correlations do not exist, then investors may not be able
to use
USOF as a cost-effective way to invest indirectly in oil or as a
hedge
against the risk of loss in oil-related
transactions.
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USOF
does not expect to make cash
distributions.
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USOF
and its general partner may have conflicts of interest, which may
permit
them to favor their own interests to your
detriment.
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USOF
has a limited operating history so there is no extensive performance
history to serve as a basis for you to evaluate an investment in
USOF.
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Investing
in USOF involves other significant risks. See “What Are the Risk Factors
Involved with an Investment in USOF?” starting on page 10.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED IN THIS
PROSPECTUS, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE
COMMODITY FUTURES TRADING COMMISSION (“CFTC”) HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS IT PASSED ON THE ADEQUACY OR ACCURACY OF
THIS
DISCLOSURE DOCUMENT.
This
prospectus is in two parts: a disclosure document and a statement of additional
information. These parts are bound together, and both contain important
information.
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Per
Unit
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Per
Basket
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Price
of the
units*
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$
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51.85
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$
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5,185,000
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*Based
on
closing NAV on April 27, 2007. The price may vary based on NAV in effect
on a
particular day.
The
date
of this post-effective amendment is May 1, 2007.
COMMODITY
FUTURES TRADING COMMISSION
RISK
DISCLOSURE STATEMENT
YOU
SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO
PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES
AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH
TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER,
COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY
AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT
TO
THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR
EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE
DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL BEGINNING ON PAGE 43
AND A
STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER
THE AMOUNT OF YOUR INITIAL INVESTMENT, ON PAGE 5.
THIS
BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO
EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE
TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS
DISCLOSURE DOCUMENT, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS
OF
THIS INVESTMENT, BEGINNING ON PAGE 10.
YOU
SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR
OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES,
INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT
TO
REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND
ITS
PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO
COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN
NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE
EFFECTED.
TABLE
OF CONTENTS
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
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iii
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PROSPECTUS
SUMMARY
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1
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Overview
of USOF
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1
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The
Units
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3
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USOF’s
Investments in Oil Interests
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3
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Principal
Investment Risks of an Investment in USOF
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4
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Principal
Offices of USOF and the General Partner
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5
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Financial
Condition of USOF
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5
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Breakeven
Analysis
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5
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Offering
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7
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WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN USOF?
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10
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Risks
Associated With Investing Directly or Indirectly in Oil
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10
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USOF’s
Operating Risks
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14
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Risk
of Leverage and Volatility
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21
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Over-the-Counter
Contract Risk
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21
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Risk
of Trading in International Markets
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22
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Tax
Risk
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22
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Legal
Risks
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23
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THE
OFFERING
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25
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What
is USOF?
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25
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Who
is the General Partner?
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25
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Prior
Performance of the General Partner and Affiliates
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28
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How
Does USOF Operate?
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31
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What
is USOF’s Investment Strategy?
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35
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What
are Oil Futures Contracts?
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36
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What
is the Crude Oil Market and the Petroleum-Based Fuel
Market?
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39
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Why
Does USOF Purchase and Sell Oil Futures Contracts?
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40
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What
is the Flow of Units?
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41
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What
are the Trading Policies of USOF?
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41
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Who
are the Service Providers?
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42
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Fees
of USOF
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43
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Form
of Units
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44
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Transfer
of Units
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45
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Withdrawal
of Limited Partners
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46
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What
is the Plan of Distribution?
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47
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Use
of Proceeds
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52
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Limited
Partnership Agreement
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53
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Liability
and Indemnification
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56
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Books
and Records
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58
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Statements,
Filings, and Reports
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58
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Reports
to Limited Partners
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58
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Fiscal
Year
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59
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Governing
Law; Consent to Delaware Jurisdiction
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59
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Legal
Matters
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59
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Privacy
Policy
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59
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U.S.
Federal Income Tax Considerations
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60
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Backup
Withholding
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67
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Other
Tax Considerations
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67
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Investment
By ERISA Accounts
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67
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INFORMATION
YOU SHOULD KNOW
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70
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SUMMARY
OF PROMOTIONAL AND SALES MATERIAL
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70
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PATENT
APPLICATION PENDING
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70
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WHERE
YOU CAN FIND MORE INFORMATION
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70
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STATEMENT
OF ADDITIONAL INFORMATION
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SAI-1
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CFTC
Annual Report
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SAI-12
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Explanatory
Note
This
Post-Effective Amendment No. 1 on Form S-3 contains an updated prospectus
relating to the offer and sale of units initially registered by the registration
statement on Form S-1 (File No. 333-140117) declared effective by the Securities
and Exchange Commission on January 30, 2007. This Post-Effective Amendment
is being filed solely to convert the registration statement on Form S-1 into
a
registration statement on Form S-3. All filing fees payable in connection with
the registration of these securities were previously paid in connection with
the
filing of the original registration statement.
STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
This
Prospectus includes “forward-looking statements” which generally relate to
future events or future performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or
the negative of these terms or other comparable terminology. All statements
(other than statements of historical fact) included in this Prospectus and
movements in the commodities markets and indexes that track such movements,
USOF’s operations, the General Partner’s plans and references to USOF’s future
success and other similar matters, are forward-looking statements. These
statements are only predictions. Actual events or results may differ materially.
These statements are based upon certain assumptions and analyses the General
Partner has made based on its perception of historical trends, current
conditions and expected future developments, as well as other factors
appropriate in the circumstances. Whether or not actual results and developments
will conform to the General Partner’s expectations and predictions, however, is
subject to a number of risks and uncertainties, including the special
considerations discussed in this Prospectus, general economic, market and
business conditions, changes in laws or regulations, including those concerning
taxes, made by governmental authorities or regulatory bodies, and other world
economic and political developments. See “What Are the Risk Factors Involved
with an Investment in USOF?” Consequently, all the forward-looking statements
made in this Prospectus are qualified by these cautionary statements, and there
can be no assurance that the events or developments that will or may occur
in
the future, including such matters as changes in inflation in the United States
movements in the stock market, movements in the U.S. and foreign currencies,
actual results or developments the General Partner anticipates will be realized
or, even if substantially realized, that they will result in the expected
consequences to, or have the expected effects on, USOF’s operations or the value
of the units.
PROSPECTUS
SUMMARY
This
is only a summary of the Prospectus and, while it contains material information
about USOF and its units, it does not contain or summarize all of the
information about USOF and the units contained in this Prospectus that is
material and/or which may be important to you. You should read this entire
Prospectus, including “What Are the Risk Factors Involved with an Investment in
USOF?” beginning on page 10, before making an investment decision about the
units.
Overview
of USOF
United
States Oil Fund, LP, a Delaware limited partnership (“USOF” or “Us” or “We”), is
a commodity pool that issues units that may be purchased and sold on the
American Stock Exchange. USOF changed its name from New York Oil ETF, LP
to
United States Oil Fund, LP on September 30, 2005. USOF was organized as a
limited partnership under Delaware law on May 12, 2005. USOF is operated
pursuant to the Third Amended and Restated Limited Partnership Agreement
(“LP
Agreement”), which is attached as an exhibit to this registration statement. It
is managed and controlled by its general partner, Victoria Bay Asset Management,
LLC (“General Partner”). The General Partner is a single member limited
liability company formed in Delaware on May 10, 2005 that is registered as
a
commodities pool operator (“CPO”) with the CFTC and is a member of the National
Futures Association (“NFA”).
The
net
assets of USOF will consist primarily of investments in futures contracts for
WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline,
natural gas, and other petroleum-based fuels that are traded on the New York
Mercantile Exchange, ICE Futures or other U.S. and foreign exchanges
(collectively, “Oil Futures Contracts”) and other oil interests such as
cash-settled options on Oil Futures Contracts, forward contracts for oil, and
over-the-counter transactions that are based on the price of oil, other
petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing
(collectively, “Other Oil Interests”). For convenience and unless otherwise
specified, Oil Futures Contracts and Other Oil Interests collectively are
referred to as “oil interests” in this Prospectus. The General Partner is
authorized by USOF in its sole judgment to employ, establish the terms of
employment for, and terminate commodities trading advisors or futures commission
merchants.
The
investment objective of USOF is for the changes in percentage terms of the
units’ net asset value to reflect the changes in percentage terms of the spot
price of West Texas Intermediate (“WTI”) light, sweet crude oil delivered to
Cushing, Oklahoma (“WTI light, sweet crude oil”), as measured by the changes in
the price of the futures contract on WTI light, sweet crude oil as traded
on the
New York Mercantile Exchange 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, less USOF’s expenses. It is not the intent of USOF to be operated in a
fashion such that its NAV will equal, in dollar terms, the spot price of
WTI
light, sweet crude oil or any particular futures contract based on WTI light,
sweet crude oil.
USOF
seeks to achieve its investment objective by investing in a mix of Oil Futures
Contracts and Other Oil Interests such that changes in USOF’s NAV will closely
track the changes in the price of a specified Oil Futures Contract (“Benchmark
Oil Futures Contract”). The General Partner believes the Benchmark Oil Futures
Contract historically exhibited a close correlation with the spot price of
WTI
light, sweet crude oil. On any valuation day (a valuation day is any day
as of
which USOF calculates its NAV), the Benchmark Oil Futures Contract is the
near
month futures contract for WTI light, sweet crude oil traded on the New York
Mercantile Exchange unless the near month futures contract will expire within
two weeks of the valuation day, in which case the Benchmark Oil Futures Contract
is the next month futures contract for WTI light, sweet crude oil traded
on the
New York Mercantile Exchange. This convention is used to define the Benchmark
Oil Futures Contract because the General Partner believes from its review
of
past market activity that most Oil Futures Contracts traded on the New York
Mercantile Exchange are closed out or offset by the parties prior to the
settlement date of the contract and there is lighter trading during the days
immediately preceding settlement. Because there is lighter trading during
the
two-week period prior to settlement, the trading price of the near month
contract may not provide as accurate a reflection of the spot price of oil.
The
General Partner generally invests in the next month contract to expire during
this period.
As
a
specific benchmark, the General Partner endeavors to place USOF’s trades in Oil
Futures Contracts and Other Oil Interests and otherwise manage USOF’s
investments so that A will be within plus/minus 10 percent of B,
where:
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A
is the average daily change in USOF’s NAV for any period of 30 successive
valuation days,
i.e.,
any day as of which USOF calculates its NAV,
and
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B
is the average daily change in the price of the Benchmark Oil Futures
Contract over the same period.
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The
Benchmark Futures Contract is changed, or “rolled” from the near month contract
to expire to the next month to expire over a four (4) day period.
The
General Partner believes that market arbitrage opportunities will cause USOF’s
unit price on the American Stock Exchange to closely track USOF’s NAV per unit.
The General Partner further believes that the prices of the Benchmark Oil
Futures Contract have historically closely tracked the spot prices of WTI
light,
sweet crude oil. The General Partner believes that the net effect of these
two
expected relationships and the expected relationship described above between
USOF’s NAV and the Benchmark Oil Futures Contract, will be that the changes in
the price of USOF’s units on the American Stock Exchange will closely track, in
percentage terms, the changes in the price of the spot price of a barrel
of WTI
light, sweet crude oil, less USOF’s expenses.
USOF
invests in oil interests to the fullest extent possible without being leveraged
or unable to satisfy its current or potential margin or collateral obligations
with respect to its investments in Oil Futures Contracts and Other Oil
Interests. The primary focus of the General Partner will be the investment
in
Oil Futures Contracts and the management of its investments in short-term
obligations of the United States of two years or less (“Treasuries”), cash and
cash equivalents for margining purposes and as collateral.
The
General Partner employs a “neutral” investment strategy intended to track the
changes in the spot price of WTI light, sweet crude oil regardless of whether
the price of oil goes up or goes down. USOF’s “neutral” investment strategy is
designed to permit investors generally to purchase and sell USOF’s units for the
purpose of investing indirectly in oil in a cost-effective manner, and/or
to
permit participants in the oil or other industries to hedge the risk of losses
in their oil-related transactions. Accordingly, depending on the investment
objective of an individual investor, the risks generally associated with
investing in oil and/or the risks involved in hedging may exist. In addition,
an
investment in USOF involves the risk that the changes in the price of USOF’s
units will not accurately track the spot price of WTI light, sweet crude
oil.
For example, USOF also invests in Treasuries and holds cash and cash equivalents
to be used to meet its current or potential margin or collateral requirements
with respect to its investments in Oil Futures Contracts and Other Oil
Interests. USOF does not expect there to be any meaningful correlation between
the performance of USOF’s investments in Treasuries/cash/cash equivalents and
the changes in the price of WTI light, sweet crude oil. While the level of
interest earned on or the market price of these investments may in some respect
correlate to changes in the price of oil, this correlation is not anticipated
as
part of USOF’s efforts to meet its objectives. This and certain risk factors
discussed in this Prospectus may cause a lack of correlation between changes
in
USOF’s NAV and changes in the price of WTI light, sweet crude
oil.
USOF
creates and redeems units only in blocks called Creation Baskets and Redemption
Baskets, respectively. Only Authorized Purchasers may purchase or redeem
Creation Baskets or Redemption Baskets. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under
no
obligation to offer to the public units of any baskets it does create. Baskets
are generally created when there is sufficient demand for units that the market
price per unit is at a premium to the NAV per unit. Authorized Purchasers will
then sell such units, which will be listed on the American Stock Exchange,
to
the public at prices that are expected to reflect, among other factors, the
trading price of the units on the American Stock Exchange, the NAV of USOF
at
the time the Authorized Purchaser purchased the Creation Baskets and the NAV
at
the time of the offer of the units to the public, the supply of and demand
for
units at the time of sale, and the liquidity of the Oil Futures Contracts market
and the market for Other Oil Interests, and are expected to fall between USOF’s
NAV and the trading price of the units on the American Stock Exchange at the
time of sale. Similarly, baskets are generally redeemed when the market price
per unit is at a discount to the NAV per unit. Retail investors seeking to
purchase or sell units on any day are expected to effect such transactions
in
the secondary market, on the American Stock Exchange, at the market price per
unit, rather than in connection with the creation or redemption of
baskets.
All
proceeds from the sale of Creation Baskets are invested as quickly as possible
in the investments described in this Prospectus. There is no escrow or similar
holding of funds that has a time period or other conditions. Investments
are
held through USOF’s custodian, Brown Brothers Harriman & Co. (“Custodian”),
or through accounts with USOF’s commodities futures brokers. There is no stated
maximum time period for USOF’s operations
and the fund will continue until all units are redeemed or the fund is
liquidated pursuant to the terms of the LP Agreement.
There
is
no specified limit on the maximum amount of Creation Baskets that can be sold.
At some point, position limits on certain of the futures contracts in which
USOF
intends to invest may practically limit the maximum amount of Creation Baskets
that will be sold if the General Partner determines that the other investment
alternatives available to USOF at that time will not enable it to meet its
stated investment objective.
Units
may
also be purchased and sold in smaller increments than a Creation Basket on
the
American Stock Exchange. However, these transactions are effected at bid and
ask
prices established by specialist firm(s). Like any listed security, units of
USOF can be purchased and sold at any time a secondary market is
open.
In
managing USOF’s assets, the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs
quantitative methodologies whereby each time one or more baskets are purchased
or redeemed, the General Partner will purchase or sell Oil Futures Contracts
and
Other Oil Interests with an aggregate face amount that approximates the amount
of Treasuries and/or cash received or paid upon the purchase or redemption
of
the basket(s).
Note
to Secondary Market Investors:
The
units can be directly purchased from or redeemed by USOF only in Creation
Baskets or Redemption Baskets, respectively, and only by Authorized Purchasers.
Each Creation Basket and Redemption Basket consists of 100,000 units and is
expected to be worth several million dollars. Individual investors, therefore,
will not be able to directly purchase units from or redeem units with USOF.
Some
of the information contained in this Prospectus, including information about
buying and redeeming units directly from and to USOF is only relevant to
Authorized Purchasers. Units are listed and traded on the American Stock
Exchange and may be purchased and sold as individual units. Individuals
interested in purchasing units in the secondary market should contact their
broker. Units purchased or sold through a broker may be subject to
commissions.
Except
when aggregated in Redemption Baskets, units are not redeemable securities.
There is no guarantee that units will trade at or near their
NAV.
The
Units
The
units
are registered as securities under the Securities Act of 1933 (“1933 Act”) and
do not provide dividend rights or conversion rights and there will not be
sinking funds. The units may only be redeemed when aggregated in Redemption
Baskets as discussed under “Creations and Redemptions” and limited partners have
limited voting rights as discussed under “Who is the General Partner?”
Cumulative voting is neither permitted nor required and there are no preemptive
rights. As discussed in the LP Agreement, upon liquidation of USOF, its assets
will be distributed pro rata to limited partners based upon the number of units
held. Each limited partner will receive its share of the assets in cash or
in
kind, and the proportion of such share that is received in cash may vary from
partner to partner, as the General Partner in its sole discretion may
decide.
This
is a
continuous offering under Rule 415 of the 1933 Act and will terminate when
all
of the registered units have been sold. It is anticipated that when all
registered units have been sold pursuant to this registration statement,
additional units will be registered in subsequent registration statements.
As
discussed above, the minimum purchase requirement for Authorized Purchasers
is a
Creation Basket, which consists of 100,000 units. Under the plan of
distribution, USOF does not require a minimum purchase amount for investors
who
purchase units from Authorized Purchasers. There are no arrangements to place
funds in an escrow, trust, or similar account.
USOF’s
Investments in Oil Interests
A
brief
description of the principal types of oil interests in which USOF may invest
is
set forth below.
|
·
|
An
oil futures contract is a standardized contract traded on a futures
exchange that calls for the future delivery of a specified quantity
of oil
at a specified time and place.
|
|
·
|
An
oil forward contract is a supply contract between principals, not
traded
on an exchange, to buy or sell a specified quantity of oil at or
before a
specified date at a specified
price.
|
|
·
|
A
spot contract for oil is a cash market transaction in which the buyer
and
seller agree to the immediate purchase and sale of oil, usually with
a
two-day settlement. Spot contracts are not uniform and are not
exchange-traded.
|
|
·
|
An
option on an oil futures contract, forward contract or oil on the
spot
market gives the buyer of the option the right, but not the obligation,
to
buy or sell a futures contract, forward contract or oil, as applicable,
at
a specified price on or before a specified date. Options on futures
contracts are standardized contracts traded on an exchange, while
options
on forward contracts and oil on the spot market, referred to collectively
in this Prospectus as over-the-counter options, generally are individually
negotiated, principal-to-principal contracts not traded on an
exchange.
|
|
·
|
Over-the-counter
contracts (such as swap contracts) generally involve an exchange
of a
stream of payments between the contracting parties. Over-the-counter
contracts generally are not uniform and not
exchange-traded.
|
A
more
detailed description of oil interests and other aspects of the oil and oil
interest markets can be found later in this Prospectus.
As
noted, USOF invests primarily in Oil Futures Contracts, including those traded
on the New York Mercantile Exchange. USOF expressly disclaims any association
with such Exchange or endorsement of USOF by such Exchange and acknowledges
that
“NYMEX” and “New York Mercantile Exchange” are registered trademarks of such
Exchange.
Principal
Investment Risks of an Investment in USOF
An
investment in USOF involves a degree of risk. Some of the risks you may face
are
summarized below. A more extensive discussion of these risks appears beginning
on page 10.
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·
|
Unlike
mutual funds, commodity pools or other investment pools that actively
manage their investments in an attempt to realize income and gains
from
their investing activities and distribute such income and gains to
their
investors, USOF generally does not distribute cash to limited partners
or
other unitholders. You should not invest in USOF if you will need
cash
distributions from USOF to pay taxes on your share of income and
gains of
USOF, if any, or for any other
reason.
|
|
·
|
There
is the risk that the changes in the price of USOF’s units on the American
Stock Exchange will not closely track the changes in spot price of
WTI
light, sweet crude oil. This could happen if the price of units traded
on
the American Stock Exchange does not correlate closely with USOF’s NAV;
the changes in USOF’s NAV do not closely correlate with changes in the
price of the Benchmark Oil Futures Contract; or the changes in the
price
of the Benchmark Oil Futures Contract do not closely correlate with
changes in the cash or spot price of WTI light, sweet crude oil.
This is a
risk because if these correlations do not exist, then investors may
not be
able to use USOF as a cost-effective way to invest indirectly in
oil or as
a hedge against the risk of loss in oil-related
transactions.
|
|
·
|
USOF
seeks to have changes in its units’ NAV in percentage terms track changes
in the spot price of WTI light, sweet crude oil rather than profit
from
speculative trading of oil interests. The General Partner therefore
endeavors to manage USOF’s positions in oil interests so that USOF’s
assets are, unlike those of other commodity pools, not leveraged
(i.e., so
that the aggregate value of USOF’s unrealized losses from its investments
in such oil interests at any time will not exceed the value of
USOF’s
assets). There is no assurance that the General Partner will successfully
implement this investment strategy. If the General Partner permits
USOF to
become leveraged, you could lose all or substantially all of your
investment if USOF’s trading positions suddenly turn unprofitable. These
movements in price may be the result of factors outside of the
General
Partner’s control and may not be anticipated by the General
Partner.
|
|
·
|
Investors
may choose to use USOF as a means of investing indirectly in oil
and there
are risks involved in such investments. Among other things, the crude
oil
industry experiences numerous operating risks. These operating risks
include the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured formations and environmental hazards. Environmental hazards
include oil spills, natural gas leaks, ruptures and discharges of
toxic
gases. Crude oil operations also are subject to various U.S. federal,
state and local regulations that materially affect
operations.
|
|
·
|
Investors,
including those who participate in the oil industry, may choose to
use
USOF as a vehicle to hedge against the risk of loss and there are
risks
involved in hedging activities. While hedging can provide protection
against an adverse movement in market prices, it can also preclude
a
hedgor’s opportunity to benefit from a favorable market
movement.
|
|
·
|
USOF
invests primarily in Oil Futures Contracts, and particularly in Oil
Futures Contracts traded on the New York Mercantile Exchange.
Representatives of the New York Mercantile Exchange have asserted
certain
claims regarding USOF’s operations and the Exchange’s service marks and
settlement prices of oil futures contracts traded on the
Exchange.
|
|
·
|
USOF
invests primarily in Oil Futures Contracts that are traded in the
United
States. However, a portion of USOF’s trades may take place in markets and
on exchanges outside the United States. Some non-U.S. markets present
risks because they are not subject to the same degree of regulation
as
their U.S. counterparts. In some of these non-U.S. markets, the
performance on a contract is the responsibility of the counterparty
and is
not backed by an exchange or clearing corporation and therefore exposes
USOF to credit risk. Trading in non-U.S. markets also leaves USOF
susceptible to fluctuations in the value of the local currency against
the
U.S. dollar.
|
|
·
|
USOF
may also invest in Other Oil Interests, many of which are negotiated
contracts that are not as liquid as Oil Futures Contracts and expose
USOF
to credit risk that its counterparty may not be able to satisfy its
obligations to USOF.
|
|
·
|
USOF
pays fees and expenses that are incurred regardless of whether it
is
profitable.
|
|
·
|
You
will have no rights to participate in the management of USOF and
will have
to rely on the duties and judgment of the General Partner to manage
USOF.
|
|
·
|
The
structure and operation of USOF may involve conflicts of interest.
For
example, a conflict may arise because the General Partner and its
principal and affiliates may trade for themselves. In addition,
the
General Partner has sole current authority to manage the investments
and
operations, which may create a conflict with the unitholders’ best
interests. The General Partner may also have a conflict to the
extent that
its trading decisions may be influenced by the effect they would
have on
United States Natural Gas Fund, LP, the other commodity pool it
manages,
or any other commodity pool the General Partner has formed or may
form in
the future.
|
|
·
|
USOF
has a limited operating history. Therefore, there is no extensive
performance history of this fund to serve as a basis for you to evaluate
an investment in it.
|
For
additional risks, see “What Are the Risk Factors Involved with an Investment in
USOF?”
Principal
Offices of USOF and the General Partner
USOF’s
principal office is located at 1320 Harbor Bay Parkway, Suite 145, Alameda,
California 94502. The telephone number is 510.522.3336. The General Partner’s
principal office is also located at 1320 Harbor Bay Parkway, Suite 145, Alameda,
California 94502.
Financial
Condition of USOF
USOF’s
NAV is determined as of the earlier of the close of the New York Stock Exchange
or 4:00 p.m. New York time on each American Stock Exchange trading
day.
Breakeven
Analysis
The
breakeven analysis below indicates the approximate dollar returns and percentage
required for the redemption value of a hypothetical $50.00 initial investment
in
a single unit to equal the amount invested twelve months after the investment
was made. (We based the $50.00 assumption on recent values of USOF’s NAV.) This
breakeven analysis refers to the redemption of baskets by Authorized Purchasers
and is not related to any gains an individual investor would have to achieve
in
order to break even. The breakeven analysis is an approximation
only.
Assumed
initial selling price per
unit
|
|
$
|
50.00
|
|
Management
Fee (0.50%)*
|
|
$
|
0.25
|
|
Creation
Basket Fee**
|
|
$
|
(0.01
|
)
|
Estimated
Brokerage Fee (.13%)***
|
|
$
|
0.06
|
|
Interest
Income (5.19%)****
|
|
$
|
(2.59
|
)
|
Registration
Fees*****
|
|
$
|
3.12
|
|
Legal,
Printing, and Accounting Expenses******
|
|
$
|
1.00
|
|
New
York Mercantile Exchange Licensing Fee*******
|
|
$
|
0.20
|
|
Independent
Directors and Officers’ Fee********
|
|
$
|
0.01
|
|
Amount
of trading income (loss) required for the redemption value at the
end of
one year
to
equal the initial selling price of the unit
|
|
$
|
1.96
|
|
Percentage
of initial selling price per unit
|
|
|
3.90
|
%
|
*
|
USOF
is contractually obligated to pay the General Partner a management
fee
based on daily net assets and paid monthly of 0.50% per annum on
average
net assets of $1,000,000,000 or less. For purposes of this example
we
assumed that the average net assets are $1,000,000,000 or less. If
the
average net assets were greater than $1,000,000,000 then the management
fee would be 0.20% and the breakeven amount would be
lower.
|
**
|
Authorized
Purchasers are required to pay a Creation Basket fee of $1,000 for
each
order they place to create or redeem one or more baskets. An order
must be
at least one basket, which is 100,000 units. This breakeven analysis
assumes a hypothetical investment in a single unit so the Creation
Basket
fee is $.01 (1,000/100,000).
|
***
|
USOF
determined this estimate as follows. The breakeven analysis assumes
an
initial investment by an investor in one unit. USOF would be required
to
issue one Creation Basket of 100,000 units in order for the investor
to
purchase the one unit. Assuming the price of the units was $50.00,
USOF
would receive $5,000,000 upon the sale of the basket. Assuming
the current
near month contract to expire is $65.00, USOF would be required
to
purchase and sell (in order to close out) 76 oil futures contracts
at
$65,000 per contract (1,000 barrels of oil per contract × $65.00 per
barrel) during each month of the year, or 912 contracts bought
and sold
per year. Futures commission merchants typically charge approximately
$3.50 per contract buy or sale ($7.00 per buy and sale, or “round turn”),
so the total annual commission charge would be $6,384 (912 contracts
per
year × $7.00 per buy and sell per contract). As a percentage of the total
investment of $5,000,000 to support the issuance of the Creation
Basket,
USOF’s annual commission expense would be 0.13% ($6,384 ÷
$5,000,000).
|
****
|
USOF
earns interest on funds it deposits with the commodities futures
merchant
and the Custodian and it estimates that the interest rate will
be 5.19%
based on the current interest rate on three-month Treasury Bills
as of
February 26, 2007. The actual rate may
vary.
|
*****
|
The
fee to register 50,000,000 units with the SEC and the National
Association
of Securities Dealers (“NASD”) is $311,577 (the SEC’s fee is $236,577 and
the NASD’s fee is $75,000). An order must be at least one basket which is
100,000 units. This breakeven analysis assumes a hypothetical investment
in a single unit so the fee is $3.12 ($311,577/100,000). Previously,
this
fee was borne by the General Partner, however, currently it is
borne by
USOF.
|
******
|
USOF
estimates that the legal, printing, and accounting costs will be
approximately $100,000. An order must be at least one basket which
is
100,000 units. This breakeven analysis assumes a hypothetical investment
in a single unit so this cost per unit is $1.00 ($100,000/100,000).
Previously, these costs were borne by the General Partner, however,
currently they are borne by USOF.
|
*******
|
Assuming
the aggregate assets of USOF and certain other funds formed by
the General
Partner are $1,000,000,000 or less, the New York Mercantile Exchange
licensing fee is expected to be .04%. For more information see
“Fees of
USOF.”
|
********
|
For
2007, this amount is estimated at $184,000. USOF determined the
per unit
estimate as follows: it is assumed that USOF will have an aggregate
NAV of
$900,000,000 and that the offering price per unit is $50.00. Assuming
that
18 million units are issued, the allocation cost per unitholder
would be
$.015.
|
Offering
|
|
USOF
is offering Creation Baskets consisting of 100,000 units through
ALPS
Distributors, Inc. (“Marketing Agent”) as marketing agent to Authorized
Purchasers. Authorized Purchasers may purchase Creation Baskets
consisting
of 100,000 units at USOF’s NAV.
|
|
|
|
Use
of Proceeds:
|
|
The
General Partner applies substantially all of USOF’s assets toward trading
in oil interests and investing in Treasuries, cash and cash equivalents.
The General Partner deposits substantially all of USOF’s net assets with
the futures commission merchant, UBS Securities LLC, or other custodian
to
be used to meet its current or potential margin or collateral requirements
in connection with its investment in oil interests. USOF uses only
Treasuries or cash or cash equivalents to satisfy these requirements.
The
General Partner expects that all entities that will hold or trade
USOF’s
assets will be based in the United States and will be subject to
United
States regulations. Approximately 5% to 10% of USOF’s assets are normally
committed as margin for commodity futures contracts. However, from
time to
time, the percentage of assets committed as margin may be substantially
more, or less, than such range. The remaining portion of USOF’s assets are
held in Treasuries and/or cash or cash equivalents by its custodian,
Brown
Brothers Harriman & Co. (“Custodian”) or posted as collateral to
support USOF’s investments in oil interests. All interest income earned on
these investments is retained for USOF’s
benefit.
|
American
Stock Exchange Symbol:
|
|
USO
|
|
|
|
Creation
and Redemption:
|
|
Authorized
Purchasers pay a $1,000 fee for each order to create or redeem one
or more
Creation Baskets or Redemption Baskets. Authorized Purchasers are
not
required to sell any specific number or dollar amount of units. The
per
unit price of units offered in Creation Baskets on any day after
the
effective date of the registration statement relating to this Prospectus
is the total NAV of USOF calculated shortly after the close of the
American Stock Exchange on that day divided by the number of issued
and
outstanding units.
|
Withdrawal:
|
|
As
discussed in the LP Agreement, if the General Partner gives at
least
fifteen (15) days’ written notice to a limited partner, then the General
Partner may for any reason, in its sole discretion, require any
such
limited partner to withdraw entirely from the partnership or to
withdraw a
portion of its partner capital account. If the General Partner
does not
give at least fifteen (15) days’ written notice to a limited partner, then
it may only require withdrawal of all or any portion of the capital
account of any limited partner in the following
circumstances:
(i)
the unitholder made a misrepresentation to the General Partner
in
connection with its purchase of units; or (ii) the limited partner’s
ownership of units would result in the violation of any law or
regulations
applicable to the partnership or a
partner.
|
Registration
Clearance and Settlement:
|
|
Individual
certificates will not be issued for the units. Instead, units will
be
represented by one or more global certificates, which will be deposited
by
the Custodian with the Depository Trust Company (“DTC”) and registered in
the name of Cede & Co., as nominee for DTC. The global certificates
evidence all of the units outstanding at any time. Unitholders
are limited
to (1) participants in DTC such as banks, brokers, dealers and
trust
companies (“DTC Participants”), (2) those who maintain, either directly or
indirectly, a custodial relationship with a DTC Participant (Indirect
Participants), and (3) those banks, brokers, dealers, trust companies
and others who hold interests in the units through DTC Participants
or
Indirect Participants, in each case who satisfy the requirements
for
transfers of units. DTC Participants acting on behalf of investors
holding
units through such participants’ accounts in DTC will follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds
Settlement System. Units will be credited to DTC Participants’ securities
accounts following confirmation of receipt of payment.
The
administrator, Brown Brothers Harriman & Co. (“Administrator”) has
been appointed registrar and transfer agent for the purpose of
registering
and transferring units. The General Partner will recognize transfer
of
units only if such transfer is done on accordance with the LP Agreement,
including the delivery of a transfer
application.
|
Net
Asset Value:
|
|
The
NAV is calculated by taking the current market value of USOF’s total
assets and subtracting any liabilities. Under USOF’s current operational
procedures, the Administrator calculates the NAV of USOF’s units as of the
earlier of 4:00 p.m. New York time or the close of the New York Stock
Exchange each day. The American Stock Exchange currently calculates
an
approximate net asset value every 15 seconds throughout each day
USOF’s
units are traded on the American Stock Exchange for as long as the
New
York Mercantile Exchange’s main pricing mechanism is
open.
|
Fund
Expenses:
|
|
USOF
pays the General Partner a management fee of 0.50% of NAV on the
first
$1,000,000,000 of assets and 0.20% of NAV after the first $1,000,000,000
of assets. Brokerage fees for Treasuries, Oil Futures Contracts,
and Other
Oil Interests are estimated to be 0.13% and will be paid to unaffiliated
brokers. USOF also pays any licensing fees for the use of intellectual
property, registration fees with the SEC, NASD, or other regulatory
agency
in connection with this and subsequent offers and sales of the
units and
the legal, printing, accounting and other expenses associated with
such
registrations. The license fee to be paid to the New York Mercantile
Exchange is .04% of NAV for the first $1,000,000,000 of assets
and .02% of
NAV after the first $1,000,000,000 of assets. The assets of USOF
are
aggregated with those of other funds formed by the General Partner.
USOF
also pays a portion of the fees and expenses, including directors
and
officers liability insurance, of the independent directors of the
General
Partner which is currently estimated to be $184,000 for 2007, though
this
amount may change in future years. The General Partner, and not
USOF, is
responsible for payment of the fees of USOF’s Marketing Agent,
Administrator and Custodian. USOF and/or the General Partner may
be
required to indemnify the Marketing Agent, Administrator or Custodian
under certain circumstances.
|
Termination
Events:
|
|
USOF
shall continue in effect from the date of its formation in perpetuity,
unless sooner terminated upon the occurrence of any one or more of
the
following events: the death, adjudication of incompetence, bankruptcy,
dissolution, withdrawal, or removal of a General Partner who is the
sole
remaining General Partner, unless a majority in interest of limited
partners within ninety (90) days after such 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. Upon termination of the partnership, the affairs of the
partnership shall be wound up and all of its debts and liabilities
discharged or otherwise provided for in the order of priority as
provided
by law. The fair market value of the remaining assets of the partnership
shall then be determined by the General Partner. Thereupon, the assets
of
the partnership shall be distributed pro rata to the partners in
accordance with their units.
|
|
|
|
Authorized
Purchasers:
|
|
USOF’s
initial Authorized Purchaser was KV Execution Services, LLC. USOF
has also
entered into agreements with several other Authorized Purchasers.
A
current list of Authorized Purchasers is set forth on USOF’s website at
www.unitedstatesoilfund.com. Authorized Purchasers purchase or redeem
Creation Baskets or Redemption Baskets, respectively, from or to
USOF.
Authorized Purchasers must be (1) registered broker-dealers or other
securities market participants, such as banks and other financial
institutions, that are not required to register as broker-dealers
to
engage in securities transactions, and (2) DTC Participants. To become
an
Authorized Purchaser, a person must enter into an Authorized Purchaser
Agreement with the General Partner.
|
WHAT
ARE THE RISK FACTORS INVOLVED WITH AN INVESTMENT IN USOF?
You
should consider carefully the risks described below before making an investment
decision. You should also refer to the other information included in this
Prospectus as well as information found in our periodic reports, which include
USOF’s financial statements and related notes, that are incorporated by
reference. See “Incorporation By Reference of Certain
Information.”
Risks
Associated With Investing Directly or Indirectly in Oil
Investing
in oil interests subjects USOF to the risks of the crude oil industry and this
could result in large fluctuations in the price of USOF’s
units.
USOF
is
subject to the risks and hazards of the crude oil industry because it invests
in
oil interests. The risks and hazards that are inherent in the oil industry
may
cause the price of oil to widely fluctuate. If USOF’s units accurately track the
spot price of WTI light, sweet crude oil, then the price of its units may also
fluctuate.
The
risks
of crude oil drilling and production activities include the
following:
|
·
|
no
commercially productive crude oil or natural gas reservoirs will
be
found;
|
|
·
|
crude
oil and natural gas drilling and production activities may be shortened,
delayed or canceled;
|
|
·
|
the
ability of an oil producer to develop, produce and market reserves
may be
limited by:
|
|
·
|
political
conflicts, including war,
|
|
·
|
compliance
with governmental requirements,
|
|
·
|
mechanical
difficulties or shortages or delays in the delivery of drilling rigs
and
other equipment;
|
|
·
|
decisions
of the cartel of oil producing countries ( e.g. , OPEC, the Organization
of the Petroleum Exporting Countries), to produce more or less
oil;
|
|
·
|
increases
in oil production due to price rises may make it more economical
to
extract oil from additional sources and may later temper further
oil price
increases; and
|
|
·
|
economic
activity of users, as certain economies’ oil consumption increases ( e.g.
, China, India) and as economies contract (in a recession or depression),
oil demand and prices fall.
|
The
crude
oil industry experiences numerous operating risks. These operating risks include
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards. Environmental hazards include oil spills,
natural gas leaks, ruptures and discharges of toxic gases.
Crude
oil
operations also are subject to various U.S. federal, state and local regulations
that materially affect operations. Matters regulated include discharge permits
for drilling operations, drilling and abandonment bonds, reports concerning
operations, the spacing of wells and pooling of properties and taxation. At
various times, regulatory agencies have imposed price controls and limitations
on production. In order to conserve supplies of crude oil and natural gas,
these
agencies have restricted the rates of flow of crude oil and natural gas wells
below actual production capacity. Federal, state, and local laws regulate
production, handling, storage, transportation and disposal of crude oil and
natural gas, by-products from crude oil and natural gas and other substances
and
materials produced or used in connection with crude oil and natural gas
operations.
The
price of USOF’s units may be influenced by factors such as the short-term supply
and demand for oil and the short-term supply and demand for USOF’s units. This
may cause the units to trade at a price that is above or below USOF’s NAV per
unit. Accordingly, changes in the price of units may substantially vary from
the
changes in the spot price of WTI light, sweet crude oil. If this variation
occurs, then you may not be able to effectively use USOF as a way to hedge
against oil-related losses or as a way to indirectly invest in
oil.
While
it
is expected that the trading prices of units will fluctuate in accordance with
changes in USOF’s NAV, the prices of units may also be influenced by other
factors, including the short-term supply and demand for oil and the units.
There
is no guarantee that the units will not trade at appreciable discounts from,
and/or premiums to, USOF’s NAV. This could cause changes in the price of units
to substantially vary from changes in the spot price of WTI light, sweet crude
oil. This may be harmful to you because if changes in the price of units varies
substantially from changes in the spot price of WTI light, sweet crude oil,
then
you may not be able to effectively use USOF as a way to hedge the risk of losses
in your oil-related transactions or as a way to indirectly invest in
oil.
Changes
in USOF’s NAV may not correlate with changes in the price of the Benchmark Oil
Futures Contract. If this were to occur, you may not be able to effectively
use
USOF as a way to hedge against oil-related losses or as a way to indirectly
invest in oil.
The
General Partner endeavors to invest USOF’s assets as fully as possible in
short-term Oil Futures Contracts and Other Oil Interests so that the changes
in
NAV closely correlate with the changes in the price of the Benchmark Oil Futures
Contract. However, changes in USOF’s NAV may not correlate with the changes in
the price of the Benchmark Oil Futures Contract for several reasons as set
forth
below:
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USOF
(i) may not be able to buy/sell the exact amount of Oil Futures Contracts
and Other Oil Interests to have a perfect correlation with NAV; (ii)
may
not always be able to buy and sell Oil Futures Contracts or Other
Oil
Interests at the market price; (iii) may not experience a perfect
correlation between the spot price of WTI light, sweet crude oil
and the
underlying investments in Oil Futures Contracts and Other Oil Interests
and Treasuries, cash and cash equivalents; and (iv) is required to
pay
brokerage fees and the management fee, which will have an effect
on the
correlation.
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Short-term
supply and demand for WTI light, sweet crude oil may cause the market
price of the changes in the Benchmark Oil Futures Contract to vary
from
changes in USOF’s NAV if USOF has fully invested in Oil Futures Contracts
that do not reflect such supply and demand and it is unable to replace
such contracts with Oil Futures Contracts that do reflect such supply
and
demand. In addition, there are also technical differences between
the two
markets, e.g., one is a physical market while the other is a futures
market traded on exchanges, that may cause variations between the
spot
price of oil and the prices of related futures
contracts.
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USOF
plans to buy only as many Oil Futures Contracts and Other Oil Interests
that it can to get the changes in the NAV as close as possible to
the
price of the changes in Benchmark Oil Futures Contract. The remainder
of
its assets will be invested in Treasuries, cash and cash equivalents
and
will be used to satisfy initial margin and additional margin requirements,
if any, and to otherwise support its investments in oil interests.
Investments in Treasuries, cash and cash equivalents, both directly
and as
margin, will provide rates of return that will vary from changes
in the
value of the spot price of WTI light, sweet crude oil and the price
of the
Benchmark Oil Futures Contract.
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In
addition, because USOF will incur certain expenses in connection
with its
investment activities, and will hold most of its assets in more liquid
short-term securities for margin and other liquidity purposes and
for
redemptions that may be necessary on an ongoing basis, the General
Partner
will not be able to fully invest USOF’s assets in Oil Futures Contracts or
Other Oil Interests and there cannot be perfect correlation between
changes in USOF’s NAV and the changes in the price of the Benchmark Oil
Futures Contract.
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As
USOF grows, there may be more or less correlation. For example, if
USOF
only has enough money to buy three Benchmark Oil Futures Contracts
and it
needs to buy four contracts to track the price of oil then the correlation
will be lower, but if it buys 20,000 Benchmark Oil Futures Contracts
and
it needs to buy 20,001 contracts then the correlation will be higher.
At
certain asset levels, USOF may be limited in its ability to purchase
the
Benchmark Oil Futures Contract or other Oil Futures Contracts due
to
accountability levels imposed by the relevant exchanges. To the extent
that USOF invests in these other Oil Futures Contracts or Other Oil
Interests, the correlation with the Benchmark Oil Futures Contracts
may be
lower. If USOF is required to invest in other Oil Futures Contracts
and
Other Oil Interests that are less correlated with
the Benchmark Oil Futures Contract, USOF would likely invest in
over-the-counter contracts to increase the level of correlation of
USOF’s
assets. Over-the-counter contracts entail certain risks described
below
under “Over-the-Counter Contract
Risk.”
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USOF
may not be able to buy the exact number of Oil Futures Contracts
and Other
Oil Interests to have a perfect correlation with the Benchmark Oil
Futures
Contract if the purchase price of Oil Futures Contracts required
to be
fully invested in such contracts is higher than the proceeds received
for
the sale of a Creation Basket on the day the basket was sold. In
such
case, USOF could not invest the entire proceeds from the purchase
of the
Creation Basket in such futures contracts (for example, assume USOF
receives $6,679,000 for the sale of a Creation Basket and assume
that the
price of an Oil Futures Contract for WTI light, sweet crude oil is
$66,800, then USOF could only invest in only 99 Oil Futures Contracts
with
an aggregate value of $6,613,200). USOF would be required to invest
a
percentage of the proceeds in Treasuries to be deposited as margin
with
the futures commission merchant through which the contract was purchased.
The remainder of the purchase price for the Creation Basket would
remain
invested in cash and Treasuries as determined by the General Partner
from
time to time based on factors such as potential calls for margin
or
anticipated redemptions. If the trading market for Oil Futures Contracts
is suspended or closed, USOF may not be able to purchase these investments
at the last reported price for such
investments.
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If
changes in USOF’s NAV do not correlate with changes in the price of the
Benchmark Oil Futures Contract, then investing in USOF may not be an effective
way to hedge against oil-related losses or indirectly invest in
oil.
The
Benchmark Oil Futures Contract may not correlate with the spot price of WTI
light, sweet, crude oil and this could cause the price of units to substantially
vary from the spot price of WTI light, sweet crude oil. If this were to occur,
then you may not be able to effectively use USOF as a way to hedge against
oil-related losses or as a way to indirectly invest in
oil.
When
using the Benchmark Oil Futures Contract as a strategy to track the spot price
of WTI light, sweet crude oil, at best the correlation between changes in prices
of such oil interests and the spot price can be only approximate. The degree
of
imperfection of correlation depends upon circumstances such as variations in
the
speculative oil market, supply of and demand for such oil interests and
technical influences in oil futures trading. If there is a weak correlation
between the oil interests and the spot price of WTI light, sweet, crude oil,
then the price of units may not accurately track the spot price of WTI light,
sweet crude oil and you may not be able to effectively use USOF as a way to
hedge the risk of losses in your oil-related transactions or as a way to
indirectly invest in oil.
USOF
may experience a loss if it is required to sell Treasuries at a price lower
than
the price at which they were acquired.
The
value
of Treasuries generally moves inversely with movements in interest rates. If
USOF is required to sell Treasuries at a price lower than the price at which
they were acquired, USOF will experience a loss. This loss may adversely impact
the price of the units and may decrease the correlation between the price of
the
units, the price of USOF’s Oil Futures Contracts and Other Oil Interests, and
the spot price of WTI light, sweet crude oil.
Certain
of USOF’s investments could be illiquid which could cause large losses to
investors at any time or from time to time.
USOF
may
not always be able to liquidate its positions in its investments at the desired
price. It is difficult to execute a trade at a specific price when there is
a
relatively small volume of buy and sell orders in a market. A market disruption,
such as a foreign government taking political actions that disrupt the market
in
its currency, its oil production or exports, or in another major export, can
also make it difficult to liquidate a position. Alternatively, limits imposed
by
futures exchanges or other regulatory organizations, such as accountability
levels, position limits and daily price fluctuation limits, may contribute
to a
lack of liquidity with respect to some commodity interests.
Unexpected
market illiquidity may cause major losses to investors at any time or from
time
to time. In addition, USOF does not intend at this time to establish a credit
facility, which would provide an additional source of liquidity and instead
will
rely only on the Treasuries, cash and cash equivalents that it holds. The
anticipated large value of the positions in certain investments, e.g., Oil
Futures Contracts, or in negotiated over-the-counter contracts that the General
Partner will acquire or enter into for USOF, increases the risk of illiquidity.
Such positions may be more difficult to liquidate at favorable prices and there
is an additional risk that losses may be incurred during the period in which
positions are being liquidated. The Other Oil Interests that USOF invests in
may
have a greater likelihood of
being
illiquid since they are contracts between two parties that take into account
not
only market risk, but also the relative credit, tax, and settlement risks under
such contracts. In addition, such contracts have limited transferability that
results from such risks and the contract’s express limitations. USOF anticipates
that it will invest in Other Oil Interests as a result of the speculative
position limits on the New York Mercantile Exchange or other
exchanges.
If
the nature of hedgors and speculators in futures markets has shifted such that
oil purchasers are the predominant hedgors in the market, USOF might have to
reinvest at higher futures prices or choose Other Oil
Interests.
The
changing nature of the hedgors and speculators in the oil market will influence
whether futures prices are above or below the expected future spot price. In
order to induce speculators to take the corresponding long side of the same
futures contract, oil producers must generally be willing to sell futures
contracts at prices that are below expected future spot prices. Conversely,
if
the predominant hedgors in the futures market are the purchasers of the oil
who
purchase futures contracts to hedge against a rise in prices, then speculators
will only take the short side of the futures contract if the futures price
is
greater than the expected future spot price of oil. This can have significant
implications for USOF when it is time to reinvest the proceeds from a maturing
futures contract into a new futures contract.
While
USOF does not intend to take physical delivery of oil under Oil Futures
Contracts, physical delivery under such contracts impacts the value of the
contracts.
While
USOF does not intend to take physical delivery of oil under its Oil Futures
Contracts, futures contracts are not required to be cash-settled and it is
possible to take delivery under these contracts. Storage costs associated with
purchasing oil could result in costs and other liabilities that could impact
the
value of Oil Futures Contracts or Other Oil Interests. Storage costs include
the
time value of money invested in oil as a physical commodity plus the actual
costs of storing the oil less any benefits from ownership of oil that are not
obtained by the holder of a futures contract. In general, Oil Futures Contracts
have a one-month delay for contract delivery and the back month (the back month
is any future delivery month other than the spot month) includes storage costs.
To the extent that these storage costs change for oil while USOF holds Oil
Futures Contracts or Other Oil Interests, the value of the Oil Futures Contracts
or Other Oil Interests, and therefore USOF’s NAV, may change as
well.
The
price relationship between the near month contract and the next month contract
that compose the Benchmark Oil Futures Contract will vary and may impact both
the total return over time of USOF’s NAV, as well as the degree to which its
total return tracks other natural gas price indices’ total
returns.
The
design of USOF’s Benchmark Futures Contract is such that every month it begins
by using the near month contract to expire until the near month contract
is
within two weeks of expiration, when it will use the next month contract
to
expire as its benchmark contract and keeps that contract as its benchmark
until
it becomes the near month contract and close to expiration. In the event
of an
oil futures market where near month contracts trade at a higher price than
next
month to expire contracts, a situation described as “backwardation” in the
futures market, then absent the impact of the overall movement in oil prices
the
value of the benchmark contract would tend to rise as it approaches expiration.
As a result the total return of the Benchmark Oil Futures Contract would
tend to
track higher. Conversely, in the event of an oil futures market where near
month
contracts trade at a lower price than next month contracts, a situation
described as “contango” in the futures market, then absent the impact of the
overall movement in oil prices the value of the benchmark contract would
tend to
decline as it approaches expiration. As a result the total return of the
Benchmark Oil Futures Contract would tend to track lower. When compared to
total
return of other price indices, such as the spot price of oil, the impact
of
backwardation and contango may lead the total return of USOF’s NAV to vary
significantly. In the event of a prolonged period of contango, and absent
the
impact of rising or falling oil prices, this could have a significant negative
impact on USOF’s NAV and total return.
Regulation
of the commodity interests and energy markets is extensive and constantly
changing; future regulatory developments are impossible to predict but may
significantly and adversely affect USOF.
The
regulation of commodity interest transactions in the United States is a rapidly
changing area of law and is subject to ongoing modification by government and
judicial action. In addition, various national governments have expressed
concern regarding the disruptive effects of speculative trading in the energy
markets and the need to regulate the derivatives markets in general. The effect
of any future regulatory change on USOF is impossible to predict, but could
be
substantial and adverse.
If
you are investing in USOF for purposes of hedging, you might be subject to
several risks including the possibility of losing the benefit of favorable
market movement.
Participants
in the oil or in other industries may use USOF as a vehicle to hedge the risk
of
losses in their oil-related transactions. There are several risks in connection
with using USOF as a hedging device. While hedging can provide protection
against an adverse movement in market prices, it can also preclude a hedgor’s
opportunity to benefit from a favorable market movement. In a hedging
transaction, the hedgor may be concerned that the hedged item will increase
in
price, but must recognize the risk that the price may instead decline and if
this happens he will have lost his opportunity to profit from the change in
price because the hedging transaction will result in a loss rather than a gain.
Thus, the hedgor foregoes the opportunity to profit from favorable price
movements.
In
addition, if the hedge is not a perfect one, the hedgor can lose on the hedging
transaction and not realize an offsetting gain in the value of the underlying
item being hedged.
When
using futures contracts as a hedging technique, at best, the correlation between
changes in prices of futures contracts and of the items being hedged can be
only
approximate. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative markets, demand for futures
and
for oil products, technical influences in futures trading, and differences
between anticipated energy costs being hedged and the instruments underlying
the
standard futures contracts available for trading. Even a well-conceived hedge
may be unsuccessful to some degree because of unexpected market behavior as
well
as the expenses associated with creating the hedge.
In
addition, using an investment in USOF as a hedge for changes in energy costs
(e.g.,
investing in oil, gasoline, or other fuels, or electricity) may not correlate
because changes in the spot price of oil may vary from changes in energy costs
because the spot price of oil does not reflect the refining, transportation,
and
other costs that may impact the hedgor’s energy costs.
An
investment in USOF may provide you little or no diversification benefits. Thus,
in a declining market, USOF may have no gains to offset your losses from other
investments, and you may suffer losses on your investment in USOF at the same
time you incur losses with respect to other asset
classes.
Historically,
Oil Futures Contracts and Other Oil Interests have generally been non-correlated
to the performance of other asset classes such as stocks and bonds.
Non-correlation means that there is a low statistically valid relationship
between the performance of futures and other commodity interest transactions,
on
the one hand, and stocks or bonds, on the other hand. However, there can be
no
assurance that such non-correlation will continue during future periods. If,
contrary to historic patterns, USOF’s performance were to move in the same
general direction as the financial markets, you will obtain little or no
diversification benefits from an investment in the units. In such a case, USOF
may have no gains to offset your losses from other investments, and you may
suffer losses on your investment in USOF at the same time you incur losses
with
respect to other investments.
Variables
such as drought, floods, weather, embargoes, tariffs and other political events
may have a larger impact on oil prices and oil-linked instruments, including
Oil
Futures Contracts and Other Oil Interests, than on traditional securities.
These
additional variables may create additional investment risks that subject USOF’s
investments to greater volatility than investments in traditional
securities.
Non-correlation
should not be confused with negative correlation, where the performance of
two
asset classes would be opposite of each other. There is no historic evidence
that the spot price of oil and prices of other financial assets, such as stocks
and bonds, are negatively correlated. In the absence of negative correlation,
USOF cannot be expected to be automatically profitable during unfavorable
periods for the stock market, or vice versa.
USOF’s
Operating Risks
USOF
is not a registered investment company so you do not have the protections of
the
Investment Company Act of 1940.
USOF
is
not an investment company subject to the Investment Company Act of 1940.
Accordingly, you do not have the protections afforded by that statute which,
for
example, requires investment companies to have a majority of disinterested
directors and regulates the relationship between the investment company and
its
investment manager.
USOF
has a limited operating history so there is no extensive performance history
to
serve as a basis for you to evaluate an investment in
USOF.
USOF
has
a limited operating history. Therefore, you do not have the benefit of reviewing
extensive past performance of USOF as a basis for you to evaluate an investment
in USOF. The General Partner’s current experience also involves managing United
States Natural Gas Fund, LP (“USNG”), an exchange traded security that invests
primarily in futures contracts for natural gas, Treasuries, cash and cash
equivalents, which began trading on April 18, 2007. However, there are
significant differences between the crude oil futures markets and the natural
gas futures markets. The General Partner’s results with the natural gas funds
may not be representative of results that may be experienced with a fund
investing in crude oil futures.
The
General Partner is leanly staffed and relies heavily on key personnel to manage
trading activities.
In
managing and directing the day-to-day activities and affairs of USOF, the
General Partner relies heavily on Mr. Nicholas Gerber, Mr. John Love
and Mr. John Hyland. If Mr. Gerber, Mr. Love or Mr. Hyland
were to leave or be unable to carry out their present responsibilities, it
may
have an adverse effect on the management of USOF. Furthermore, Mr. Gerber,
Mr. Love and Mr. Hyland are involved in the management of USNG, and
the General Partner is currently in the process of registering two other
exchange traded security funds, United States Heating Oil Fund, LP (“USHO”) and
United States Gasoline Fund, LP (“USG”). Mr. Gerber and Mr. Love are also
employed by Ameristock Corporation, a registered investment adviser that
manages
a public mutual fund. It is estimated that Mr. Gerber will spend approximately
50% of his time on USOF, USNG, USHO and USG matters. Mr. Love will spend
approximately 80% of his time on USOF, USNG, USHO and USG matters and Mr.
Hyland
will spend approximately 75% of his time on USOF, USNG, USHO and USG
matters.
Accountability
levels, position limits, and daily price fluctuation limits set by the exchanges
have the potential to cause a tracking error, which could cause the price of
units to substantially vary from the price of the Benchmark Oil Futures Contract
and prevent you from being able to effectively use USOF as a way to hedge
against oil-related losses or as a way to indirectly invest in
oil.
U.S.
designated contract markets such as the New York Mercantile Exchange 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 as a hedge, which an investment
in
USOF is not) may hold, own or control. For example, the current accountability
level for investments at any one time in Oil Futures Contracts (including
investments in the Benchmark Oil Futures Contract) is 20,000. While this
is not
a fixed ceiling, it is a threshold above which the New York Mercantile Exchange
may exercise greater scrutiny and control over an investor, including limiting
an investor to holding no more than 20,000 Oil Futures Contracts. With regard
to
position limits, the New York Mercantile Exchange limits an investor from
holding more than 3,000 net futures in the last 3 days of trading in the
near
month contract to expire.
In
addition to accountability levels and position limits, the New York Mercantile
Exchange also sets daily price fluctuation limits on the Benchmark Oil Futures
Contract. The daily price fluctuation limit establishes the maximum amount
that
the price of futures contracts 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 Oil Futures Contract, no trades may be made at a price beyond
that limit.
In
addition to accountability levels and position limits, the New York Mercantile
Exchange also limits the amount of price fluctuation for Oil Futures Contracts.
For example, the New York Mercantile Exchange imposes a $10.00 per barrel
($10,000 per contract) price fluctuation limit for Oil Futures Contracts. This
limit is initially based off of the previous trading day’s settlement price. If
any Oil Futures Contract is traded, bid, or offered at the limit for five
minutes, trading is halted for five minutes. When trading resumes it begins
at
the point where the limit was imposed and the limit is reset to be $10.00 per
barrel in either direction of that point. If another halt were triggered, the
market would continue to be expanded by $10.00 per barrel in either direction
after each successive five-minute trading halt. There is no maximum price
fluctuation limits during any one trading session.
All
of
these limits may potentially cause a tracking error between the price of the
units and the price of the Benchmark Oil Futures Contract. This may in turn
prevent you from being able to effectively use USOF as a way to hedge against
oil-related losses or as a way to indirectly invest in oil.
USOF
is
not limiting the size of the offering and is committed to utilizing
substantially all of its proceeds to purchase Oil Futures Contracts and Other
Oil Interests. If USOF encounters accountability levels, position limits, or
price fluctuation limits for oil contracts on the New York Mercantile Exchange,
it may then, if permitted under applicable regulatory requirements, purchase
futures contracts on the ICE Futures (formerly, the International Petroleum
Exchange) or other exchanges that trade listed oil futures. The futures
contracts available on the ICE Futures
are comparable to the contracts on the New York Mercantile Exchange, but they
may have different underlying commodities, sizes, deliveries, and
prices.
There
are technical and fundamental risks inherent in the trading system the General
Partner intends to employ.
The
General Partner’s trading system is quantitative in nature and it is possible
that the General Partner might make a mathematical error. In addition, it is
also possible that a computer or software program may malfunction and cause
an
error in computation.
USOF
and the General Partner may have conflicts of interest, which may permit them
to
favor their own interests to your detriment.
USOF
and
the General Partner may have inherent conflicts to the extent the General
Partner attempts to maintain USOF’s asset size in order to preserve its fee
income and this may not always be consistent with USOF’s objective of tracking
changes in the spot price of WTI light, sweet crude oil. The General Partner’s
officers, directors and employees do not devote their time exclusively to USOF.
These persons are directors, officers or employees of other entities that may
compete with USOF for their services. They could have a conflict between their
responsibilities to USOF and to those other entities.
In
addition, the General Partner’s principals, officers, directors or employees may
trade futures and related contracts for their own account. A conflict of
interest may exist if their trades are in the same markets and at the same
time
as USOF trades using the clearing broker to be used by USOF. A potential
conflict also may occur if the General Partner’s principals, officers, directors
or employees trade their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by
USOF.
The
General Partner has sole current authority to manage the investments and
operations of USOF, and this may allow it to act in a way that furthers its
own
interests which may create a conflict with your best interests. Limited partners
have limited voting control, which will limit the ability to influence matters
such as amendment of the LP Agreement, change in USOF’s basic investment policy,
dissolution of this fund, or the sale or distribution of USOF’s
assets.
The
General Partner serves as the general partner to both USOF and USNG and will
serve as the general partner for USHO and USG. The General Partner may have
a
conflict to the extent that its trading decisions for USOF may be influenced
by
the effect they would have on USNG, USHO and USG. These trading decisions
may be
influenced since the General Partner also serves as the general partner for
USNG
and will serve as the general partner for USHO and USG and is required to
meet
investment objectives for USNG, USHO and USG as well as USOF. If the General
Partner believes that a trading decision it made on behalf of USOF might
(i)
impede USNG, USHO or USG from reaching its investment objective, or (ii)
improve
the likelihood of meeting the objective of USNG, USHO or USG, then the General
Partner may choose to change its trading decision for USOF, which could either
impede or improve the opportunity for USOF from meeting its investment
objective. In addition, the General Partner is required to indemnify the
officers and directors of USNG, and will be required to indemnify the officers
and directors of USHO and USG, if the need for indemnification arises. This
potential indemnification will cause the General Partner’s assets to decrease.
If the General Partner’s other sources of income are not sufficient to
compensate for the indemnification, then the General Partner may terminate
and
you could lose your investment.
Unitholders
may only vote on the removal of the General Partner and limited partners have
only limited voting rights. Unitholders and limited partners will not
participate in the management of USOF and do not control the General Partner
so
they will not have influence over basic matters that affect
USOF.
Unitholders
that have not applied to become limited partners have no voting rights, other
than to remove the General Partner. Limited partners will have limited voting
rights with respect to USOF’s affairs. Unitholders may remove the General
Partner only if 66 2/3% of the unitholders elect to do so. Unitholders and
limited partners will not be permitted to participate in the management or
control of USOF or the conduct of its business. Unitholders and limited partners
must therefore rely upon the duties and judgment of the General Partner to
manage USOF’s affairs.
The
General Partner may manage a large amount of assets and this could affect USOF’s
ability to trade profitably.
Increases
in assets under management may affect trading decisions. In general, the General
Partner does not intend to limit the amount of assets of USOF that it may
manage. The more assets the General Partner manages, the more
difficult it may be for it to trade profitably because of the difficulty of
trading larger positions without adversely affecting prices and performance
and
of managing risk associated with larger positions.
USOF
could terminate at any time and cause the liquidation and potential loss of
your
investment and could upset the overall maturity and timing of your investment
portfolio.
USOF
may
terminate at any time, regardless of whether USOF has incurred losses, subject
to the terms of the LP Agreement. In particular, unforeseen circumstances,
including the death, adjudication of incompetence, bankruptcy, dissolution,
or
removal of the General Partner could cause USOF 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 interest of the limited partners subject to conditions.
However, no level of losses will require the General Partner to terminate USOF.
USOF’s termination would cause the liquidation and potential loss of your
investment. Termination could also negatively affect the overall maturity and
timing of your investment portfolio.
Limited
partners may not have limited liability in certain circumstances, including
potentially having liability for the return of wrongful
distributions.
Under
Delaware law, a limited partner might be held liable for our obligation as
if it
were a General Partner if the limited partner participates in the control of
the
partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
A
limited
partner will not be liable for assessments in addition to its initial capital
investment in any of our capital securities representing limited partnership
interests. However, a limited partner may be required to repay to us any amounts
wrongfully returned or distributed to it under some circumstances. Under
Delaware law, we may not make a distribution to limited partners if the
distribution causes our liabilities (other than liabilities to partners on
account of their partnership interests and nonrecourse liabilities) to exceed
the fair value of our assets. Delaware law provides that a limited partner
who
receives such a distribution and knew at the time of the distribution that
the
distribution violated the law will be liable to the limited partnership for
the
amount of the distribution for three years from the date of the
distribution.
With
adequate notice, a limited partner may be required to withdraw from the
partnership for any reason.
If
the
General Partner gives at least fifteen (15) days’ written notice to a limited
partner, then the General Partner may for any reason, in its sole discretion,
require any such limited partner to withdraw entirely from the partnership
or to
withdraw a portion of his partner capital account. The General Partner may
require withdrawal even in situations where the limited partner has complied
completely with the provisions of the LP Agreement.
USOF’s
existing units are, and any units USOF issues in the future will be, subject
to
restrictions on transfer. Failure to satisfy these requirements will preclude
you from being able to have all the rights of a limited
partner.
No
transfer of any unit or interest therein may be made if such transfer would
(a)
violate the then applicable federal or state securities laws or rules and
regulations of the SEC, any state securities commission, the CFTC or any other
governmental authority with jurisdiction over such transfer, or (b) cause USOF
to be taxable as a corporation or affect USOF’s existence or qualification as a
limited partnership. In addition, investors may only become limited partners
if
they transfer their units to purchasers that meet certain conditions outlined
in
the LP Agreement, which provides that each record holder or limited partner
or
unitholder applying to become a limited partner (each a record holder) may
be
required by the General Partner to furnish certain information, including that
holder’s nationality, citizenship or other related status. A transferee who is
not a U.S. resident may not be eligible to become a record holder or a limited
partner if its ownership would subject USOF to the risk of cancellation or
forfeiture of any of its assets under any federal, state or local law or
regulation. All purchasers of USOF’s units, who wish to become limited partners
or record holders, and receive cash distributions, if any, or have certain
other
rights, must deliver an executed transfer application in which the purchaser
or
transferee must certify that, among other things, he, she or it agrees to be
bound by USOF’s LP Agreement and is eligible to purchase USOF’s securities. Any
transfer of units will not be recorded by the transfer agent or recognized
by us
unless a completed transfer application is delivered to the General Partner
or
the Administrator. A person purchasing USOF’s existing units, who does not
execute a transfer application and certify that the purchaser is eligible to
purchase those securities acquires no rights in those securities other than
the
right to resell those securities. Whether or not a transfer application is
received or the consent
of the General Partner obtained, our units will be securities and will be
transferable according to the laws governing transfers of securities. See
“Transfer of Units.”
USOF
does not expect to make cash distributions.
The
General Partner has not previously made any cash distributions and intends
to
re-invest any realized gains in additional oil interests rather than
distributing cash to limited partners. Therefore, unlike mutual funds, commodity
pools or other investment pools that actively manage their investments in an
attempt to realize income and gains from their investing activities and
distribute such income and gains to their investors, USOF generally does not
expect to distribute cash to limited partners. You should not invest in USOF
if
you will need cash distributions from USOF to pay taxes on your share of income
and gains of USOF, if any, or for any other reason. Although USOF does not
intend to make cash distributions, the income earned from its investments held
directly or posted as margin may reach levels that merit distribution, e.g.,
at
levels where such income is not necessary to support its underlying investments
in Oil Interests and investors adversely react to being taxed on such income
without receiving distributions that could be used to pay such tax. If this
income becomes significant then cash distributions may be made.
There
is a risk that USOF will not earn trading gains sufficient to compensate for
the
fees and expenses that it must pay and as such USOF may not earn any
profit.
USOF
pays
brokerage charges of approximately 0.13%, futures commission merchant fees
of
$3.50 per buy or sell, management fees of 0.50% of NAV on the first
$1,000,000,000 of assets and 0.20% of NAV after the first $1,000,000,000
of
assets, and over-the-counter spreads and extraordinary expenses (i.e.
expenses
not in the ordinary course of business, including the indemnification of
any
person against liabilities and obligations to the extent permitted by law
and
required under the LP Agreement and under agreements entered into by the
General
Partner on USOF’s behalf and the bringing and defending of actions at law or in
equity and otherwise engaging in the conduct of litigation and the incurring
of
legal expenses and the settlement of claims and litigation) that can not
be
quantified. These fees and expenses must be paid in all cases regardless
of
whether USOF’s activities are profitable. Accordingly, USOF must earn trading
gains sufficient to compensate for these fees and expenses before it can
earn
any profit.
USOF
has historically depended upon its affiliates to pay all its expenses. If this
offering of units does not raise sufficient funds to pay USOF’s future expenses
and no other source of funding of expenses is found, USOF may be forced to
terminate and investors may lose all or part of their
investment.
Prior
to
the offering of units that commenced on January 30, 2007, all of USOF’s expenses
were funded by the General Partner and its affiliates. These payments by the
General Partner and its affiliates were designed to allow USOF the ability
to
commence the public offering of its units. USOF now directly pays certain of
these fees and expenses. The General Partner will continue to pay other fees
and
expenses, as set forth in the LP Agreement. If the General Partner and USOF
are
unable to raise sufficient funds to cover their expenses or locate any other
source of funding, USOF may be forced to terminate and investors may lose all
or
part of their investment.
USOF
may incur higher fees and expenses upon renewing existing or entering into
new
contractual relationships.
The
clearing arrangements between the clearing brokers and USOF generally are
terminable by the clearing brokers once the clearing broker has given USOF
notice. Upon termination, the General Partner may be required to renegotiate
or
make other arrangements for obtaining similar services if USOF intends to
continue trading in Oil Futures Contracts or Other Oil Interest contracts at
its
present level of capacity.
The
services of any clearing broker may not be available, or even if available,
these services may not be available on the terms as favorable as those of the
expired or terminated clearing arrangements.
USOF
may miss certain trading opportunities because it will not receive the benefit
of the expertise of trading advisors.
The
General Partner does not employ trading advisors for USOF; however, it reserves
the right to employ them in the future. The only advisor to USOF is the General
Partner. A lack of trading advisors may be disadvantageous to USOF because
it
will not receive the benefit of a trading advisor’s
expertise.
An
unanticipated number of redemption requests during a short period of time could
have an adverse effect on the NAV of USOF.
If
a
substantial number of requests for redemption of Redemption Baskets are received
by USOF during a relatively short period of time, USOF may not be able to
satisfy the requests from USOF’s assets not committed to trading. As a
consequence, it could be necessary to liquidate positions in USOF’s trading
positions before the time that the trading strategies would otherwise dictate
liquidation.
The
failure or bankruptcy of a clearing broker could result in a substantial loss
of
USOF’s assets.
Under
CFTC regulations, a clearing broker maintains customers’ assets in a bulk
segregated account. If a clearing broker fails to do so, or is unable to satisfy
a substantial deficit in a customer account, its other customers may be subject
to risk of loss of their funds in the event of that clearing broker’s
bankruptcy. In that event, the clearing broker’s customers, such as USOF, are
entitled to recover, even in respect of property specifically traceable to
them,
only a proportional share of all property available for distribution to all
of
that clearing broker’s customers. USOF also may be subject to the risk of the
failure of, or delay in performance by, any exchanges and markets and their
clearing organizations, if any, on which commodity interest contracts are
traded.
From
time
to time, the clearing brokers may be subject to legal or regulatory proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear USOF’s
trades.
Third
parties may infringe upon or otherwise violate intellectual property rights
or
assert that the General Partner has infringed or otherwise violated their
intellectual property rights, which may result in significant costs and diverted
attention.
Third
parties may utilize USOF’s intellectual property or technology, including the
use of its business methods, trademarks and trading program software, without
permission. The General Partner has a patent pending for USOF’s business method
and it is registering its trademarks. USOF does not currently have any
proprietary software. However, if it obtains proprietary software in the future,
then any unauthorized use of USOF’s proprietary software and other technology
could also adversely affect its competitive advantage. USOF may have difficulty
monitoring unauthorized uses of its patents, trademarks, proprietary software
and other technology. Also, third parties may independently develop business
methods, trademarks or proprietary software and other technology similar to
that
of the General Partner or claim that the General Partner has violated their
intellectual property rights, including their copyrights, trademark rights,
trade names, trade secrets and patent rights. As a result, the General Partner
may have to litigate in the future to protect its trade secrets, determine
the
validity and scope of other parties’ proprietary rights, defend itself against
claims that it has infringed or otherwise violated other parties’ rights, or
defend itself against claims that its rights are invalid. Any litigation of
this
type, even if the General Partner is successful and regardless of the merits,
may result in significant costs, divert its resources from USOF, or require
it
to change its proprietary software and other technology or enter into royalty
or
licensing agreements. See “Legal Risks” below.
The
success of USOF depends on the ability of the General Partner to accurately
implement trading systems, and any failure to do so could subject USOF to losses
on such transactions.
The
General Partner uses mathematical formulas built into a generally available
spreadsheet program to decide whether it should buy or sell oil interests each
day. Specifically, the General Partner uses the spreadsheet to make mathematical
calculations and to monitor positions in oil interests and Treasuries and
correlations to the spot price of WTI light, sweet crude oil. The General
Partner must accurately process the spreadsheets’ outputs and execute the
transactions called for by the formulas. In addition, USOF relies on the General
Partner to properly operate and maintain its computer and communications
systems. Execution of the formulas and operation of the systems are subject
to human error. Any failure, inaccuracy or delay in implementing any of the
formulas or systems and executing USOF’s transactions could impair its ability
to achieve USOF’s investment objective. It could also result in decisions to
undertake transactions based on inaccurate or incomplete information. This
could
cause substantial losses on transactions.
USOF
may experience substantial losses on transactions if the computer or
communications system fails.
USOF’s
trading activities, including its risk management, depend on the integrity
and
performance of the computer and communications systems supporting them.
Extraordinary transaction volume, hardware or software failure, power or
telecommunications failure, a natural disaster or other catastrophe could cause
the computer systems to operate at an unacceptably slow speed or even fail.
Any
significant degradation or failure of the systems that the General Partner
uses
to gather and analyze information, enter orders, process data, monitor risk
levels and otherwise engage in trading activities may result in substantial
losses on transactions, liability to other parties, lost profit opportunities,
damages to the General Partner’s and USOF’s reputations, increased operational
expenses and diversion of technical resources.
If
the computer and communications systems are not upgraded, USOF’s financial
condition could be harmed.
The
development of complex computer and communications systems and new technologies
may render the existing computer and communications systems supporting USOF’s
trading activities obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the systems
of
exchanges, clearing brokers and the executing brokers. As a result, if these
third parties upgrade their systems, the General Partner will need to make
corresponding upgrades to continue effectively its trading activities. USOF’s
future success will depend on USOF’s ability to respond to changing technologies
on a timely and cost-effective basis.
USOF
depends on the reliable performance of the computer and communications systems
of third parties, such as brokers and futures exchanges, and may experience
substantial losses on transactions if they fail.
USOF
depends on the proper and timely function of complex computer and communications
systems maintained and operated by the futures exchanges, brokers and other
data
providers that the General Partner uses to conduct trading activities. Failure
or inadequate performance of any of these systems could adversely affect the
General Partner’s ability to complete transactions, including its ability to
close out positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a material adverse
effect on revenues and materially reduce USOF’s available capital. For example,
unavailability of price quotations from third parties may make it difficult
or
impossible for the General Partner to use its proprietary software that it
relies upon to conduct its trading activities. Unavailability of records from
brokerage firms may make it difficult or impossible for the General Partner
to
accurately determine which transactions have been executed or the details,
including price and time, of any transaction executed. This unavailability
of
information also may make it difficult or impossible for the General Partner
to
reconcile its records of transactions with those of another party or to
accomplish settlement of executed transactions.
The
occurrence of a terrorist attack, or the outbreak, continuation or expansion
of
war or other hostilities could disrupt USOF’s trading activity and materially
affect USOF’s profitability.
The
operations of USOF, the exchanges, brokers and counterparties with which USOF
does business, and the markets in which USOF does business could be severely
disrupted in the event of a major terrorist attack or the outbreak, continuation
or expansion of war or other hostilities. The terrorist attacks of September
11,
2001 and the war in Iraq, global anti-terrorism initiatives and political unrest
in the Middle East and Southeast Asia continue to fuel this
concern.
Risk
of Leverage and Volatility
If
the General Partner permits USOF to become leveraged, you could lose all or
substantially all of your investment if USOF’s trading positions suddenly turn
unprofitable.
Commodity
pools’ trading positions in futures contracts or other commodity interests 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 interests’)
entire face value. This feature permits commodity pools to “leverage” their
assets by purchasing
or selling futures contracts (or other commodity interests) with an aggregate
value in excess of the commodity pool’s assets. While this leverage can increase
the pool’s profits, relatively small adverse movements in the price of the
pool’s futures contracts can cause significant losses to the pool. While the
General Partner has not and does not intend to leverage USOF’s assets, it is not
prohibited from doing so under the LP Agreement or otherwise.
The
price of oil is volatile which could cause large fluctuations in the price
of
units.
Movements
in the price of oil may be the result of factors outside of the General
Partner’s control and may not be anticipated by the General Partner. For
example, price movements for barrels of oil are influenced by, among other
things:
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changes
in interest rates;
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actions
by oil producing countries such as the OPEC
countries;
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governmental,
agricultural, trade, fiscal, monetary and exchange control programs
and
policies;
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weather
and climate conditions;
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changing
supply and demand relationships, including but not limited to increased
demand by other countries such as
China;
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changes
in balances of payments and trade;
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U.S.
and international rates of
inflation;
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currency
devaluations and revaluations;
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U.S.
and international political and economic events;
and
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changes
in philosophies and emotions of market
participants.
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Over-the-Counter
Contract Risk
Over-the-counter
transactions are subject to little, if any,
regulation.
A
portion
of USOF’s assets may be used to trade over-the-counter oil interest contracts,
such as forward contracts or swap or spot contracts. Over-the-counter contracts
are typically traded on a principal-to-principal basis through dealer markets
that are dominated by major money center and investment banks and other
institutions and are essentially unregulated by the CFTC. You therefore do
not
receive the protection of CFTC regulation or the statutory scheme of the
Commodity Exchange Act in connection with this trading activity by USOF. The
markets for over-the-counter contracts rely upon the integrity of market
participants in lieu of the additional regulation imposed by the CFTC on
participants in the futures markets. The lack of regulation in these markets
could expose USOF in certain circumstances to significant losses in the event
of
trading abuses or financial failure by participants.
USOF
will be subject to credit risk with respect to counterparties to
over-the-counter contracts entered into by USOF or held by special purpose
or
structured vehicles.
USOF
faces the risk of non-performance by the counterparties to the over-the-counter
contracts. Unlike in futures contracts, the counterparty to these contracts
is
generally a single bank or other financial institution, rather than a clearing
organization backed by a group of financial institutions. As a result, there
will be greater counterparty credit risk in these transactions. A counterparty
may not be able to meet its obligations to USOF, in which case USOF could suffer
significant losses on these contracts.
If
a
counterparty becomes bankrupt or otherwise fails to perform its obligations
due
to financial difficulties, USOF may experience significant delays in obtaining
any recovery in a bankruptcy or other reorganization proceeding. USOF may obtain
only limited recovery or may obtain no recovery in such
circumstances.
USOF
may be subject to liquidity risk with respect to its over-the-counter
contracts.
Over-the-counter
contracts may have terms that make them less marketable than Oil Futures
Contracts. Over-the-counter contracts are less marketable because they are
not
traded on an exchange, do not have uniform terms and conditions,
and are entered into based upon the creditworthiness of the parties and the
availability of credit support, such as collateral, and in general, they are
not
transferable without the consent of the counterparty. These conditions diminish
the ability to realize the full value of such contracts.
Risk
of Trading in International Markets
Trading
in international markets would expose USOF to credit and regulatory
risk.
The
General Partner invests primarily in Oil Futures Contracts, a significant
portion of which will be on United States exchanges including the New York
Mercantile Exchange. However, a portion of USOF’s trades may take place on
markets and exchanges outside the United States. Some non-U.S. markets present
risks because they are not subject to the same degree of regulation as their
U.S. counterparts. None of the CFTC, NFA, or any domestic exchange regulates
activities of any foreign boards of trade or exchanges, including the execution,
delivery and clearing of transactions, nor has the power to compel enforcement
of the rules of a foreign board of trade or exchange or of any applicable
non-U.S. laws. Similarly, the rights of market participants, such as USOF,
in
the event of the insolvency or bankruptcy of a non-U.S. market or broker
are
also likely to be more limited than in the case of U.S. markets or brokers.
As a
result, in these markets, USOF has less legal and regulatory protection than
it
does when it trades domestically.
In
some
of these non-U.S. markets, the performance on a contract is the responsibility
of the counterparty and is not backed by an exchange or clearing corporation
and
therefore exposes USOF to credit risk. Trading in non-U.S. markets also leaves
USOF susceptible to swings in the value of the local currency against the U.S.
dollar. Additionally, trading on non-U.S. exchanges is subject to the risks
presented by exchange controls, expropriation, increased tax burdens and
exposure to local economic declines and political instability. An adverse
development with respect to any of these variables could reduce the profit
or
increase the loss earned on trades in the affected international
markets.
International
trading activities subject USOF to foreign exchange
risk.
The
price
of any non-U.S. futures, options on futures or other commodity interest contract
and, therefore, the potential profit and loss on such contract, may be affected
by any variance in the foreign exchange rate between the time the order is
placed and the time it is liquidated, offset or exercised. As a result, changes
in the value of the local currency relative to the U.S. dollar may cause losses
to USOF even if the contract traded is profitable.
USOF’s
international trading would expose it to losses resulting from non-U.S.
exchanges that are less developed or less reliable than United States
exchanges.
Some
non-U.S. exchanges also may be in a more developmental stage so that prior
price
histories may not be indicative of current price dynamics. In addition, USOF
may
not have the same access to certain positions on foreign trading exchanges
as do
local traders, and the historical market data on which General Partner bases
its
strategies may not be as reliable or accessible as it is for U.S.
exchanges.
Tax
Risk
Please
refer to “U.S. Federal Income Tax Considerations” for information regarding the
U.S. federal income tax consequences of the purchase, ownership and disposition
of units.
Your
tax liability may exceed the amount of distributions, if any, on your
units.
Cash
or
property will be distributed at the sole discretion of the General Partner.
The
General Partner has not and does not intend to make cash or other distributions
with respect to units. You will be required to pay U.S. federal income tax
and,
in some cases, state, local, or foreign income tax, on your allocable share
of
USOF’s taxable income, without regard to whether you receive distributions or
the amount of any distributions. Therefore, your tax liability with respect
to
your units may exceed the amount of cash or value of property (if any)
distributed.
Your
allocable share of taxable income or loss may differ from your economic income
or loss on your units.
Due
to
the application of the assumptions and conventions applied by USOF in making
allocations for tax purposes and other factors, your allocable share of USOF’s
income, gain, deduction or loss may be different than your economic profit
or
loss from your units for a taxable year. This difference could be temporary
or
permanent and, if permanent, could result in your being taxed on amounts in
excess of your economic income.
Items
of income, gain, deduction, loss and credit with respect to units could be
reallocated if the IRS does not accept the assumptions and conventions applied
by USOF in allocating those items, with potential adverse consequences for
you.
The
U.S.
tax rules pertaining to partnerships are complex and their application to large,
publicly traded partnerships such as USOF is in many respects uncertain. USOF
will apply certain assumptions and conventions in an attempt to comply with
the
intent of the applicable rules and to report taxable income, gains, deductions,
losses and credits in a manner that properly reflects unitholders’ economic
gains and losses. These assumptions and conventions may not fully comply with
all aspects of the Internal Revenue Code (“Code”) and applicable Treasury
Regulations, however, and it is possible that the U.S. Internal Revenue Service
will successfully challenge our allocation methods and require us to reallocate
items of income, gain, deduction, loss or credit in a manner that adversely
affects you. If this occurs, you may be required to file an amended tax return
and to pay additional taxes plus deficiency interest.
We
could be treated as a corporation for federal income tax purposes, which may
substantially reduce the value of your units.
USOF
has
received an opinion of counsel that, under current U.S. federal income tax
laws,
USOF will be treated as a partnership that is not taxable as a corporation
for
U.S. federal income tax purposes, provided that (i) at least 90 percent of
USOF’s annual gross income consists of “qualifying income” as defined in the
Code, (ii) USOF is organized and operated in accordance with its governing
agreements and applicable law and (iii) USOF does not elect to be taxed as
a
corporation for federal income tax purposes. Although the General Partner
anticipates that USOF will satisfy the “qualifying income” requirement for all
of its taxable years, that result cannot be assured. USOF has not requested
and
will not request any ruling from the IRS with respect to its classification
as a
partnership not taxable as a corporation for federal income tax purposes. If
the
IRS were to successfully assert that USOF is taxable as a corporation for
federal income tax purposes in any taxable year, rather than passing through
its
income, gains, losses and deductions proportionately to unitholders, USOF would
be subject to tax on its net income for the year at corporate tax rates. In
addition, although the General Partner does not currently intend to make
distributions with respect to units, any distributions would be taxable to
unitholders as dividend income. Taxation of USOF as a corporation could
materially reduce the after-tax return on an investment in units and could
substantially reduce the value of your units.
PROSPECTIVE
INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO
THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN UNITS; SUCH TAX
CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.
Legal
Risks
Representatives
of the New York Mercantile Exchange have notified USOF of its belief that USOF
is engaging in unauthorized use of such Exchange’s service marks and settlement
prices.
USOF
invests primarily in Oil Futures Contracts, and particularly in Oil Futures
Contracts traded on the New York Mercantile Exchange. Representatives of the
New
York Mercantile Exchange have at various times asserted varying claims regarding
USOF’s operations and the Exchange’s service marks and settlement prices of oil
futures contracts traded on the Exchange.
The
New
York Mercantile Exchange initially claimed that USOF’s use of the Exchange’s
service marks would cause confusion as to USOF’s source, origin, sponsorship or
approval, and constitute infringement of the Exchange’s trademark rights and
unfair competition and dilution of the Exchange’s marks. In response to these
claims, the General Partner changed USOF’s name. In addition, USOF expressly
disclaims any association with the Exchange
or endorsement of USOF by the Exchange and acknowledges that “NYMEX” and “New
York Mercantile Exchange” are registered trademarks of such
Exchange.
The
General Partner has also engaged in discussions with the New York Mercantile
Exchange regarding a possible license agreement. In this regard, USOF received
a
letter from the Exchange dated March 29, 2006 (the “March 29th Letter”). The
March 29th Letter was in response to USOF’s request for additional information
in connection with the negotiation of the possible license agreement. In the
March 29th Letter, the Exchange stated that it would cause the cessation of
any
market data vendor’s provision of New York Mercantile Exchange settlement prices
to USOF and/or take other action to prevent USOF from using any New York
Mercantile Exchange settlement prices unless USOF enters into a license
agreement with the Exchange, or has indicated in writing that it will cease
from
using any Exchange settlement prices. USOF will continue to seek an amicable
resolution to this situation. It is evaluating the current draft of the license
agreement in view of the March 29th letter but is also taking into account
a
recent New York federal district court decision against the NYMEX that found
under similar circumstances that NYMEX’s intellectual property rights, including
those related to its settlement prices, were significantly limited. USOF and
the
General Partner have retained separate counsel to represent them in this
matter.
At
this
time, USOF is unable to determine what the outcome from this matter will be.
There could be a number of consequences. Under the license agreement currently
being negotiated, USOF would be required to pay a license fee to the New York
Mercantile Exchange for the use of its settlement prices. Also, if the
resolution or lack of resolution of this matter results in a material
restriction on, or significant additional expense associated with, the use
of
the New York Mercantile Exchange’s oil futures contract settlement prices, USOF
may be required to invest to a greater degree than currently anticipated in
Oil
Futures Contracts traded on commodity exchanges other than the New York
Mercantile Exchange and Other Oil Interests. These or other consequences may
adversely affect USOF’s ability to achieve its investment
objective.
Others
may also notify USOF of intellectual property rights that could adversely impact
USOF.
Separately,
Goldman, Sachs & Co. (“Goldman Sachs”) sent USOF a letter on March 17, 2006,
providing USOF notice under 35 U.S.C. Section 154(d) of two pending United
States patent applications, Publication Nos. 2004/0225593A1 and 2006/0036533A1.
Both patent applications are generally directed to a method and system for
creating and administering a publicly traded interest in a commodity pool.
In
particular, the Abstract of each patent application defines a means for creating
and administering a publicly traded interest in a commodity pool that includes
the steps of forming a commodity pool having a first position in a futures
contract and a corresponding second position in a margin investment, and issuing
equity interest of the commodity pool to third party investors. USOF Units
are
equity interests in a publicly traded commodity pool. In addition, USOF will
directly invest in futures contracts and hold other investments to be used
as
margin for its future contract positions. If patents were to be issued to
Goldman Sachs based upon these patent applications as currently drafted, and
USOF continued to operate as currently contemplated after the patents were
issued, claims against USOF and the General Partner for infringement of the
patents may be made by Goldman Sachs. However, as these patent applications
are
pending and have not been substantively examined by the U.S. Patent and
Trademark Office, it is uncertain at this time what subject matter will be
covered by the claims of any patent issuing on one of these applications, should
a patent issue at all.
Under
the
provisions of 35 U.S.C. §154(d), Goldman Sachs may seek damages in the form of a
reasonable royalty from the date the Units are publicly offered for sale to
the
date one of their cited patent applications issues as a U.S. Patent if, and
only
if, the invention as claimed in the issued patent is substantially identical
to
the invention as claimed in the published patent application. To obtain a
reasonable royalty under 35 U.S.C. §154(d), one of Goldman Sachs’s patents must
issue and then it must be proved that post-issuance acts or systems of USOF
infringe a valid claim of the issued patent, and that the infringed claim is
substantially identical to one of the claims in the corresponding published
application. If at the time a Goldman Sachs patent issues, USOF does not
infringe the claims of the issued patent based on its current design or through
modifications made prior to issuance, or if any infringed issued claim is not
substantially identical to a published claim, then Goldman Sachs will not be
able to obtain a reasonable royalty under 35 U.S.C. §154(d). At this time
neither of Goldman Sachs’s patent applications have been substantively examined
by an examiner at the U.S. Patent and Trademark Office nor are they currently
being considered for examination on an expedited basis under a Petition to
Make
Special, and considering that both have been placed in Class 705 for
examination, which has an average pendency of approximately 44-45 months to
issuance (or abandonment) and an issuance rate of approximately 11% in 2004,
it
is likely that neither application will issue within the next two years.
Nonetheless, USOF currently is reviewing the Goldman Sachs published patent
applications,
and is engaged in discussions with Goldman Sachs regarding their pending
applications and USOF’s own pending patent application. At this time, due in
part to the requirements of 35 U.S.C. §154(d) and the fact that the Goldman
Sachs patent applications are pending and have not been issued as U.S. Patents,
USOF is unable to determine what the outcome from this matter will be. See
“Operating Risks — Third parties may infringe upon or otherwise violate
intellectual property rights or assert that the General Partner has infringed
or
otherwise violated their intellectual property rights, which may result in
significant costs and diverted attention.”
THE
OFFERING
What
is USOF?
USOF
is a
Delaware limited partnership organized on May 12, 2005. USOF maintains its
main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. USOF is a commodity pool. It operates pursuant to the terms of the LP
Agreement dated as of January 19, 2007, which grants full management control
to
the General Partner.
Who
is the General Partner?
Our
sole
General Partner is Victoria Bay Asset Management, LLC, a single member limited
liability company that was formed in the state of Delaware on May 10, 2005
and
which changed its name on June 10, 2005. It maintains its main business office
at 1320 Harbor Bay Parkway, Suite 145, Alameda, California 94502. The General
Partner is a wholly-owned subsidiary of Wainwright Holdings, Inc., a Delaware
corporation (“Wainwright”). Mr. Nicholas Gerber (discussed below) controls
Wainwright by virtue of his ownership of Wainwright’s shares. Wainwright is a
holding company that also owns an insurance company organized under Bermuda
law
and a registered investment adviser firm named Ameristock Corporation. The
General Partner is a member of the NFA and is registered with the CFTC as of
December 1, 2005. The General Partner’s registration as a CPO was approved on
December 1, 2005.
On
September 8, 2006, the General Partner formed USNG, another limited partnership
that is a commodity pool and issues units traded on the American Stock Exchange.
The investment objective of USNG is for the changes in percentage terms of
the
unit’s net asset value to reflect the changes in percentage terms of the price
of natural gas delivered at the Henry Hub, Louisiana as measured by the
“Benchmark Futures Contract,” less USNG’s expenses. USNG began trading on April
18, 2007. The General Partner is the general partner of USNG and will be
responsible for the management of the USNG. Wainwright will be the initial
limited partner of USNG.
The
General Partner is currently in the process of registering two other exchange
traded security funds, USHO and USG. USHO will be a publicly traded limited
partnership which seeks to have the changes in percentage terms of its unit’s
NAV track the changes in percentage terms of the price of heating oil (also
known as No. 2 fuel) delivered to the New York harbor. USG will be a publicly
traded limited partnership which seeks to have the changes in percentage
terms
of its unit’s NAV track the changes in percentage terms of the price of unleaded
gasoline delivered to the New York harbor.
The
General Partner is required to evaluate the credit risk for USOF to the futures
commission merchant, oversee the purchases and sale of USOF’s units by certain
Authorized Purchasers, review daily positions and margin requirements of USOF,
and manage USOF’s investments. The General Partner also pays the fees of the
Marketing Agent, the Administrator, and the Custodian.
Limited
partners have no right to elect the General Partner on an annual or any other
continuing basis. If the General Partner voluntarily withdraws, however, the
holders of a majority of our outstanding limited partner interests (excluding
for purposes of such determination interests owned by the withdrawing General
Partner and its affiliates) may elect its successor. The General Partner may
not
be removed as general partner except upon approval by the affirmative vote
of
the holders of at least 66 2/3 percent of our outstanding limited partnership
interests (excluding limited partnership interests owned by the General Partner
and its affiliates), subject to the satisfaction of certain conditions set
forth
in the LP Agreement.
The
business and affairs of our General Partner are managed by a board of directors,
which is comprised of four management directors who are also its executive
officers (the “Management Directors”) and three independent directors who meet
the independent director requirements established by the American Stock Exchange
and the Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, the
Management Directors have the authority to manage the General Partner pursuant
to its Limited Liability Company Agreement. The General Partner has an audit
committee which is made up of the three independent directors (Peter M.
Robinson, Gordon L. Ellis, and Malcolm R. Fobes III). The audit committee is
governed by an audit committee charter that is posted on USOF’s website.
Mr. Fobes and Mr. Ellis meet the financial sophistication requirements
of the American Stock Exchange and the audit committee charter. Through its
management directors, the General Partner manages the day-to-day operations
of
USOF.
Nicholas
Gerber
has been
the President and CEO of the General Partner since June 9, 2005 and a Management
Director of the General Partner since May 10, 2005. He maintains his main
business office at 1320 Harbor Bay Parkway, Suite 145, Alameda, California
94502. Mr. Gerber acts as a portfolio manager for USOF
and
USNG. Mr. Gerber will act as a portfolio manager for USHO and USG.
He
registered with the NFA as a Principal of the General Partner in November
2005,
and as an Associated Person of the General Partner in December 2005. Currently,
Mr. Gerber manages USOF and USNG. He will also manage USHO and USG.
Mr. Gerber has an extensive background in securities portfolio management
and in developing investment funds that make use of indexing and futures
contracts. He is also the founder of Ameristock Corporation, a California-based
investment adviser registered under the Investment Advisers Act of 1940,
that
has been sponsoring and providing portfolio management services to mutual
funds
since 1995. Since 1995, Mr. Gerber has been the portfolio manager of the
Ameristock Mutual Fund, Inc. a mutual fund registered under the Investment
Company Act of 1940, focused on large cap U.S. equities that currently has
approximately $800 million in assets. In these roles, Mr. Gerber has gained
extensive experience in evaluating and retaining third-party service providers,
including custodians, accountants, transfer agents, and distributors. Prior
to
managing Ameristock Mutual Fund Inc., Mr. Gerber served as a portfolio
manager with Bank of America Capital Management. While there he was responsible
for the daily stewardship of four funds with a combined value in excess of
$240
million. At Bank of America Capital Management, Mr. Gerber worked
extensively in the development and managing of mutual funds and institutional
accounts that were designed to track assorted equity market indices such
as the
Standard & Poor’s 500 and the Standard & Poor’s Midcap 400. Before
joining Bank of America, he was managing director and founder of the Marc
Stevens Futures Index Fund, a fund that combined the use of commodity futures
with equity stock index futures. The futures index fund was a commodity pool
and
Mr. Gerber was the CPO. It was ultimately purchased by Newport Commodities.
Mr. Gerber’s two decades of experience in institutional investment include
a period of employment as a floor trader on the New York Futures Exchange.
Mr. Gerber has passed the Series 3 examination for associated persons. He
holds an MBA in finance from the University of San Francisco and a BA from
Skidmore College. Mr. Gerber is 44 years old.
Howard
Mah
has been
a Management Director of the General Partner since May 10, 2005, Secretary
of
the General Partner since June 9, 2005, and Chief Financial Officer of the
General Partner since May 23, 2006. In these roles, Mr. Mah is currently
involved in the management of USOF and USNG and will be involved in the
management of USHO and USG. Mr. Mah also serves as the General Partner’s
Chief Compliance Officer. He received a Bachelor of Education from the
University of Alberta, in 1986 and an MBA from the University of San Francisco
in 1988. He has been the Compliance Officer of Ameristock Corporation since
2001; a tax & finance consultant in private practice since 1995, Secretary
of Ameristock Mutual Fund since 1995 and Ameristock Focused Value Fund from
December 2000 to January 2005; Chief Compliance Officer of Ameristock Mutual
Fund since 2004 and the Co-Portfolio Manager of the Ameristock Focused Value
Fund from December 2000 to January 2005. Mr. Mah is 42 years
old.
Andrew
F. Ngim
has been
a Management Director of the General Partner since May 10, 2005 and Treasurer
of
the General Partner since June 9, 2005. As Treasurer of the General Partner,
Mr. Ngim is currently involved in the management of USOF and USNG and will
be involved in the management of USHO and USG. He received a Bachelor of
Arts
from the University of California at Berkeley in 1983. Mr. Ngim has been
the Managing Director of Ameristock Corporation since 1999. He was the
co-portfolio manager of the Ameristock Large Company Growth Fund from December
2000 to June 2002 and a Benefits Consultant with PricewaterhouseCoopers from
1994 to 1999. Mr. Ngim is 46 years old.
Robert
L. Nguyen
has been
a Management Director of the General Partner since May 10, 2005. As a Management
Director of the General Partner, Mr. Nguyen is currently involved on the
management of USOF and USNG and will be involved in the management of USHO
and
USG. He received a Bachelor of Science from California State University
Sacramento in 1981. Mr. Nguyen has been the Managing Principal of
Ameristock Corporation since 2000. He was Co-Portfolio Manager of the Ameristock
Large Company Growth Fund from December 2000 to June 2002 and Institutional
Specialist with Charles Schwab & Company Inc. from 1995 to 1999.
Mr. Nguyen is 47 years old.
Peter
M. Robinson
has been
an Independent Director of the General Partner since September 30, 2005.
Mr. Robinson has been employed with the Hoover Institution since 1993.
Mr. Robinson graduated from Dartmouth College in 1979 and Oxford University
in 1982. Mr. Robinson spent six years in the White House, serving from 1982
to 1983 as chief speechwriter to Vice President George Bush and from 1983 to
1988 as special assistant and speechwriter to President Ronald Reagan. After
the
White House, Mr. Robinson received an MBA from the Stanford University
Graduate School of Business. Mr. Robinson then spent a year in New York
City with Fox Television. He spent a second year in Washington, D.C., with
the
Securities and Exchange Commission, where he served as the director of the
Office of Public Affairs, Policy Evaluation, and Research. Mr. Robinson has
also written three books and has been published in the New
York Times, Red Herring
, and
Forbes
ASAP
and he
is the editor
of
Can
Congress Be Fixed?: Five Essays on Congressional Reform
(Hoover
Institution Press, 1995). Mr. Robinson is 48 years old.
Gordon
L. Ellis
has been
an Independent Director of the General Partner since September 30, 2005.
Mr. Ellis has been Chairman of International Absorbents, Inc. since July
1988, President and Chief Executive Officer since November 1996 and a Class
I
Director of the company since July 1985. Mr. Ellis is also a director of
Absorption Corp., International Absorbents, Inc.’s wholly-owned subsidiary.
Mr. Ellis is a director/trustee of Polymer Solutions, Inc., a former
publicly-held company that sold all of its assets effective as of February
3,
2004 and is currently winding down its operations and liquidating following
such
sale. Mr. Ellis is a professional engineer with an MBA in international
finance. Mr. Ellis is 59 years old.
Malcolm
R. Fobes III
has been
an Independent Director of the General Partner since September 30, 2005.
Mr. Fobes is the founder, Chairman and Chief Executive Officer of Berkshire
Capital Holdings, Inc., a California-based investment adviser registered under
the Investment Advisers Act of 1940, that has been sponsoring and providing
portfolio management services to mutual funds since 1997. Since 1997,
Mr. Fobes has been the Chairman and President of The Berkshire Funds, a
mutual fund investment company registered under the Investment Company Act
of
1940. Mr. Fobes also serves as portfolio manager of the Berkshire Focus
Fund, a mutual fund registered under the Investment Company Act of 1940, which
concentrates its investments in the electronic technology industry. From April
2000 to July 2006, Mr. Fobes also served as co-portfolio manager of The
Wireless Fund, a mutual fund registered under the Investment Company Act of
1940, which concentrates its investments in companies engaged in the
development, production, or distribution of wireless-related products or
services. In these roles, Mr. Fobes has gained extensive experience in
evaluating and retaining third-party service providers, including custodians,
accountants, transfer agents, and distributors. Mr. Fobes was also
contributing editor of Start a Successful Mutual Fund: The Step-by-Step
Reference Guide to Make It Happen (JV Books, 1995). Prior to forming Berkshire
Capital Holdings, Inc., Mr. Fobes was employed by various
technology-related companies, including Adobe Systems, Inc., a leading provider
of digital publishing and imaging software technologies. Mr. Fobes holds a
B.S. degree in Finance and Economics from San Jose State University in
California. Mr. Fobes is 42 years old.
The
following individuals provide significant services to USOF but are employed
by
the entities noted below.
John
Love
acts as
the Operations Manager for USOF and for USNG and is expected to be the
Operations Manager for USHO and USG and is employed by Ameristock Corporation.
Mr. Love has served as the operations manager of Ameristock Corporation
since 2002, where he is responsible for marketing the Ameristock Mutual Fund.
From April 2001 to September 2002, Mr. Love was the project manager for
TouchVision Interactive where he provided leadership to project teams while
assisting with business and process development. From January 1996 to November
2000, Mr. Love was the managing director of Jamison/Gold (Keane Inc.) where
he provided leadership to all departments including operations, production,
technology, sales, marketing, administration, recruiting, and finance. From
December 2000 to February 2001, Mr. Love was employed by Digital Boardwalk
Inc. Mr. Love’s experience also includes leading a group of multimedia
producers who controlled web and kiosk projects from pre-contract to deployment.
He holds a BFA in cinema-television from the University of Southern California.
Mr. Love does not have any experience operating a commodity pool.
Mr. Love is 35 years old.
John
T. Hyland, CFA
acts as
a Portfolio Manager and as the Director of Portfolio Research and is employed
by
the General Partner. He registered with the NFA as an Associated Person of
the
General Partner in December 2005, and as a Principal of the General Partner
in
January 2006. In April 2006, Mr. Hyland became the Portfolio Manager and
Director of Portfolio Research for USOF and in March 2007 became the Portfolio
Manager and Director of Portfolio Research for USNG. He is also expected
to
become the Portfolio Manager and Director of Portfolio Research for USHO
and
USG. As part of his responsibilities for USOF and USNG, Mr. Hyland handles
day-to-day trading, helps set investment policies, and oversees USOF’s and
USNG’s activities with its futures commission brokers, custodian-administrator,
and marketing agent. Mr. Hyland has an extensive background in portfolio
management and research with both equity and fixed income securities, as
well as
in the development of new types of complex investment funds. In July 2001,
Mr. Hyland founded Towerhouse Capital Management, LLC, a firm that provides
portfolio management and new fund development expertise to non-U.S.
institutional investors. Mr. Hyland has been, and remains, a Principal and
Portfolio Manager for Towerhouse. From July 2001 to January 2002,
Mr. Hyland was the Director of Global Property Securities Research for
Roulac International, where he worked on the development of a hedge fund
focused
on global real estate stocks. From 1996 through 2001, Mr. Hyland was the
Director of Securities Research and Portfolio Manager for the capital markets
division of CB Richard Ellis, a global commercial real estate services firm.
His
division provided portfolio management of equities as an advisor or sub-advisor
for mutual funds and separate accounts focused on real estate investment
trusts.
In addition, his group conducted research in the area of structured commercial
real estate debt (including Commercial Mortgage-Back Securities, or “CMBS”), and
lead the creation of one of the earliest re-securitizations of multiple CMBS
pool tranches into a Collateralized
Debt Obligation (“CDO”) vehicle. In the ten years prior to working at CB Richard
Ellis, Mr. Hyland had worked as a portfolio manager or financial
representative for several other investment firms and mutual funds.
Mr. Hyland received his Chartered Financial Analyst (“CFA”) designation in
1994. From 1993 until 2003, Mr. Hyland was on the Board of Directors of the
Security Analysts of San Francisco (“SASF”), a not-for-profit organization of
investment management professionals. He served as the president of the SASF
from
2001-2002. Mr. Hyland is a member of the CFA Institute (formerly AIMR). He
is also a member of the National Association of Petroleum Investment Analysts
(NAPIA), a not-for-profit organization of investment professionals focused
on
the oil industry. He serves as an arbitrator for the National Association
of
Securities Dealers (“NASD”), as part of their dispute resolution program. He is
a graduate of the University of California, Berkeley and received a BA in
political science/international relations in 1982. Mr. Hyland is 47 years
old.
Kathryn
D. Rooney
acts as
a Marketing Manager and is employed by Ameristock Corporation and ALPS. Her
primary responsibilities include soliciting orders, customers and customer
funds. Currently, Ms. Rooney is the Director of Business Development for
Ameristock Mutual Fund. She has held this position since September of 2003.
Prior to working for Ameristock Mutual Fund, Ms. Rooney was the Regional
Director for Accessor Capital Management from November of 2002 to September
of
2003. Before working at Accessor Capital Management, Ms. Rooney worked at
ALPS Mutual Fund Services, Inc. as a National Sales Director. She held this
position from May of 1999 through November of 2002. Before working at ALPS
Mutual Fund Services, Inc., Ms. Rooney worked as a Trust Officer for Fifth
Third Bank from June of 1994 through May of 1999. Ms. Rooney is 34 years
old.
The
following are individual Principals, as that term is defined in CFTC Rule 3.1,
for USOF: Melinda Gerber, Howard Mah, Andrew Ngim, Robert Nguyen, Peter
Robinson, Gordon Ellis, Malcolm Fobes, John Love, and John Hyland. These
individuals are principals due to their positions, however, Nicholas Gerber
and
Melinda Gerber are also principals due to their controlling stake in Wainwright.
Neither the General Partner, nor the principals own or have any other beneficial
interest in USOF. Nicholas Gerber and John Hyland make trading and investment
decisions for USOF. Nicholas Gerber, John Love, and John Hyland execute trades
on behalf of USOF. In addition, Nicholas Gerber, John Love, John Hyland and
Kathryn Rooney are registered with the CFTC as Associated Persons of the General
Partner and are members of the NFA.
Prior
Performance of the General Partner and Affiliates
On
September 8, 2006, the General Partner formed USNG, but since it only began
trading on April 18, 2007, there is no prior performance for USNG. USOF’s
offering began on April 10, 2006 and is a continuous offering. As of December
31, 2006, the total amount of money raised by USOF from Authorized Purchasers
was $1,740,249,722; the total number of Authorized Purchasers was 9, the
number
of baskets purchased by Authorized Purchasers was 290; and the aggregate
amount
of units purchased was 29 million. For more information on the performance
of
USOF, see the Performance Tables below.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
Experience
in Raising and Investing in Funds Through December 31,
2006
|
|
|
|
|
|
|
|
Dollar
Amount
Offered:
|
|
$
|
2,708,260,000
|
|
Dollar
Amount Raised:
|
|
$
|
1,740,249,722
|
|
Organizational
Expenses*:
|
|
|
|
|
SEC
registration fee**:
|
|
$
|
111,370
|
|
AMEX
Listing Fee**:
|
|
$
|
5,000
|
|
Auditor’s
fees and expenses**:
|
|
$
|
44,000
|
|
Legal
fees and expenses**:
|
|
$
|
1,151,354
|
|
Printing
expenses**:
|
|
$
|
240,000
|
|
Length
of Offering:
|
|
|
Continuous
|
|
*
|
Amounts
are for organizational and offering expenses incurred in connection
with
the initial public offering on April 10,
2006.
|
**
|
Paid
for by an affiliate of the General Partner in connection with the
initial
public offering.
|
USOF
is
responsible for the fees paid to the SEC and NASD, and the legal, accounting,
and printing fees associated with this offering of units and future offerings
of
units.
Performance
Capsule
|
|
|
|
|
|
Name
of Commodity Pool:
|
|
USOF
|
Type
of Commodity Pool:
|
|
Exchange
traded security
|
Inception
of Trading:
|
|
April
10, 2006
|
Aggregate
Subscriptions (from inception through March 30,
2007):
|
|
$2,933,494,900
|
Total
Net Assets as of March 30, 2007:
|
|
$964,116,921
|
Initial
NAV Per Unit as of Inception:
|
|
$67.39
|
NAV
per Unit as of March 30, 2007:
|
|
$53.56
|
Worst
Monthly Percentage Draw-down:
|
|
September
2006 (11.71%)
|
Worst
Peak-to-Valley Draw-down:
|
|
June
2006-January 2007 (30.60%)
|
Total
Rate of Return Since Inception:
|
|
(20.52%)
|
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS
Month
|
|
Rates
of Return
For
the Year 2006
|
|
|
|
|
|
April
|
|
|
3.47
|
%
|
May
|
|
|
(2.91
|
%)
|
June
|
|
|
3.16
|
%
|
July
|
|
|
(0.50
|
%)
|
August
|
|
|
(6.97
|
%)
|
September
|
|
|
(11.71
|
%)
|
October
|
|
|
(8.46
|
%)
|
November
|
|
|
4.73
|
%
|
December
|
|
|
(5.21
|
%)
|
Total
Rate of Return (since inception through December 31,
2006)
|
|
|
(23.03
|
%)
|
Month
|
|
Rates
of Return
For
the Year 2007
|
|
|
|
|
|
January
|
|
|
(6.55
|
%)
|
February
|
|
|
5.63
|
%)
|
March
|
|
|
4.61
|
%
|
Annual
Rate of Return (through March 30, 2007)
|
|
|
3.26
|
%
|
Draw-down:
Losses experienced by a pool or trading program over a specified period.
Draw-down is measured on the basis of monthly returns only and does not reflect
intra-month figures.
Worst
Monthly Percentage Draw-down: The largest single month loss sustained since
inception of trading.
Worst
Peak-to-Valley Draw-down: The largest percentage decline in the NAV per unit
over the history of a pool or trading program. This need not be a continuous
decline, but can be a series of positive and negative returns where the negative
returns are larger than the positive returns. Worst Peak-to-Valley Draw-down
represents the greatest percentage decline from any month-end NAV per unit
that
occurs without such month-end NAV per unit being equaled or exceeded as of
a
subsequent month-end.
In
addition, Nicholas Gerber, the president and CEO of the General Partner, ran
the
Marc Stevens Futures Index Fund over 10 years ago. This fund combined commodity
futures with equity stock index futures. It was a very small private offering,
which had under $1 million in assets. The Marc Stevens Futures Index Fund was
a
commodity pool and Mr. Gerber was the CPO. Ameristock Corporation is an
affiliate of the General Partner and it is a California-based registered
investment advisor registered under the Investment Advisors Act of 1940 that
has
been sponsoring and providing portfolio management services to mutual funds
since 1995. Ameristock Corporation is the investment adviser to the Ameristock
Mutual Fund, Inc., a mutual fund registered under the Investment Company Act
of
1940 that focuses on large cap U.S. equities that has approximately $800 million
in assets.
How
Does USOF Operate?
The
net
assets of USOF consist primarily of investments in futures contracts for WTI
light, sweet crude oil, but may also consist of other types of crude oil,
heating oil, gasoline, natural gas and other petroleum-based fuels that are
traded on the New York Mercantile Exchange, ICE Futures or other U.S. and
foreign exchanges (collectively, “Oil Futures Contracts”). USOF may also invest
in other oil-related investments such as cash-settled options on Oil Futures
Contracts, forward contracts for oil, and over-the-counter transactions that
are
based on the price of oil, other petroleum-based fuels, Oil Futures Contracts
and indices based on the foregoing (collectively, “Other Oil Interests”). For
convenience and unless otherwise specified, Oil Futures Contracts and Other
Oil
Interests collectively are referred to as “oil interests” in this
Prospectus.
USOF
invests in oil interests to the fullest extent possible without being leveraged
or unable to satisfy its current or potential margin or collateral obligations
with respect to its investments in Oil Futures Contracts and Other Oil
Interests. In pursuing this objective, the primary focus of the General Partner,
is the investment in Oil Futures Contracts and the management of its investments
in short-term obligations of the United States of two years or less
(“Treasuries”), cash and cash equivalents for margining purposes and as
collateral.
The
investment objective of USOF is for changes in percentage terms of the units’
NAV to reflect the changes in percentage terms of the spot price of WTI light,
sweet crude oil delivered to Cushing, Oklahoma, as measured by changes in
the
price of the futures contract on WTI light, sweet crude oil as traded on
the New
York Mercantile Exchange that is the near month contract to expire, except
when
the near month contract is within two weeks of expiration, in which case
the
futures contract will be the next month contract to expire. It is not the
intent
of USOF to be operated in a fashion such that its NAV will equal, in dollar
terms, the spot price of WTI light, sweet crude oil or any particular futures
contract based on WTI light, sweet crude oil.
USOF
seeks to achieve its investment objective by investing in a mix of Oil Futures
Contracts and Other Oil Interests such that changes in USOF’s NAV will closely
track the changes in the price of a specified Oil Futures Contract (“Benchmark
Oil Futures Contract”). The General Partner believes changes in the price of the
Benchmark Oil Futures Contract historically exhibited a close correlation
with
the changes in the spot price of WTI light, sweet crude oil. On any valuation
day (a valuation day is any day as of which USOF calculates its NAV), the
Benchmark Oil Futures Contract is the near month contract for WTI light,
sweet
crude oil traded on the New York Mercantile Exchange unless the near month
contract will expire within two weeks of the valuation day, in which case
the
Benchmark Oil Futures Contract is the next month contract for WTI light,
sweet
crude oil traded on the New York Mercantile Exchange.
More
specifically, the General Partner endeavors to place USOF’s trades in Oil
Futures Contracts and Other Oil Interests and otherwise manage USOF’s
investments so that A will be within plus/minus 10 percent of B,
where:
|
·
|
A
is the average daily change in USOF’s NAV for any period of 30 successive
valuation days; i.e.,
any day as of which USOF calculates its NAV,
and
|
|
·
|
B
is the average daily change in the price of the Benchmark Oil Futures
Contract over the same period.
|
The
General Partner believes that market arbitrage opportunities cause changes
in
USOF’s unit price on the American Stock Exchange to closely track changes in
USOF’s NAV. The General Partner further believes that the prices of the
Benchmark Oil Futures Contract have historically closely tracked the spot prices
of WTI light, sweet crude oil. The General Partner believes that the net effect
of these two relationships and the expected relationship described above between
USOF’s NAV and the Benchmark Oil Futures Contract, will be that the changes in
the price of USOF’s units on the American Stock Exchange will closely track the
changes in the spot price of a barrel of WTI light, sweet crude oil, less USOF’s
expenses. The following graph demonstrates the correlation between the NAV
of
USOF and the spot price of WTI light, sweet crude oil since the initial public
offering of our units on April 10, 2006.
An
investment in the units allows both retail and institutional investors to easily
gain exposure to the oil market in a cost-effective manner. In addition, the
units also provide additional means for diversifying an investor’s investments
or hedging exposure to changes in oil prices.
The
Benchmark Oil Futures Contract will be changed or “rolled” from the near month
contract to expire to the next month to expire over a four (4) day
period.
These
relationships are illustrated in the following diagram:
|
The
Price of USOF’s Units Is Expected to Correlate Closely With USOF’s
NAV
USOF’s
units are traded on the American Stock Exchange. The price of units
fluctuates in response to USOF’s NAV and the supply and demand pressures
of the Exchange. Because of certain arbitrage opportunities, the
General
Partner believes the price of USOF’s units traded on the Exchange will
correlate closely with USOF’s NAV.
|
|
Changes
in USOF’s NAV Are Expected to Correlate Closely With the Changes in the
Price of the Benchmark Oil Futures Contract
The
General Partner endeavors to invest USOF’s assets as fully as possible in
Oil Futures Contracts and Other Oil Interests so that the changes
in the
NAV closely correlate with changes in the price of the Benchmark
Oil
Futures Contract.
|
|
Changes
in the Price of the Benchmark Oil Futures Contract Are Expected to
Correlate closely With Changes in the Sport Price of Light, Sweet
Crude
Oil
The
General Partner believes that changes in the price of the Benchmark
Oil
Futures Contract will closely correlate with changes in the cash
or spot
price of light, sweet crude oil.
|
The
General Partner employs a “neutral” investment strategy in order to track the
spot price of WTI light, sweet crude oil regardless of whether the price of
oil
goes up or goes down. USOF’s “neutral” investment strategy is designed to permit
investors generally to purchase and sell USOF’s units for the purpose of
investing indirectly in oil in a cost-effective manner, and/or to permit
participants in the oil or other industries to hedge the risk of losses in
their
oil-related transactions.
USOF’s
total portfolio composition is disclosed, each business day that the American
Stock Exchange is open for trading, on USOF’s website at
http://www.unitedstatesoilfund.com and through the American Stock Exchange’s
website at http://www.amex.com. The website disclosure of portfolio holdings
is
made daily and includes, as applicable, the name and value of each oil interest,
the specific types of Other Oil Interests and characteristics of such Other
Oil
Interests, Treasuries, and amount of cash and cash equivalents held in USOF’s
portfolio. USOF’s website is publicly accessible at no charge. USOF’s assets are
held in segregation pursuant to Commodity Exchange Act and CFTC
regulations.
The
units
issued by USOF may only be purchased by Authorized Purchasers only in blocks
of
100,000 units called Creation Baskets. The amount of the purchase payment for
a
Creation Basket is equal to the aggregate NAV of units in the Creation Basket.
Similarly, Authorized Purchasers may redeem units only in blocks of 100,000
units called Redemption Baskets. The amount of the redemption proceeds for
a
Redemption Basket is equal to the aggregate NAV of units in the Redemption
Basket. The purchase price for Creation Baskets, and the redemption price for
Redemption Baskets is the actual NAV calculated at the end of the business
day
when notice for a purchase or redemption is received by USOF. The American
Stock
Exchange publishes an approximate NAV intra-day based on the prior day’s NAV and
the current price of Benchmark Oil Futures Contracts, but the basket price
is
determined based on the actual NAV at the end of the day.
While
USOF only issues units in large blocks called Creation Baskets, units may also
be purchased and sold in much smaller increments on the American Stock Exchange.
These transactions, however, are effected at the bid and ask prices established
by specialist firm(s). Like any listed security, units can be purchased and
sold
at any time a secondary market is open.
Graph
A
and Graph B on the following page illustrate the historical correlation between
the monthly average spot price of WTI light, sweet crude oil and the monthly
average price of futures contracts for WTI light, sweet crude oil delivered
to
Cushing, Oklahoma traded on the New York Mercantile Exchange. In addition,
Graph
C illustrates the historical correlation between the Benchmark Oil Futures
Contract and other fuel-based commodity futures contracts in which USOF may
invest.
These
correlations are relevant because the General Partner endeavors to invest USOF’s
assets in Oil Futures Contracts and Other Oil Interests so that changes in
USOF’s NAV correlate as closely as possible with changes in the price of the
Benchmark Oil Futures Contract. As noted, the General Partner also believes
that
the changes in price of the Benchmark Oil Futures Contract will closely
correlate with changes in the spot price of WTI light, sweet crude oil. Assuming
that the units’ value tracks the Benchmark Oil Futures Contract as intended
because of the correlations illustrated by the following charts, the stated
objective of USOF for the units’ NAV to reflect the performance of the spot
price of WTI light, sweet crude oil would be met if the trend reflected over
the
past ten years were to continue. However, there is no guarantee that such trend
will continue. To obtain the monthly average prices presented below, USOF added
the closing prices for every day in each month and then divided that number
by
the total number of days in that month.
GRAPH
A
GRAPH
B
GRAPH
C
What
is USOF’s Investment Strategy?
In
managing USOF’s assets the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs
a
quantitative methodology whereby each time a Creation Basket is purchased,
the
General Partner purchases oil interests, such as an Oil Futures Contract for
WTI
light, sweet crude oil traded on the New York Mercantile Exchange, that have
an
aggregate face amount that approximates the amount of Treasuries and cash
received upon the issuance of one or more Creation Baskets.
As
an
example, assume that a Creation Basket purchase order is placed on January
2,
2007. If one were to assume USOF’s closing NAV per unit for January 2 is $63.76,
USOF would receive $6,376,000 for the Creation Basket ($63.76 NAV per unit
times
100,000 units, and ignoring the Creation Basket fee of $1,000). Assume that
the
price of an Oil Futures Contract for WTI light, sweet crude oil on January
3,
2007 is $63,770. Because the price of oil reflected in these Near Month futures
contracts on January 3, 2007 is different (in this case, higher) than the price
of oil reflected in USOF’s NAV calculated as of January 2, 2007 (the day the
corresponding Creation Basket was sold), USOF cannot invest the entire purchase
amount corresponding to the Creation Basket in futures contracts — i.e., it can
only invest in 99 Oil Futures Contracts with an aggregate value of $6,313,230
($63,770 per contract times 99 contracts). Assuming a margin equal to 10% of
the
value of the Oil Futures Contracts which would require $631,323 in Treasuries
to
be deposited as margin with the futures commission merchant through which the
contract was purchased, the remainder of the purchase price for the Creation
Basket, $5,744,677, would remain invested in cash and Treasuries as determined
by the General Partner from time to time based on factors such as potential
calls for margin or anticipated redemptions.
The
specific Oil Futures Contracts purchased depends on various factors, including
a
judgment by the General Partner as to the appropriate diversification of USOF’s
investments in futures contracts with respect to the month of expiration, and
the prevailing price volatility of particular contracts. While the General
Partner has made significant investments in New York Mercantile Exchange Oil
Futures Contracts, as USOF reaches certain position limits on the New York
Mercantile Exchange, or for other reasons, it has also and may continue to
invest in Oil Futures Contracts traded on other exchanges or invest in other
Oil
Interests such as contracts in the “over-the-counter” market.
The
General Partner does not anticipate letting its Oil Futures Contracts expire
and
taking delivery of the underlying oil. Instead, the General Partner will close
existing positions when it is determined appropriate to do so and
reinvest the proceeds in new Oil Futures Contracts. Positions may also be closed
out to meet orders for Redemption Baskets.
By
remaining invested as fully as possible in Oil Futures Contracts or Other Oil
Interests, the General Partner believes that changes in USOF’s NAV will continue
to closely track the changes in the prices of the futures contracts in which
USOF invests. The General Partner believes that certain arbitrage opportunities
result in the price of the units traded on the American Stock Exchange closely
tracking the NAV of USOF. Additionally, as discussed above, the General Partner
has conducted research that indicates that oil futures contracts traded on
the
New York Mercantile Exchange have closely tracked the spot price of the
underlying oil. Based on these expected interrelationships, the General Partner
believes that the changes in the price of USOF’s units as traded on the American
Stock Exchange will continue to closely track the changes in the spot price
of
WTI light, sweet crude oil.
What
are Oil Futures Contracts?
Oil
Futures Contracts are agreements between two parties. One party agrees to buy
oil from the other party at a later date at a price and quantity agreed-upon
when the contract is made. Oil Futures Contracts are traded on futures
exchanges, including the New York Mercantile Exchange. Oil Futures Contracts
trade in units of 1,000 barrels. For example, on the New York Mercantile
Exchange futures contracts are priced by floor brokers and other exchange
members through an “open outcry” of offers to purchase or sell the contracts. In
contrast, another exchange, ICE Futures, uses an electronic, screen-based system
that determines the price by matching electronically offers to purchase and
sell.
Certain
typical and significant characteristics of Oil Futures Contracts are discussed
below. Additional risks of investing in Oil Futures Contracts are included
in
“What are the Risk Factors Involved with an Investment in USOF?”
Impact
of Accountability Levels, Position Limits and Price Fluctuation
Limits.
Futures
contracts include typical and significant characteristics. Most significantly,
the CFTC and U.S. designated contract markets such as the New York Mercantile
Exchange 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 in USOF is not) may hold, own or control. The net position
is the difference between an individual or firm’s open long contracts and open
short contracts in any one commodity. In addition, most U.S. futures exchanges,
such as the New York Mercantile Exchange, limit the price fluctuation for
futures contracts.
The
accountability levels for the Benchmark Oil Futures Contract and other Oil
Futures Contracts traded on the New York Mercantile Exchange are not a fixed
ceiling, but rather a threshold above which the New York Mercantile Exchange
may
exercise greater scrutiny and control over an investor’s positions. The current
accountability level for investments at any one time in Oil Futures Contracts
(including investments in the Benchmark Oil Futures Contract) is 20,000
contracts. If USOF exceeds this accountability level for investments in Oil
Futures Contracts, the New York Mercantile Exchange will monitor USOF’s exposure
and ask for further information on USOF’s activities including the total size of
all positions, investment and trading strategy, and the extent of USOF’s
liquidity resources. If deemed necessary by the New York Mercantile Exchange,
it
could also order USOF to reduce its position back to the accountability
level.
If
the
New York Mercantile Exchange orders USOF to reduce its position back to the
accountability level, or to an accountability level that the New York Mercantile
Exchange deems appropriate for USOF, such an accountability level may impact
the
mix of investments in oil interests made by USOF. To illustrate, assume that
the
price of the Benchmark Oil Futures Contract and the unit price of USOF are
each
$10, and that the New York Mercantile Exchange has determined that USOF may
not
own more than 20,000 contracts in Oil Futures Contracts. In such case, USNG
could invest up to $2 billion of its daily net assets in the Benchmark Oil
Futures Contract (i.e., $10 per contract multiplied by 1,000 (a Benchmark Oil
Futures Contract is a contract for 1,000 barrels oil multiplied by 20,000
contracts)) before reaching the accountability level imposed by the New York
Mercantile Exchange. Once the daily net assets of the portfolio exceed $2
billion in the Benchmark Oil Futures Contract, the portfolio may not be able
to
make any further investments in the Benchmark Oil Futures Contract, depending
on
whether the New York Mercantile Exchange imposes limits. If the New York
Mercantile Exchange does impose limits at the $2 billion level (or another
level), USOF anticipates that it will invest the majority of its assets above
that level in a mix of other Oil Futures Contracts or Other Oil
Interests.
In
addition to accountability levels, the New York Mercantile Exchange imposes
position limits on contracts held in the last few days of trading in the near
month contract to expire. It is unlikely that USOF will run up against such
position limits because USOF’s investment strategy is to exit from the near
month contract over a four-day period beginning two weeks from expiration of
the
contract.
U.S.
futures exchanges, including the New York Mercantile Exchange, also limit the
amount of price fluctuation for Oil Futures Contracts. For example, the New
York
Mercantile Exchange imposes a $10.00 per barrel ($10,000 per contract) price
fluctuation limit for Oil Futures Contracts. This limit is initially based
off
the previous trading day’s settlement price. If any Oil Futures Contract is
traded, bid, or offered at the limit for five minutes, trading is halted for
five minutes. When trading resumes it begins at the point where the limit was
imposed and the limit is reset to be $10.00 per barrel in either direction
of
that point. If another halt were triggered, the market would continue to be
expanded by $10.00 per barrel in either direction after each successive
five-minute trading halt. There is no maximum price fluctuation limits during
any one trading session.
USOF
anticipates that to the extent it invests in Oil Futures Contracts other than
WTI light, sweet crude oil contracts (such as futures contracts for Brent crude
oil, natural gas, heating oil, and gasoline) and Other Oil Interests, it will
invest in various non-exchange-traded derivative contracts to hedge the
short-term price movements of such Oil Futures Contracts and Other Oil Interests
against the current Benchmark Oil Futures Contract.
Examples
of the position and price limits imposed are as follows:
Futures
Contract
|
|
Position
Accountability
Levels
and Limits
|
|
Maximum
Daily
Price
Fluctuation
|
|
|
|
|
|
New
York Mercantile Exchange WTI Light, Sweet Crude Oil
|
|
Any
one month/all months: 20,000 net futures, but not to exceed 3,000
contracts in the last three days of trading in the spot
month.
|
|
$10.00
per barrel ($10,000 per contract) for all months. If any contract
is
traded, bid, or offered at the limit for five minutes, trading
is halted
for five minutes. When trading resumes, the limit is expanded by
$10.00
per barrel in either direction. If another halt were triggered,
the market
would continue to be expanded by $10.00 per barrel in either direction
after each successive five-minute trading halt. There will be no
maximum
price fluctuation limits during any one trading
session.
|
|
|
|
|
|
ICE
Futures Brent Crude Futures
|
|
There
are no position limits.
|
|
There
is no maximum daily price fluctuation limit.
|
|
|
|
|
|
ICE
WTI Crude Futures
|
|
There
are no position limits.
|
|
There
is no maximum daily price fluctuation.
|
|
|
|
|
|
New
York Mercantile Exchange Heating Oil
|
|
Any
one month/all months: 7,000 net futures, but not to exceed 1,000
contracts
in the last three days of trading in the spot month
|
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract
is
traded, bid, or offered at the limit for five minutes, trading
is halted
for five minutes. When trading resumes, the limit is expanded by
$0.25 per
gallon in either direction. If another halt were triggered, the
market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no
maximum
price fluctuation limits during any one trading
session.
|
|
|
|
|
|
New
York Mercantile Exchange Gasoline
|
|
Any
one month/all months: 7,000 net futures, but not to exceed 1,000
contracts
in the last three days of trading in the spot month.
|
|
$0.25
per gallon ($10,500 per contract) for all months. If any contract
is
traded, bid, or offered at the limit for five minutes, trading
is halted
for five minutes. When trading resumes, the limit is expanded by
$0.25 per
gallon in either direction. If another halt were triggered, the
market
would continue to be expanded by $0.25 per gallon in either direction
after each successive five-minute trading halt. There will be no
maximum
price fluctuation limits during any one trading
session.
|
Price
Volatility.
Despite
daily price limits, the price volatility of Oil Futures Contracts generally
has
been historically greater than that for traditional securities such as stocks
and bonds. Price volatility often is greater day-to-day as opposed to intra-day.
Oil Futures Contracts tend to be more volatile than stocks and bonds because
price movements for barrels of oil are more currently and directly influenced
by
economic factors for which current data is available and are traded by oil
futures traders throughout the day. These economic factors include changes
in
interest rates; governmental, agricultural, trade, fiscal, monetary and exchange
control programs and policies; weather and climate conditions; changing supply
and demand relationships; changes in balances of payments and trade; U.S. and
international rates of inflation; currency devaluations and revaluations; U.S.
and international political and economic events; and changes in philosophies
and
emotions of market participants. Because USOF invests a significant portion
of
its assets in Oil Futures Contracts, the assets of USOF, and therefore the
prices of USOF units, may be subject to greater volatility than traditional
securities.
Term
Structure of Crude Oil Futures Prices and the impact on total
returns.
Several
factors determine the total return from investing in a futures contract
position. One factor that impacts the total return that will result in investing
in near month crude oil futures contracts and “rolling” those contracts forward
each month is the price relationship between the current near month contract
and
the next month contract. If the price of near month contract is higher than
the
next month contract (a situation referred to as “backwardation” in the futures
market), then absent any other change there is a tendency for the price of
a
next month contract to rise in value as it becomes the near month contract
and
approaches expiration. Conversely, if the price of a near month contract is
lower than the next month contract (a situation referred to as “contango” in the
futures market), than absent any other change there is a tendency for the price
of a next month contract to decline in value as it becomes near month contract
and approaches expiration.
As
an
example, assume that the price of crude oil for immediate delivery (the “spot”
price), was $50 per barrel, and the value of a position in the near month
futures contract was also $50. Over time the price of the barrel of crude oil
will fluctuate up and down based on a number of market factors, including demand
for oil relative to its supply. The value of the near month contract will
likewise fluctuate up and down in reaction to a number of market factors. If
investors seeks to maintain their holding in a near month contract position
and
not take delivery of the oil, every month they must sell their current near
month as it approaches expiration and invest in the next month
contract.
If
the
futures market is in backwardation, e.g., when the expected price of oil in
the
future would be less, the investor would be buying next month contracts for
a
lower price than the current near month contract. Hypothetically, and assuming
no other changes 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 interest earned on cash), the
value of the next month contract would rise as it approaches expiration and
becomes the new near month contract. In this example, the value of the $50
investment would tend to rise faster than the spot price of crude oil, or fall
slower. As a result, it would be possible in this hypothetical example for
the
price of spot crude oil to have risen to $60 after some period of time, while
the value of the investment in the futures contract will have risen to $65,
assuming backwardation is large enough or enough time has elapsed. Similarly,
the spot price of crude oil could have fallen to $40 while the value of an
investment in the futures contract could have fallen to only $45. Over time
if
backwardation remained constant the difference would continue to
increase.
If
the
futures market is in contango, the investor would be buying next month contracts
for a higher price than the current near month contract. Hypothetically, and
assuming no other changes 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 interest earned
on
cash), the value of the next month contract would fall as it approaches
expiration and becomes the new near month contract. In this example, it would
mean that the value of the $50 investment would tend to rise slower than the
spot price of crude oil, or fall faster. As a result, it would be possible
in
this hypothetical example for the price of spot crude oil to have risen to
$60
after some period of time, while the value of the investment in the futures
contract will have risen to only $55, assuming contango is large enough or
enough time has elapsed. Similarly, the spot price of crude oil could have
fallen to $45 while the value of an investment in the futures contract could
have fallen to $50. Over time if contango remained constant the difference
would
continue to increase.
Historically
the futures oil markets have experienced periods of contango and backwardation,
with backwardation being in place more often than contango. During the past
two
years, including 2006, these markets have experienced contango. This has
impacted the total return on an investment in USOF units during the past year
relative
to a hypothetical direct investment in crude oil. For example an investment
made
in USOF units on April 10 and held to December 31, 2006 decreased, based
upon the changes in the closing market prices for USOF units on those days,
by
23.03%, while the spot price of crude oil for immediate delivery during the
same
period decreased 11.18% (note: this comparison ignores the potential costs
associated with physically owning and storing crude oil). However, the
investment objective of USOF is not to have the market price of its units match,
dollar for dollar, changes in the spot price of oil, or changes in the price
of
the Benchmark Contract. This period of contango did not meaningfully impact
USOF’s investment objective of having percentage changes in its per unit price
track percentage changes in the price of the Benchmark Contract since the impact
of backwardation and contango tended to equally impact the percentage changes
in
price of both USOF’s units and the Benchmark Contract. It is impossible to
predict with any degree of certainty whether backwardation or contango will
occur in the future. It is likely that both conditions will occur during
different periods.
Marking-to-Market
Futures Positions.
Oil
Futures Contracts are marked to market at the end of each trading day, to ensure
that the outstanding futures obligations are limited by the maximum daily
permissible price movement. This process of marking-to-market is designed to
prevent losses from accumulating in any futures account. Therefore, if USOF’s
futures positions have declined in value, USOF may be required to post
additional variation margin to cover this decline. Alternatively, if USOF
futures positions have increased in value, this increase will be credited to
USOF’s account.
What
is the Crude Oil Market and the Petroleum-Based Fuel
Market?
USOF
may
purchase Oil Futures Contracts traded on the New York Mercantile Exchange that
are based on WTI light, sweet crude oil. It may also purchase contracts on
other
exchanges, including the ICE Futures and the Singapore Exchange. The contract
provides for delivery of several grades of domestic and internationally traded
foreign crudes, and, among other things, serves the diverse needs of the
physical market.
Light,
sweet crudes are preferred by refiners because of their low sulfur content
and
relatively high yields of high-value products such as gasoline, diesel fuel,
heating oil, and jet fuel. The price of WTI light, sweet crude oil has
historically exhibited periods of significant volatility.
Demand
for petroleum products by consumers, as well as agricultural, manufacturing
and
transportation industries, determines demand for crude oil by refiners. Since
the precursors of product demand are linked to economic activity, crude oil
demand will tend to reflect economic conditions. However, other factors such
as
weather also influence product and crude oil demand.
Crude
oil
supply is determined by both economic and political factors. Oil prices (along
with drilling costs, availability of attractive prospects for drilling, taxes
and technology, among other factors) determine exploration and development
spending, which influence output capacity with a lag. In the short run,
production decisions by OPEC also affect supply and prices. Oil export embargoes
and the current conflict in Iraq represent other routes through which political
developments move the market. It is not possible to predict the aggregate effect
of all or any combination of these factors.
In
Europe, Brent crude oil is the standard for futures contracts traded on the
ICE
Futures, an electronic marketplace for energy trading and price discovery.
Brent
crude oil is the price reference for two-thirds of the world’s traded
oil.
Heating
oil, also known as No. 2 fuel oil, accounts for 25% of the yield of a barrel
of
crude oil, the second largest “cut” from oil after gasoline. The heating oil
futures contract, listed and traded at the New York Mercantile Exchange, trades
in units of 42,000 gallons (1,000 barrels) and is based on delivery in New
York
harbor, the principal cash market center. The price of heating oil has
historically been volatile.
Natural
gas accounts for almost a quarter of U.S. energy consumption. The natural gas
futures contract, listed and traded on the New York Mercantile Exchange, trades
in units of 10,000 million British thermal units and is based on delivery at
the
Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas
pipeline systems that draw supplies from the region’s prolific gas deposits. The
pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the
Midwest, and up to the Canadian border. The price of natural gas has
historically been volatile.
Gasoline
is the largest single volume refined product sold in the U.S. and accounts
for
almost half of national oil consumption. The gasoline futures contract, listed
and traded on the New York Mercantile Exchange, trades in units
of
42,000 gallons (1,000 barrels) and is based on delivery at petroleum products
terminals in the New York harbor, the major East Coast trading center for
imports and domestic shipments from refineries in the New York harbor area
or
from the Gulf Coast refining centers. The price of gasoline has historically
been volatile.
Why
Does USOF Purchase and Sell Oil Futures Contracts?
USOF’s
investment objective is for changes in percentage terms of the units’ net asset
value to reflect the changes in percentage terms of the spot price of West
Texas
Intermediate light, sweet crude oil delivered to Cushing, Oklahoma, less
USOF’s
expenses. USOF invests primarily in Oil Futures Contracts. USOF seeks to
have
its aggregate NAV approximate at all times the aggregate face amount of the
Oil
Futures Contracts (or Other Oil Interests) it holds.
Other
than investing in Oil Futures Contracts and Other Oil Interests, USOF may also
invest in assets to support these investments in oil interests. At any given
time, a significant majority of USOF’s investments will be in Treasuries that
serve as segregated assets supporting USOF’s positions in Oil Futures Contracts
and Other Oil Interests. For example, the purchase of an Oil Futures Contract
with a stated value of $10 million would not require USOF to pay $10 million
upon entering into the contract; rather, only a margin deposit, generally of
5%-10% of the stated value of the Oil Futures Contract, would be required.
To
secure its Oil Futures Contract obligations, USOF would then segregate in a
margin account Treasuries in an amount equal to the balance of the current
market value of the contract, which at the contract’s inception would be $10
million minus the amount of the deposit, or $9.5 million (assuming a 5%
margin).
As
a
result of the foregoing, approximately 5% to 10% of USOF’s assets are held as
margin in segregated accounts with a futures commission merchant. In addition
to
the Treasuries it posts with the futures commission for the Oil Futures
Contracts it owns, USOF holds through the Custodian cash, cash equivalents
and
Treasuries that can be posted as margin or as collateral to support its
over-the-counter contracts. USOF earns interest income from the Treasuries,
cash
and cash equivalents that it purchases, and on the cash it holds through
the
Custodian. It anticipates that the earned interest income will increase the
NAV
and limited partners’ capital contribution accounts. USOF reinvests the earned
interest income, hold it in cash, or use it to pay its expenses. If USOF
reinvests the earned interest income, it will make investments that are
consistent with its investment objectives.
What
is the Flow of Units?
What
are the Trading Policies of USOF?
Liquidity
USOF
invests only in Oil Futures Contracts and Other Oil Interests that are traded
in
sufficient volume to permit, in the opinion of the General Partner, ease of
taking and liquidating positions in these financial interests.
Spot
Commodities
While
the
contracts can be physically settled, USOF does not intend to take or make
physical delivery as permitted under the contracts. USOF may from time to time
trade in spot, or cash, oil.
Leverage
While
USOF’s historical ratio of variation margin to total assets has generally ranged
from 0% to 5%, the General Partner endeavors to have the value of USOF’s
Treasuries, cash and cash equivalents whether held by USOF or posted as margin
or collateral at all times approximate the aggregate face value of its
obligations under USOF’s Oil Futures Contracts and Other Oil
Interests.
Borrowings
Borrowings
are not used by USOF unless USOF is required to borrow money in the event of
delivery, if USOF trades in cash commodities, or for short-term needs created
by
unexpected redemptions. USOF maintains Treasuries, cash or cash equivalents
that
equal the value of margin posted and the actual value of the Oil Futures
Contracts. USOF has not established and does not plan to establish credit
lines.
Over-the-Counter
Derivatives (Including Spreads and Straddles)
In
the
future USOF may purchase over-the-counter contracts. Unlike most of the
exchange-traded oil futures contracts or exchange-traded options on such
futures, each party to such contract bears the credit risk that the other party
may not be able to perform its obligations under its contract.
Some
oil-based derivatives transactions contain fairly generic terms and conditions
and are available from a wide range of participants. Other oil-based derivatives
have highly customized terms and conditions and are not as widely available.
Many of these over-the-counter contracts are cash-settled forwards for the
future delivery of oil- or petroleum-based fuels that have terms similar to
the
Oil Futures Contracts. Others take the form of “swaps” in which the two parties
exchange cash flows based on pre-determined formulas tied to the price of the
crude oil spot, or forward crude oil prices, or crude oil futures prices. For
example, USOF may enter into over-the-counter derivative contracts whose value
will be tied to changes in the difference between the WTI spot price, the price
of Oil Futures Contract traded on New York Mercantile Exchange and the prices
of
other Oil Futures Contracts that may be invested in by USOF.
To
protect itself from the credit risk that arises in connection with such
contracts, USOF may enter into agreements with each counterparty that provide
for the netting of its overall exposure to its counterparty, such as the
agreements published by the International Swaps and Derivatives Association,
Inc. USOF also may require that the counterparty be highly rated and/or provide
collateral or other credit support to address USOF’s exposure to the
counterparty.
USOF
may
employ spreads or straddles in its trading to mitigate the differences in its
investment portfolio and its goal of tracking the price of the Benchmark Oil
Futures Contract. USOF would use a spread when it chooses to take simultaneous
long and short positions in futures written on the same underlying asset, but
with different delivery months. The effect of holding such combined positions
is
to adjust the sensitivity of USOF to changes in the price relationship between
futures contracts which will expire sooner and those that will expire later.
USOF would use such a spread if the General Partner felt that taking such long
and short positions, when combined with the rest of its holdings, would more
closely track the investment goals of USOF, or the General Partner felt if
it
would lead to an overall lower cost of trading to achieve a given level of
economic exposure to movements in oil prices. USOF would enter into a straddle
when it chooses to take an option position consisting of a long (or short)
position in both a call option and put option. The economic effect of holding
certain combinations of put options and call options can be very similar to
that
of owning the underlying futures contracts. USOF would make use of such a
straddle approach if, in the opinion of the General Partner, the resulting
combination would more closely track the investment goals of USOF or if it
would
lead to an overall lower cost of trading to achieve a given level of economic
exposure to movements in oil prices.
During
the period ended December 31, 2006, USOF did not employ any hedging methods
since all of its investments were made over an exchange. Therefore, USOF was
not
exposed to counterparty risk.
Pyramiding
USOF
does
not and will not employ the technique, commonly known as pyramiding, in which
the speculator uses unrealized profits on existing positions as variation margin
for the purchase or sale of additional positions in the same or another
commodity interest.
Who
are the Service Providers?
Brown
Brothers Harriman & Co. is the registrar and transfer agent for the units.
Brown Brothers Harriman & Co. is also the custodian for USOF. In this
capacity, Brown Brothers Harriman & Co. holds USOF’s cash and Treasuries
pursuant to a custodial agreement. In addition, Brown Brothers Harriman &
Co. performs certain administrative
and accounting services for USOF and prepares certain SEC and CFTC reports
on
behalf of USOF. The General Partner pays Brown Brothers Harriman & Co.’s
fees for these services.
USOF
also
employs ALPS Distributors, Inc. as a Marketing Agent, which is further discussed
under “What is USOF’s Plan of Distribution?” The General Partner pays ALPS
Distributors, Inc.’s fees.
UBS
Securities LLC (“UBS Securities”) is USOF’s futures commission merchant. USOF
and UBS Securities have entered into an Institutional Futures Client Account
Agreement. This Agreement requires UBS Securities to provide services to USOF
in
connection with the purchase and sale of oil interests that may be purchased
or
sold by or through UBS Securities for USOF’s account. USOF pays the fees of UBS
Securities.
UBS
Securities’ principal business address is 677 Washington Blvd, Stamford, CT
06901. UBS Securities is a futures clearing broker for USOF. UBS Securities
is
registered in the U.S. with the NASD as a broker-dealer and with the CFTC
as an
futures commission merchant. UBS Securities is a member of various U.S. futures
and securities exchanges.
UBS
Securities was involved in the 2003 Global Research Analyst Settlement. This
settlement is part of the global settlement that UBS Securities and nine other
firms have reached with the SEC, NASD, NYSE and various state regulators. As
part of the settlement, UBS Securities has agreed to pay $80,000,000 divided
among retrospective relief, for procurement of independent research and for
investor education. UBS Securities has also undertaken to adopt enhanced
policies and procedures reasonably designed to address potential conflicts
of
interest arising from research practices.
Further,
UBS Securities, like most large, full service investment banks and
broker-dealers, receives inquiries and is sometimes involved in investigations
by the SEC, NYSE and various other regulatory organizations and government
agencies. UBS Securities fully cooperates with the authorities in all such
requests. UBS Securities regularly reports to the SEC on Form B-D investigations
that result in orders. These reports are publicly available.
UBS
Securities acts only as clearing broker for USOF and as such is paid commissions
for executing and clearing trades on behalf of USOF. UBS Securities has not
passed upon the adequacy or accuracy of this Prospectus. UBS Securities neither
acts in any supervisory capacity with respect to the General Partner nor
participates in the management of the General Partner or USOF.
Currently,
the General Partner does not employ commodities trading advisors. If, in the
future, the General Partner does employ commodities trading advisors, it will
choose each advisor based on arms-length negotiations and will consider the
advisor’s experience, fees, and reputation.
Fees
of USOF
Fees
and Compensation Arrangements with the General Partner and Non-Affiliated
Service Providers*
Service
Provider
|
|
Compensation
Paid by the General Partner
|
|
|
|
Brown
Brothers Harriman & Co., Custodian and
Administrator
|
|
A
$50,000 annual fee for its transfer agency services; and for its
custody,
fund accounting and fund administration services, the greater of
a minimum
amount of $250,000 annually or an asset charge of (a) 0.06% for the
first
$500 million of USOF’s net assets, (b) 0.0465% for USOF’s net assets
greater than $500 million but less than $1 billion, and (c) and 0.035%
of
USOF’s net assets that exceed $1 billion.
|
ALPS
Distributors, Inc., Marketing Agent
|
|
425,000
per annum plus an incentive fee as follows: 0.0% on USOF’s assets from
$0-500 million; 0.04% on USOF’s assets from $500 million-$4 billion; 0.03%
on USOF’s assets in excess of $4
billion.
|
*
|
The
General Partner pays this
compensation.
|
Compensation
to the General Partner
USOF
pays
a management fee to the General Partner as follows:
Assets
|
|
Management Fee
|
|
|
|
First
$1,000,000,000
|
|
0.50%
of NAV
|
After
the first $1,000,000,000
|
|
0.02%
of NAV
|
Fees
are
calculated on a daily basis (accrued at 1/365 of the applicable percentage
of
NAV on that day) and paid on a monthly basis.
Fees
and Compensation Arrangements with USOF and Non-Affiliated Service
Providers**
Service
Provider
|
|
Compensation
Paid by USOF
|
|
|
|
UBS
Securities LLC, Futures Commission
Merchant
|
|
Approximately
$3.50 per buy or sell
|
Non-Affiliated
Brokers
|
|
Approximately
.16% of assets
|
**
|
USOF
pays this compensation.
|
New
York Mercantile Exchange Licensing Fee***
Assets
|
|
Management Fee
|
|
|
|
First
$1,000,000,000
|
|
0.04%
of NAV
|
After
the first
$1,000,000,000
|
|
0.02%
of NAV
|
*** |
The
General Partner is continuing negotiations with the New York Mercantile
Exchange. As a result, licensing fees in the amount of $22,198
were
accrued but unpaid during 2006. It is anticipated that assets of
USOF will
be aggregated with other funds formed by the General Partner, including
USNG, to determine the amount of this fee. On a daily basis, fees
would be
allocated proportionately to each fund based on the amount of assets
held.
|
Expenses
Paid by USOF through December 31, 2006 in dollar terms
(unaudited):
Expense
|
|
Amount
in
Dollar Terms
|
|
|
|
|
|
Amount
Paid to General Partner:
|
|
$
|
1,460,448
|
|
Amount
Paid in Portfolio Brokerage
Commissions:
|
|
$
|
478,713
|
|
Other
Amounts Paid or Accrued:
|
|
$
|
22,198
|
|
Total
Expenses Paid or Accrued:
|
|
$
|
1,961,359
|
|
Expenses
Paid by USOF through December 31, 2006 as a Percentage of Average Daily Net
Assets (unaudited)
Expenses
|
|
Amount
as a Percentage
of
Average Daily Net Assets
|
|
|
|
General
Partner
|
|
0.50%
annualized
|
Portfolio
Brokerage
Commissions
|
|
0.16%
annualized
|
Total
Expense Ratio
|
|
0.66%
annualized
|
Form
of Units
Registered
Form.
Units
are issued in registered form in accordance with the LP Agreement. The
Administrator has been appointed registrar and transfer agent for the purpose
of
transferring units in certificated form. The Administrator keeps a record
of all
holders of the units in the registry (“Register”). The General Partner
recognizes transfers of units in certificated form only if done in accordance
with the LP Agreement. The beneficial interests in such units are held in
book-entry form through participants and/or accountholders in
DTC.
Book
Entry.
Individual certificates will not be issued for the units. Instead, units will
be
represented by one or more global certificates, which will be deposited by
the
Administrator with DTC and registered in the name of Cede & Co., as nominee
for DTC. The global certificates will evidence all of the units outstanding
at
any time. Unitholders are limited to (1) participants in DTC such as banks,
brokers, dealers and trust companies (DTC Participants), (2) those who maintain,
either directly or indirectly, a custodial relationship with a DTC Participant
(Indirect Participants), and (3) those banks, brokers, dealers, trust companies
and others who hold interests in the units through DTC Participants or Indirect
Participants, in each case who satisfy the requirements for transfers of units.
DTC participants acting on behalf of investors holding units through such
participants’ accounts in DTC will follow the delivery practice applicable to
securities eligible for DTC’s Same-Day Funds Settlement System. Units will be
credited to DTC Participants’ securities accounts following confirmation of
receipt of payment.
DTC.
DTC is
a limited purpose trust company organized under the laws of the State of New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” register pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (“Exchange Act”). DTC holds securities for DTC
Participants and facilitates the clearance and settlement of transaction between
DTC Participants through electronic book-entry changes in accounts of DTC
Participants.
Transfer
of Units
Transfers
of Units Only Through DTC.
The
units are only transferable through the book-entry system of DTC. Limited
partners who are not DTC Participants may transfer their units through DTC
by
instructing the DTC Participant holding their units (or by instructing the
Indirect Participant or other entity through which their units are held) to
transfer the units. Transfers are made in accordance with standard securities
industry practice.
Transfers
of interests in units with DTC will be made in accordance with the usual rules
and operating procedures of DTC and the nature of the transfer. DTC has
established procedures to facilitate transfers among the participants and/or
accountholders of DTC. Because DTC can only act on behalf of DTC Participants,
who in turn act on behalf of Indirect Participants, the ability of a person
or
entity having an interest in a global certificate to pledge such interest to
persons or entities that do not participate in DTC, or otherwise take actions
in
respect of such interest, may be affected by the lack of a definitive security
in respect of such interest.
DTC
has
advised us that it will take any action permitted to be taken by a unitholder
(including, without limitation, the presentation of a global certificate for
exchange) only at the direction of one or more DTC Participants in whose account
with DTC interests in global certificates are credited and only in respect
of
such portion of the aggregate principal amount of the global certificate as
to
which such DTC Participant or Participants has or have given such
direction.
Transfer/Application
Requirements.
All
purchasers of USOF’s units, and potentially any purchasers of limited partner
interests in the future, who wish to become limited partners or other record
holders and receive cash distributions, if any, or have certain other rights,
must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it agrees to be
bound by USOF’s LP Agreement and is eligible to purchase USOF’s securities. Each
purchaser of units offered by this Prospectus must execute a transfer
application and certification. The obligation to provide the form of transfer
application will be imposed on the seller of units or, if a purchase of units
is
made through an exchange, the form may be obtained directly through USOF.
Further, the General Partner may request each record holder to furnish certain
information, including that holder’s nationality, citizenship or other related
status. A record holder is a unitholder that is, or has applied to be, a limited
partner. An investor who is not a U.S. resident may not be eligible to become
a
record holder or one of the USOF’s limited partners if that investor’s ownership
would subject USOF to the risk of cancellation or forfeiture of any of USOF’s
assets under any federal, state or local law or regulation. If the record holder
fails to furnish the information or if the General Partner determines, on the
basis of the information furnished by the holder in response to the request,
that such holder is not qualified to become one of USOF’s limited partners, the
General Partner may be substituted as a holder for the record holder, who will
then be treated as a non-citizen assignee, and USOF will have the right to
redeem those securities held by the record holder.
A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. USOF may, at its discretion, treat
the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.
A
person
purchasing USOF’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the General
Partner obtained, our units will be securities and will be transferable
according to the laws governing transfers of securities.
Any
transfer of units will not be recorded by the transfer agent or recognized
by
the General Partner unless a completed transfer application is delivered to
the
General Partner or the Administrator. When acquiring units, the transferee
of
such units that complete a transfer application will:
|
·
|
be
an assignee until admitted as a substituted limited partner upon
the
consent and sole discretion of the General Partner and the recording
of
the assignment on the books and records of the
partnership;
|
|
·
|
automatically
request admission as a substituted limited
partner;
|
|
·
|
agree
to be bound by the terms and conditions of, and execute, our LP
Agreement;
|
|
·
|
represent
that such transferee has the capacity and authority to enter into
our LP
Agreement;
|
|
·
|
grant
powers of attorney to our General Partner and any liquidator of us;
and
|
|
·
|
make
the consents and waivers contained in our LP
Agreement.
|
An
assignee will become a limited partner in respect of the transferred units
upon
the consent of our General Partner and the recordation of the name of the
assignee on our books and records. Such consent may be withheld in the sole
discretion of our General Partner.
If
consent of the General Partner is withheld such transferee shall be an assignee.
An assignee shall have an interest in the partnership equivalent to that of
a
limited partner with respect to allocations and distributions, including,
without limitation, liquidating distributions, of the partnership. With respect
to voting rights attributable to units that are held by assignees, the General
Partner shall be deemed to be the limited partner with respect thereto and
shall, in exercising the voting rights in respect of such units on any matter,
vote such units at the written direction of the assignee who is the recordholder
of such units. If no such written direction is received, such units will not
be
voted. An assignee shall have no other rights of a limited partner.
Until
a
unit has been transferred on our books, we and the transfer agent may treat
the
record holder of the unit as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations.
Withdrawal
of Limited Partners
As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to withdraw
entirely from the partnership or to withdraw a portion of his partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal of
all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited partner’s
ownership of units would result in the violation of any law or regulations
applicable to the partnership or a partner. In these circumstances, the General
Partner without notice may require the withdrawal at any time, or retroactively.
The limited partner thus designated shall withdraw from the partnership or
withdraw that portion of his partner capital account specified, as the case
may
be, as of the close of business on such date as determined by the General
Partner. The limited partner thus designated shall be deemed to have withdrawn
from the partnership or to have made a partial withdrawal from his partner
capital account, as the case may be, without further action on the part of
the
limited partner and the provisions of the LP Agreement shall apply.
What
is the Plan of Distribution?
Buying
and Selling Units
Most
investors buy and sell units of USOF in secondary market transactions through
brokers. Units trade on the American Stock Exchange under the ticker symbol
“USO.” Units are bought and sold throughout the trading day like
other publicly traded securities. The Authorized Purchaser’s function is to
maintain an orderly market in the units, including establishing the bid and
ask
prices on the Exchange. When buying or selling units through a broker, most
investors incur customary brokerage commissions and charges. Investors are
encouraged to review the terms of their brokerage account for details on
applicable charges.
Marketing
Agent and Authorized Purchasers
The
offering of USOF’s units is a best efforts offering. USOF is continuously
offering Creation Baskets consisting of 100,000 units through the Marketing
Agent, to Authorized Purchasers. KV Execution Services, LLC was the initial
Authorized Purchaser. The initial Authorized Purchaser purchased the initial
Creation Basket of 100,000 units at USOF’s NAV on April 10, 2006. All Authorized
Purchasers pay a $1,000 fee for the creation of Creation Baskets. The Marketing
Agent receives, for its services as marketing agent to USOF, a marketing fee
$425,000 per annum plus an incentive fee as follows: 0.0% on USOF’s assets from
$0-500 million; .04% on USOF’s assets from $500 million-$4 billion; .03% on
USOF’s assets in excess of $4 billion; provided, however, that in no event may
the aggregate compensation paid to the Marketing Agent and any affiliate of
the
General Partner for distribution-related services in connection with this
offering of Units exceed ten percent (10%) of the gross proceeds of this
offering.
Kathryn
D. Rooney, a registered representative of the Marketing Agent, solicits orders,
customers and customer funds in connection with the offering of the Units.
Ms. Rooney is also the Director of Business Development for Ameristock
Corporation, an affiliate of the General Partner, and is not an employee
of the
General Partner. As a consequence, she receives no compensation from the
General
Partner even though she is designated as the Marketing Manager of USOF. Any
compensation she receives for her efforts on behalf of USOF is paid by the
Marketing Agent. Previously, she worked at ALPS Mutual Fund Services, Inc.
as a
National Sales Director. She is also registered with the NFA as an Associated
Person of the General Partner.
The
offering of baskets is being made in compliance with Conduct Rule 2810 of the
NASD. Accordingly, Authorized Purchasers will not make any sales to any account
over which they have discretionary authority without the prior written approval
of a purchaser of units.
The
per
unit price of units offered in Creation Baskets on any subsequent day will
be
the total NAV of USOF calculated on that day divided by the number of issued
and
outstanding units. An Authorized Purchaser is not required to sell any specific
number or dollar amount of units.
By
executing an Authorized Purchaser Agreement, an Authorized Purchaser becomes
part of the group of parties eligible to purchase baskets from, and put baskets
for redemption to, USOF. An Authorized Purchaser is under no obligation to
create or redeem baskets, and an Authorized Purchaser is under no obligation
to
offer to the public units of any baskets it does create.
A
list of
Authorized Purchasers is available from the Marketing Agent and can be found
on
our website at www.unitedstatesoilfund.com. Because new units can be created
and
issued on an ongoing basis, at any point during the life of USOF, a
“distribution”, as such term is used in the 1933 Act, will be occurring.
Authorized Purchasers, other broker-dealers and other persons are cautioned
that
some of their activities may result in their being deemed participants in a
distribution in a manner that would render them statutory underwriters and
subject them to the prospectus-delivery and liability provisions of the 1933
Act. Authorized Purchasers will comply with the prospectus-delivery requirements
in connection with the sale of units to customers. For example, an Authorized
Purchaser, other broker-dealer firm or its client will be deemed a statutory
underwriter if it purchases a basket from USOF, breaks the basket down into
the
constituent units and sells the units to its customers; or if it chooses to
couple the creation of a supply of new units with an active selling effort
involving solicitation of secondary market demand for the units. A determination
of whether a particular market participant is an underwriter must take into
account all the facts and circumstances pertaining to the activities of the
broker-dealer or its client in the particular case, and the examples mentioned
above should not be considered a complete description of all the activities
that
would lead to designation as an underwriter and subject them to the
prospectus-delivery and liability provisions of the 1933 Act.
Dealers
who are neither Authorized Purchasers nor “underwriters” but are nonetheless
participating in a distribution (as contrasted to ordinary secondary trading
transactions), and thus dealing with units that are part of an “unsold
allotment” within the meaning of Section 4 prospectus-delivery exemption
provided by Section 4(3) of the 1933 Act.
The
General Partner may qualify the units in states selected by the General Partner
and intends that sales be made through broker-dealers who are members of the
NASD. Investors intending to create or redeem baskets through Authorized
Purchasers in transactions not involving a broker-dealer registered in such
investor’s state of domicile or residence should consult their legal advisor
regarding applicable broker-dealer or securities regulatory requirements under
the state securities laws prior to such creation or redemption.
While
the
Authorized Purchasers may be indemnified by the General Partner, they will
not
be entitled to receive a discount or commission from USOF for their purchases
of
Creation Baskets. The difference between the price paid by Authorized Purchasers
as underwriters and the price paid to such Authorized Purchasers by investors
will be deemed underwriting compensation.
Calculating
NAV
USOF’s
NAV is calculated by:
|
·
|
Taking
the current market value of its total
assets
|
|
·
|
Subtracting
any liabilities
|
The
Administrator calculates the NAV of USOF once each trading day. The NAV for
a
particular trading day is released after 4:15 p.m. New York time. It calculates
NAV as of the earlier of the close of the New York Stock Exchange or 4:00 p.m.
New York time. Trading on the American Stock Exchange typically closes at 4:15
p.m. New York time. USOF uses the New York Mercantile Exchange closing price
(determined at the earlier of the close of that exchange or 2:30 p.m. New York
time) for the contracts held on the New York Mercantile Exchange, but calculates
or determines the value of all other USOF investments as of the earlier of
the
close of the New York Stock Exchange or 4:00 p.m. New York time.
In
addition, in order to provide updated information relating to USOF for use
by
investors and market professionals, the American Stock Exchange calculates
and
disseminates throughout the trading day an updated indicative fund value. The
indicative fund value is calculated by using the prior day’s closing NAV per
unit of USOF as a base and updating that value throughout the trading day to
reflect changes in the most recently reported trade price for the active WTI
light, sweet Oil Futures Contract on the New York Mercantile Exchange. The
prices reported for the active Oil Futures Contract month are adjusted based
on
the prior day’s spread differential between settlement values for that contract
and the spot month contract. In the event that the spot month contract is also
the active contract, the last sale price for the active contract is not
adjusted. The indicative fund value unit basis disseminated during American
Stock Exchange trading hours should not be viewed as an actual real time update
of the NAV, because NAV is calculated only once at the end of each trading
day.
The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular American Stock Exchange trading hours of 9:30 a.m. New York
time
to 4:15 p.m. New York time. The normal trading hours of the New York Mercantile
Exchange are 10:00 a.m. New York time to 2:30 p.m. New York time. This means
that there is a gap in time at the beginning and the end of each day during
which USOF’s units are traded on the American Stock Exchange, but real-time New
York Mercantile Exchange trading prices for oil futures contracts traded on
such
Exchange are not available. As a result, during those gaps there will be no
update to the indicative fund value.
The
American Stock Exchange disseminates the indicative fund value through the
facilities of CTA/CQ High Speed Lines. In addition, the indicative fund value
is
published on the American Stock Exchange’s website and is available through
on-line information services such as Bloomberg and Reuters.
Dissemination
of the indicative fund value provides additional information that is not
otherwise available to the public and is useful to investors and market
professionals in connection with the trading of USOF units on the American
Stock
Exchange. Investors and market professionals are able throughout the trading
day
to compare the market price of USOF and the indicative fund value. If the market
price of USOF units diverges significantly from the indicative fund value,
market professionals will have an incentive to execute arbitrage trades. For
example, if USOF appears to be trading at a discount compared to the indicative
fund value, a market professional could buy USOF units on the American Stock
Exchange and sell short oil future contracts. Such arbitrage trades can tighten
the tracking between the market price of USOF and the indicative fund value
and
thus can be beneficial to all market participants.
In
addition, other Oil Futures Contracts, Other Oil Interests and Treasuries held
by USOF are valued by the Administrator, using rates and points received from
client approved third party vendors (such as Reuters and WM Company) and advisor
quotes. These investments are not included in the indicative value. The
indicative fund value is based on the prior day’s NAV and moves up and down
solely according to changes in Near Month Oil Futures Contracts for WTI light,
sweet oil traded on the New York Mercantile Exchange.
Creation
and Redemption of Units
USOF
creates and redeems units from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of baskets are only
made in exchange for delivery to USOF or the distribution by USOF of the amount
of Treasuries and any cash represented by the baskets being created or redeemed,
the amount of which is based on the combined NAV of the number of units included
in the baskets being created or redeemed determined as of 4:00 p.m. New York
time on the day the order to create or redeem baskets is properly
received.
Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery
of
the Treasuries and any cash required for such creations and redemptions. The
Authorized Purchaser Agreement and the related procedures attached thereto
may
be amended by USOF, without the consent of any limited partner or unitholder
or
Authorized Purchaser. Authorized Purchasers pay a transaction fee of $1,000
to
USOF for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with USOF in exchange for baskets
receive no fees, commissions or other form of compensation or inducement of
any
kind from either USOF or the General Partner, and no such person will have
any
obligation or responsibility to the General Partner or USOF to effect any sale
or resale of units.
Each
Authorized Purchaser is required to be registered as a broker-dealer under
the
Exchange Act and is a member in good standing with the NASD, or exempt from
being or otherwise not required to be licensed as a broker-dealer or a member
of
NASD, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate
in
light of its own regulatory regime.
Under
the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify
the
Authorized Purchasers against certain liabilities, including liabilities under
the Securities Act, and to contribute to the payments the Authorized Purchasers
may be required to make in respect of those liabilities.
The
following description of the procedures for the creation and redemption of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is attached as an exhibit to the registration
statement of which this Prospectus is a part.
Creation
Procedures
On
any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase and
redemption orders, a “business day” means any day other than a day when any of
the American Stock Exchange, the New York Mercantile Exchange or the New York
Stock Exchange is closed for regular trading. Purchase orders must be placed
by
12:00 p.m. New York time or the close of regular trading on the American Stock
Exchange, whichever is earlier; except in the case of the initial Authorized
Purchaser’s or any other Authorized Purchaser’s initial order to purchase one or
more Creation Baskets on the first day the baskets are to be offered and sold,
when such orders shall be placed by 9:00 a.m. New York time on the day agreed
to
by the General Partner and the initial Authorized Purchaser. The day on which
the Marketing Agent receives a valid purchase order is the purchase order
date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries
with USOF, or a combination of Treasuries and cash, as described below. Prior
to
the delivery of baskets for a purchase order, the Authorized
Purchaser must also have wired to the Custodian the non-refundable transaction
fee due for the purchase order. Authorized Purchasers may not withdraw a
creation request.
Determination
of Required Deposits
The
total
deposit required to create each basket (“Creation Basket Deposit”) is the amount
of Treasuries and cash that is in the same proportion to the total assets of
USOF (net of estimated accrued but unpaid fees, expenses and other liabilities)
on the date the order to purchase is properly received as the number of units
to
be created under the purchase order is in proportion to the total number of
units outstanding on the date the order is received. The General Partner
determines, directly in his sole discretion or in consultation with the
Administrator, the requirements for Treasuries and the amount of cash, including
the maximum permitted remaining maturity of a Treasury and proportions of
Treasury and cash that may be included in deposits to create baskets. The
Marketing Agent publishes such requirements at the beginning of each business
day. The amount of cash deposit required is the difference between the aggregate
market value of the Treasuries required to be included in a Creation Basket
Deposit as of 4:00 p.m. New York time on the date the order to purchase is
properly received and the total required deposit.
Delivery
of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for transferring
to USOF’s account with the Custodian the required amount of Treasuries and cash
by the end of the third business day following the purchase order date. Upon
receipt of the deposit amount, the Administrator directs DTC to credit the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk of delivery
and ownership of Treasuries until such Treasuries have been received by the
Custodian on behalf of USOF shall be borne solely by the Authorized
Purchaser.
Because
orders to purchase baskets must be placed by 12:00 p.m., New York time, but
the
total payment required to create a basket during the continuous offering period
will not be determined until 4:00 p.m., New York time, on the date the purchase
order is received, Authorized Purchasers will not know the total amount of
the
payment required to create a basket at the time they submit an irrevocable
purchase order for the basket. USOF’s NAV and the total amount of the payment
required to create a basket could rise or fall substantially between the time
an
irrevocable purchase order is submitted and the time the amount of the purchase
price in respect thereof is determined.
Rejection
of Purchase Orders
The
General Partner acting by itself or through the Marketing Agent may reject
a
purchase order or a Creation Basket Deposit if:
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it
determines that the investment alternative available to USOF at that
time
will not enable it to meet its investment
objective;
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it
determines that the purchase order or the Creation Basket Deposit
is not
in proper form;
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it
believes that the purchase order or the Creation Basket Deposit would
have
adverse tax consequences to USOF or its
unitholders;
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the
acceptance or receipt of the Creation Basket Deposit would, in the
opinion
of counsel to the General Partner, be unlawful;
or
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circumstances
outside the control of the General Partner, Marketing Agent or Custodian
make it, for all practical purposes, not feasible to process creations
of
baskets.
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None
of
the General Partner, Marketing Agent or Custodian will be liable for the
rejection of any purchase order or Creation Basket Deposit.
Redemption
Procedures
The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day, an
Authorized Purchaser may place an order with the Marketing Agent to redeem
one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York time
or
the close of regular trading on the American Stock Exchange, whichever is
earlier. A redemption order so received will be effective
on the date it is received in satisfactory form by the Marketing Agent. The
redemption procedures allow Authorized Purchasers to redeem baskets and do
not
entitle an individual unitholder to redeem any units in an amount less than
a
basket, or to redeem baskets other than through an Authorized Purchaser. By
placing a redemption order, an Authorized Purchaser agrees to deliver the
baskets to be redeemed through DTC’s book-entry system to USOF not later than
3:00 p.m. New York time on the third business day following the effective date
of the redemption order. Prior to the delivery of the redemption distribution
for a redemption order, the Authorized Purchaser must also have wired to USOF’s
account at the Custodian the non-refundable transaction fee due for the
redemption order. Authorized Purchasers may not withdraw a redemption
request.
Determination
of Redemption Distribution
The
redemption distribution from USOF consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and cash that is in the same
proportion to the total assets of USOF (net of estimated accrued but unpaid
fees, expenses and other liabilities) on the date the order to redeem is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the date
the
order is received. The General Partner, directly or in consultation with the
Administrator, determines the requirements for Treasuries and the amounts of
cash, including the maximum permitted remaining maturity of a Treasury, and
the
proportions of Treasuries and cash that may be included in distributions to
redeem baskets. The Marketing Agent publishes such requirements as of 4:00
p.m.
New York time on the redemption order date.
Delivery
of Redemption Distribution
The
redemption distribution due from USOF will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following the
redemption order date if, by 3:00 p.m. New York time on such third business
day,
USOF’s DTC account has been credited with the baskets to be redeemed. If USOF’s
DTC account has not been credited with all of the baskets to be redeemed by
such
time, the redemption distribution will be delivered to the extent of whole
baskets received. Any remainder of the redemption distribution will be delivered
on the next business day to the extent of remaining whole baskets received
if
USOF receives the fee applicable to the extension of the redemption distribution
date which the General Partner may, from time to time, determine and the
remaining baskets to be redeemed are credited to USOF’s DTC account by 3:00 p.m.
New York time on such next business day. Any further outstanding amount of
the
redemption order shall be cancelled. Pursuant to information from the General
Partner, the Custodian will also be authorized to deliver the redemption
distribution notwithstanding that the baskets to be redeemed are not credited
to
USOF’s DTC account by 3:00 p.m. New York time on the third business day
following the redemption order date if the Authorized Purchaser has
collateralized its obligation to deliver the baskets through DTC’s book
entry-system on such terms as the General Partner may from time to time
determine.
Suspension
or Rejection of Redemption Orders
The
General Partner may, in its discretion, suspend the right of redemption, or
postpone the redemption settlement date, (1) for any period during which the
American Stock Exchange or the New York Mercantile Exchange is closed other
than
customary weekend or holiday closings, or trading on the American Stock Exchange
or the New York Mercantile Exchange is suspended or restricted, (2) for any
period during which an emergency exists as a result of which delivery, disposal
or evaluation of Treasuries is not reasonably practicable, or (3) for such
other
period as the General Partner determines to be necessary for the protection
of
the limited partners. None of the General Partner, the Marketing Agent, the
Administrator, or the Custodian will be liable to any person or in any way
for
any loss or damages that may result from any such suspension or
postponement.
The
General Partner will reject a redemption order if the order is not in proper
form as described in the Authorized Purchaser Agreement or if the fulfillment
of
the order, in the opinion of its counsel, might be unlawful.
Creation
and Redemption Transaction Fee
To
compensate USOF for its expenses in connection with the creation and redemption
of baskets, an Authorized Purchaser is required to pay a transaction fee to
USOF
of $1,000 per order to create or redeem baskets. An order may include multiple
baskets. The transaction fee may be reduced, increased or otherwise changed
by
the General Partner. The General Partner shall notify DTC of any change in
the
transaction fee and will not implement any increase in the fee for the
redemption of baskets until 30 days after the date of the notice.
Tax
Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not such
tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and USOF if they are required by law to pay any
such tax, together with any applicable penalties, additions to tax or interest
thereon.
Secondary
Market Transactions
As
noted,
USOF will create and redeem units from time to time, but only in one or more
Creation Baskets or Redemption Baskets. The creation and redemption of baskets
will only be made in exchange for delivery to USOF or the distribution by USOF
of the amount of Treasuries and cash represented by the baskets being created
or
redeemed, the amount of which will be based on the aggregate NAV of the number
of units included in the baskets being created or redeemed determined on the
day
the order to create or redeem baskets is properly received.
As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and other
financial institutions that are not required to register as broker-dealers
to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is under
no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets they
create will do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the American Stock
Exchange, the NAV of USOF at the time the Authorized Purchaser purchased the
Creation Baskets and the NAV of the units at the time of the offer of the units
to the public, the supply of and demand for units at the time of sale, and
the
liquidity of the Oil Futures Contract market and the market for Other Oil
Interests, and are expected to fall between USOF’s NAV and the trading price of
the units on the American Stock Exchange at the time of sale. Units initially
comprising the same basket but offered by Authorized Purchasers to the public
at
different times may have different offering prices. An order for one or more
baskets may be placed by an Authorized Purchaser on behalf of multiple clients.
Authorized Purchasers who make deposits with USOF in exchange for baskets
receive no fees, commissions or other form of compensation or inducement of
any
kind from either USOF or the General Partner, and no such person has any
obligation or responsibility to the General Partner or USOF to effect any sale
or resale of units. Units are expected to trade in the secondary market on
the
American Stock Exchange. Units may trade in the secondary market at prices
that
are lower or higher relative to their NAV per unit. The amount of the discount
or premium in the trading price relative to the NAV per unit may be influenced
by various factors, including the number of investors who seek to purchase
or
sell units in the secondary market and the liquidity of the Oil Futures
Contracts market and the market for Other Oil Interests. While the units trade
on the American Stock Exchange until 4:15 p.m. New York time, liquidity in
the
market for Oil Futures Contracts and Other Oil Interests may be reduced after
the close of the New York Mercantile Exchange at 2:30 p.m. New York time. As
a
result, during this time, trading spreads, and the resulting premium or
discount, on the units may widen.
Use
of Proceeds
The
General Partner applies substantially all of USOF’s assets toward trading in Oil
Futures Contracts and other Oil Interests and cash reserves. The General Partner
has sole authority to determine the percentage of assets that are:
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held
on deposit with the futures commission merchant or other
custodian
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used
for other investments, and
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held
in bank accounts to pay current obligations and as
reserves.
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The
General Partner deposits substantially all of USOF’s net assets with the futures
commission merchant or other custodian for trading. When USOF purchases an
Oil
Futures Contract and certain exchange traded Other Oil Interests, USOF is
required to deposit with the selling futures commission merchant on behalf
of
the exchange a portion of the value of the contract or other interest as
security to ensure payment for the obligation under oil interests at maturity.
This deposit is known as “variation margin.” USOF invests the remainder of its
assets equal to the difference between the margin deposited and the face value
of the futures contract in Treasuries.
The
General Partner believes that all entities that hold or trade USOF’s assets are
based in the United States and will be subject to United States
regulations.
Approximately
5% to 10% of USOF’s assets are normally committed as margin for commodity
futures contracts. However, from time to time, the percentage of assets
committed as margin may be substantially more, or less, than such range. The
General Partner invests the balance of USOF’s assets not invested in oil
interests or held in margin as reserves to be available for changes in margin.
All interest income is used for USOF’s benefit.
The
futures commission merchant, government agency or commodity exchange could
increase margins applicable to USOF to hold trading positions at any time.
Moreover, margin is merely a security deposit and has no bearing on the profit
or loss potential for any positions taken.
USOF’s
assets are held in segregation pursuant to the Commodity Exchange Act and CFTC
regulations.
Limited
Partnership Agreement
The
following paragraphs are a summary of certain provisions of our LP Agreement.
The following discussion is qualified in its entirety by reference to our LP
Agreement.
Authority
of the General Partner
Our
General Partner is generally authorized to perform all acts deemed necessary
to
carry out these purposes and to conduct our business. Our partnership existence
will continue into perpetuity, until terminated in accordance with our LP
Agreement. Our General Partner has a power of attorney to take certain actions,
including the execution and filing of documents, on our behalf and with respect
to our LP Agreement. However, our partnership agreement limits the authority
of
our General Partner as follows:
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Other
than in connection with the issuance or redemption of units, or upon
termination of the partnership as contemplated by the LP Agreement,
the
General Partner may not sell, exchange or otherwise dispose of all
or
substantially all of the partnership’s assets in a single transaction or a
series of related transactions (including by way of merger, consolidation
or other combination with any other person) or approve on behalf
of the
partnership, the sale, exchange or other disposition of all or
substantially all of the assets of all of the partnership, taken
as a
whole, without the approval of at least a majority of the limited
partners; provided, however, that this provision shall not preclude
or
limit the General Partner’s ability to mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the partnership’s
assets and shall not apply to any forced sale of any or all of the
partnership’s assets pursuant to the foreclosure of, or other realization
upon, any such encumbrance.
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The
General Partner is not authorized to institute or initiate on behalf
of,
or otherwise cause, the partnership to (a) make a general assignment
for
the benefit of creditors; (b) file a voluntary bankruptcy petition;
or (c)
file a petition seeking for the partnership a reorganization, arrangement,
composition, readjustment liquidation, dissolution or similar relief
under
any law.
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The
General Partner may not, without written approval of the specific
act by
all of the limited partners or by other written instrument executed
and
delivered by all of the limited partners subsequent to the date of
the LP
Agreement, take any action in contravention of the LP Agreement,
including, without limitation, (i) any act that would make it impossible
to carry on the ordinary business of the partnership, except as otherwise
provided in the LP Agreement; (ii) possess partnership property,
or assign
any rights in specific partnership property, for other than a partnership
purpose; (iii) admit a person as a partner, except as otherwise provided
in the LP Agreement; (iv) amend the LP Agreement in any manner, except
as
otherwise provided in the LP Agreement or applicable law; or (v)
transfer
its interest as General Partner of the partnership, except as otherwise
provided in the LP Agreement.
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In
general, unless approved by a majority of the limited partners, our
General Partner shall not take any action, or refuse to take any
reasonable action, the effect of which would be to cause us, to the
extent
it would materially and adversely affect limited partners, to be
taxable
as a corporation or to be treated as an association taxable as a
corporation for federal income tax
purposes.
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Withdrawal
or Removal of Our General Partner
The
General Partner shall be deemed to have withdrawn from the partnership upon
the
occurrence of any one of the following events:
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the
General Partner voluntarily withdraws from the partnership by giving
written notice to the other
partners;
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the
General Partner transfers all of its rights as General
Partner;
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the
General Partner is removed;
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the
General Partner (A) makes a general assignment for the benefit of
creditors; (B) files a voluntary bankruptcy petition; (C) files a
petition
or answer seeking for itself a reorganization, arrangement, composition,
readjustment liquidation, dissolution or similar relief under any
law; (D)
files an answer or other pleading admitting or failing to contest
the
material allegations of a petition filed against the General Partner
in a
proceeding of the type described in clauses (A) - (C) of this sentence;
or
(E) seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator of the General Partner or of all or any substantial
part of its properties;
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a
final and non-appealable judgment is entered by a court with appropriate
jurisdiction ruling that the General Partner is bankrupt or insolvent
or a
final and non-appealable order for relief is entered by a court with
appropriate jurisdiction against the General Partner, in each case
under
any federal or state bankruptcy or insolvency laws as now or hereafter
in
effect; or
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a
certificate of dissolution or its equivalent is filed for the General
Partner, or 90 days expire after the date of notice to the General
Partner
of revocation of its charter without a reinstatement of its charter,
under
the laws of its state of
incorporation.
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The
General Partner may be removed with or without cause if such removal is approved
by at least 66 2/3% of the units (excluding for this purpose units held by
the
General Partner and its affiliates).
Meetings
All
acts
of the limited partners should be done in accordance with the Delaware Revised
Uniform Limited Partnership Act (“DRULPA”). Upon the written request of 20% or
more in interest of the limited partners, the General Partner may, but is not
required to, call a meeting of the limited partners. Notice of such meeting
shall be given within 30 days after, and the meeting shall be held within 60
days after, receipt of such request. The General Partner may also call a meeting
not less than 20 and not more than 60 days prior to the meeting. Any such notice
shall state briefly the purpose of the meeting, which shall be held at a
reasonable time and place. Any limited partner may obtain a list of names,
addresses, and interests of the limited partners upon written request to the
General Partner.
Limited
Liability
Assuming
that a limited partner does not take part in the control of our business, and
that he otherwise acts in conformity with the provisions of our LP Agreement,
his liability under Delaware law will be limited, subject to certain possible
exceptions, generally to the amount of capital he is obligated to contribute
to
us in respect of his units or other limited partner interests plus his share
of
any of our undistributed profits and assets. In light of the fact that a limited
partner’s liability may extend beyond his capital contributions, a limited
partner may lose more money than he contributed.
Under
Delaware law, a limited partner might be held liable for USOF’s obligations as
if it were a General Partner if the limited partner participates in the control
of the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
Under
the
LP Agreement, a limited partner is not liable for assessments in addition to
its
initial capital investment in any of USOF’s capital securities representing
limited partnership interests. However, a limited partner still may be required
to repay to USOF any amounts wrongfully returned or distributed to it under
some
circumstances. Under Delaware law, USOF may not make a distribution to limited
partners if the distribution causes USOF’s liabilities (other than liabilities
to partners on account of their partnership interests and nonrecourse
liabilities)
to exceed the fair value of USOF’s assets. Delaware law provides that a limited
partner who receives such a distribution and knew at the time of the
distribution that the distribution violated the law will be liable to the
limited partnership for the amount of the distribution for three years from
the
date of the distribution.
The
General Partner Has Conflicts of Interest
There
are
present and potential future conflicts of interest in USOF’s structure and
operation you should consider before you purchase units. The General Partner
will use this notice of conflicts as a defense against any claim or other
proceeding made.
The
General Partner’s officers, directors and employees, do not devote their time
exclusively to USOF. These persons are directors, officers or employees of
other
entities which may compete with USOF for their services. They could have a
conflict between their responsibilities to USOF and to those other entities.
The
General Partner believes that it has sufficient personnel, time, and working
capital to discharge its responsibilities in a fair manner and that these
persons’ conflicts should not impair their ability to provide services to
USOF.
The
General Partner’s principals, officers, directors and employees may trade
futures and related contracts for their own account. Limited partners and other
unitholders will not be permitted to inspect the trading records of the
principals. A conflict of interest may exist if their trades are in the same
markets and at the same time as USOF trades using the clearing broker to be
used
by USOF. A potential conflict also may occur when the General Partner’s
principals trade their accounts more aggressively or take positions in their
accounts which are opposite, or ahead of, the positions taken by USOF. The
General Partner has adopted a Code of Ethics to ensure that the officers,
directors, and employees of the General Partner and its affiliates do not engage
in trades that will harm the fund or the unitholders. The Code of Ethics may
be
found on USOF’s website at www.unitedstatesoilfund.com.
The
General Partner has sole current authority to manage the investments and
operations of USOF, and this may allow it to act in a way that furthers its
own
interests which may create a conflict with your best interests. Limited partners
have limited voting control, which will limit the ability to influence matters
such as amendment of the LP Agreement, change in USOF’s basic investment policy,
dissolution of this fund, or the sale or distribution of USOF’s
assets.
The
General Partner serves as the general partner to both USNG and USOF. The General
Partner may have a conflict to the extent that its trading decisions may be
influenced by the effect they would have on USNG. In addition, the General
Partner is required to indemnify the officers and directors of USNG, if the
need
for indemnification arises. This potential indemnification will cause the
General Partner’s assets to decrease. If the General Partner’s other sources of
income are not sufficient to compensate for the indemnification, then the
General Partner may terminate and you could lose your investment.
No
Resolution of Conflicts Procedures
Whenever
a conflict of interest exists or arises between the General Partner on the
one
hand, and the partnership or any limited partner, on the other hand, any
resolution or course of action by the General Partner in respect of such
conflict of interest shall be permitted and deemed approved by all partners
and
shall not constitute a breach of the LP Agreement or of any agreement
contemplated hereby or of a duty stated or implied by law or equity, if the
resolution or course of action is, or by operation of the LP Agreement is deemed
to be, fair and reasonable to the partnership. If a dispute arises, under the
LP
Agreement it will be resolved either through negotiations with the General
Partner or by courts located in the State of Delaware.
Under
the
LP Agreement, any resolution is deemed to be fair and reasonable to the
partnership if the resolution is:
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approved
by the audit committee, although no party is obligated to seek approval
and the General Partner may adopt a resolution or course of action
that
has not received approval;
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on
terms no less favorable to the limited partners than those generally
being
provided to or available from unrelated third parties;
or
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fair
to the limited partners, taking into account the totality of the
relationships of the parties involved including other transactions
that
may be particularly favorable or advantageous to the limited
partners.
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The
previous risk factors and conflicts of interest are complete as of the date
of
this prospectus; however, additional risks and conflicts may occur which
are not
presently foreseen by the General Partner. You may not construe this Prospectus
as legal or tax advice. Before making an investment in this fund, you should
read this entire Prospectus, including the LP Agreement. You should also
consult
with your personal legal, tax, and other professional
advisors.
Interests
of Named Experts and Counsel
The
General Partner has employed Sutherland Asbill & Brennan LLP to prepare this
Prospectus. Neither the law firm nor any other expert hired by USOF to give
advice on the preparation of this offering document have been hired on a
contingent fee basis. Nor do any of them have any present or future expectation
of interest in the General Partner, Marketing Agent, Authorized Purchasers,
Custodian, Administrator or other service providers to USOF.
The
General Partner’s Responsibility and Remedies
Pursuant
to the DRULPA, parties may contractually modify or even eliminate fiduciary
duties in a partnership agreement to the limited partnership itself, or to
another partner or person otherwise bound by the partnership agreement. Parties
may not, however, eliminate the implied covenant of good faith and fair dealing.
Where parties unambiguously provide for fiduciary duties in a partnership
agreement, those expressed duties become the standard courts will use to
determine whether such duties were breached. For this reason, USOF’s limited
partnership agreement does not explicitly provide for any fiduciary duties
so
that common law fiduciary duty principles will apply to measure the General
Partner’s conduct.
A
prospective investor should be aware that the General Partner has a
responsibility to limited partners of USOF to exercise good faith and fairness
in all dealings. The fiduciary responsibility of a general partner to limited
partners is a developing and changing area of the law and limited partners
who
have questions concerning the duties of the General Partner should consult
with
their counsel. In the event that a limited partner of USOF believes that the
General Partner has violated its fiduciary duty to the limited partners, he
may
seek legal relief individually or on behalf of USOF under applicable laws,
including under DRULPA and under commodities laws, to recover damages from
or
require an accounting by the General Partner. Limited partners may also have
the
right, subject to applicable procedural and jurisdictional requirements, to
bring class actions in federal court to enforce their rights under the federal
securities laws and the rules and regulations promulgated thereunder by the
SEC.
Limited partners who have suffered losses in connection with the purchase or
sale of the units may be able to recover such losses from the General Partner
where the losses result from a violation by the General Partner of the federal
securities laws. State securities laws may also provide certain remedies to
limited partners. Limited partners should be aware that performance by the
General Partner of its fiduciary duty to is measured by the terms of the LP
Agreement as well as applicable law. Limited partners are afforded certain
rights to institute reparations proceedings under the Commodity Exchange Act
for
violations of the Commodity Exchange Act or of any rule, regulation or order
of
the CFTC by the General Partner.
Liability
and Indemnification
Under
the
LP Agreement, neither a General Partner nor any employee or other agent of
USOF
nor any officer, director, stockholder, partner, employee or agent of a General
Partner (a “Protected
Person”)
shall
be liable to any partner or USOF for any mistake of judgment or for any action
or inaction taken, nor for any losses due to any mistake of judgment or to
any
action or inaction or to the negligence, dishonesty or bad faith of any officer,
director, stockholder, partner, employee, agent of USOF or any officer,
director, stockholder, partner, employee or agent of such General Partner,
provided that such officer, director, stockholder, partner, employee, or agent
of the partner or officer, director, stockholder, partner, employee or agent
of
such General Partner was selected, engaged or retained by such General Partner
with reasonable care, except with respect to any matter as to which such General
Partner shall have been finally adjudicated in any action, suit or other
proceeding not to have acted in good faith in the reasonable belief that such
Protected Person’s actions was in the best interests of USOF and except that no
Protected Person shall be relieved of any liability to which such Protected
Person would otherwise be subject by reason of willful misfeasance, gross
negligence or reckless disregard of the duties involved in the conduct of the
Protected Person’s office.
USOF
shall, to the fullest extent permitted by law, but only out of USOF assets,
indemnify and hold harmless a General Partner and each officer, director,
stockholder, partner, employee or agent thereof (including persons who
serve
at
the USOF’s request as directors, officers or trustees of another organization in
which USOF has an interest as a unitholder, creditor or otherwise) and their
respective Legal Representatives and successors (hereinafter referred to as
a
“Covered
Person”
against
all liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by any Covered Person in connection with the defense
or
disposition of any action, suit or other proceedings, whether civil or criminal,
before any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with which
such person may be or may have been threatened, while in office or thereafter,
by reason of an alleged act or omission as a General Partner or director or
officer thereof, or by reason of its being or having been such a General
Partner, director or officer, except with respect to any matter as to which
such
Covered Person shall have been finally adjudicated in any such action, suit
or
other proceeding not to have acted in good faith in the reasonable believe
that
such Covered Person’s action was in the best interest of USOF, and except that
no Covered Person shall be indemnified against any liability to USOF or limited
partners to which such Covered Person would otherwise be subject by reason
of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person’s office. Expenses,
including counsel fees so incurred by any such Covered Person, may be paid
from
time to time by USOF in advance of the final disposition of any such action,
suit or proceeding on the condition that the amounts so paid shall be repaid
to
USOF if it is ultimately determined that the indemnification of such expenses
is
not authorized hereunder.
Provisions
of Law
According
to applicable law, indemnification of the General Partner is payable only if
the
General Partner determined, in good faith, that the act, omission or conduct
that gave rise to the claim for indemnification was in the best interest of
USOF
and the act, omission or activity that was the basis for such loss, liability,
damage, cost or expense was not the result of negligence or misconduct and
such
liability or loss was not the result of negligence or misconduct by the General
Partner, and such indemnification or agreement to hold harmless is recoverable
only out of the assets of USOF and not from the members,
individually.
Provisions
of Federal and State Securities Laws
This
offering is made pursuant to federal and state securities laws. If any
indemnification of the General Partner arises out of an alleged violation of
such laws, it is subject to the following legal conditions.
Those
conditions require that no indemnification may be made in respect of any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws unless: there has been a successful adjudication on
the
merits of each count involving alleged securities law violations as to the
General Partner or other particular indemnitee, or such claim has been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
General Partner or other particular indemnitee, or a court of competent
jurisdiction approves a settlement of the claims against the General Partner
or
other agent of USOF and finds that indemnification of the settlement and related
costs should be made, provided, before seeking such approval, the General
Partner or other indemnitee must apprise the court of the position held by
regulatory agencies against such indemnification. These agencies are the SEC
and
the securities administrator of the State or States in which the plaintiffs
claim they were offered or sold membership interests.
Provisions
of the Securities Act of 1933 and NASAA Guidelines
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to the General Partner or its directors, officers, or persons
controlling USOF, USOF has been informed that SEC and the various State
administrators believe that such indemnification is against public policy as
expressed in the Securities Act of 1933 and the North American Securities
Administrators Association, Inc. (NASAA) commodity pool guidelines and is
therefore unenforceable.
Books
and Records
USOF
will
keep proper books of record and account of USOF at its office located at 1320
Harbor Bay Parkway, Suite 145, Alameda, California 94502 or such office,
including of an administrative agent, as it may subsequently designate upon
notice. These books and records are open to inspection by any person who
establishes to USOF’s satisfaction that such person is a limited partner upon
reasonable advance notice at all reasonable times during the usual business
hours of USOF.
USOF
will
keep a copy of USOF’s LP Agreement on file in its office which will be available
for inspection on reasonable advance notice at all reasonable times during
its
usual business hours by any limited partner.
Statements,
Filings, and Reports
At
the
end of each fiscal year, USOF will furnish to DTC Participants for distribution
to each person who is a unitholder at the end of the fiscal year an annual
report containing USOF’s audited financial statements and other information
about USOF. The General Partner is responsible for the registration and
qualification of the units under the federal securities laws and federal
commodities laws and any other securities and blue sky laws of the United States
or any other jurisdiction as the General Partner may select. The General Partner
is responsible for preparing all reports required by the SEC and the CFTC,
but
has entered into an agreement with Brown Brother Harriman & Co. to prepare
these reports as required by the SEC, CFTC and the American Stock Exchange
on
USOF’s behalf.
The
financial statements of USOF will be audited, as required by law and as may
be
directed by the General Partner, by an independent registered public accounting
firm designated from time to time by the General Partner. The accountants report
will be furnished by USOF to unitholders upon request. USOF will make such
elections, file such tax returns, and prepare, disseminate and file such tax
reports, as it is advised by its counsel or accountants are from time to time
required by any applicable statute, rule or regulation.
Reports
to Limited Partners
In
addition to periodic reports filed with the SEC, including annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,
all
of which can be accessed on the SEC’s website at www.sec.gov or on USOF’s
website at www.unitedstatesoilfund.com, USOF, pursuant to the LP Agreement,
will
provide the following reports to limited partners in the manner prescribed
below:
Annual
Reports.
Within
90 days after the end of each fiscal year, the General Partner shall cause
to be
delivered to each limited partner who was a limited partner at any time during
the fiscal year, an annual report containing the following:
(i)
financial statements of the partnership, including, without limitation, a
balance sheet as of the end of the partnership’s fiscal year and statements of
income, partners’ equity and changes in financial position, for such fiscal
year, which shall be prepared in accordance with accounting principles generally
accepted in the United States of America consistently applied and shall be
audited by a firm of independent certified public accountants registered with
the Public Company Accounting Oversight Board,
(ii)
a
general description of the activities of the partnership during the period
covered by the report, and
(iii)
a
report of any material transactions between the partnership and the General
Partner or any of its affiliates, including fees or compensation paid by the
partnership and the services performed by the General Partner or any such
affiliate of or such fees or compensation.
Monthly
Reports.
Within
30 days after the after the end of each month, the General Partner shall cause
to be posted on its website and, upon request, to be delivered to each limited
partner who was a limited partner at any time during the month then ended,
a
monthly report containing an account statement, which will include a statement
of income (loss) and a statement of changes in NAV, for the prescribed period.
In addition, the account statement will disclose any material business dealings
between the partnership, General Partner, commodity trading advisor (if any),
futures commission merchant, or the principals thereof that previously have
not
been disclosed in the this Prospectus or any amendment thereto, other account
statements or annual reports.
USOF
will
provide information to its unitholders to the extent required by applicable
SEC,
CFTC, and American Stock Exchange requirements. An issuer, such as USOF, of
exchange-traded securities may not always readily know the identities of the
investors who own those securities. USOF will post the same information that
would otherwise be provided in USOF’s reports to limited partners described
above including its monthly account statements, which will include, without
limitation, USOF’s NAV, on USOF’s website
(www.unitedstatesoilfund.com).
Fiscal
Year
The
fiscal year of USOF will initially be the calendar year. The General Partner
may
select an alternate fiscal year at a later date.
Governing
Law; Consent to Delaware Jurisdiction
The
rights of the General Partner, USOF, DTC (as registered owner of USOF’s global
certificate for units) and the unitholders, are governed by the laws of the
State of Delaware. The General Partner, USOF and DTC and, by accepting units,
each DTC Participant and each unitholder, consents to the jurisdiction of the
courts of the State of Delaware and any federal courts located in Delaware.
Such
consent in not required for any person to assert a claim of Delaware
jurisdiction over the General Partner or USOF.
Legal
Matters
Litigation
and Claims
Within
the past 5 years of the date of this Prospectus, there have been no material
administrative, civil or criminal actions against the General Partner,
underwriter, or any principal or affiliate of either of them. This includes
any
actions pending, on appeal, concluded, threatened, or otherwise known to
them.
Legal
Opinion
Sutherland
Asbill & Brennan LLP is counsel to advise USOF and the General Partner with
respect to the preparation of units being offered hereby and has passed upon
the
validity of the units being issued hereunder. Sutherland Asbill & Brennan
LLP has also provided the General Partner with its opinion with respect to
federal income tax matters addressed herein.
Experts
The
General Partner, with the approval of its audit committee, engaged an
independent registered public accounting firm to audit USOF. Spicer Jeffries
LLP
an independent registered public accounting firm, has audited the financial
statements of United States Oil Fund, LP, at December 31, 2005 and December
31,
2006 that appear in the annual report on Form 10-K that is incorporated by
reference. The financial statements in the 10-K were included in reliance upon
the report of Spicer Jeffries LLP, given on its authority of such firm as
experts in accounting and auditing.
Privacy
Policy
USOF
and
the General Partner collect certain nonpublic personal information about
investors from the information provided by them in certain documents, as well
as
in the course of processing transaction requests. None of this information
is
disclosed except as necessary in the course of processing creations and
redemptions and otherwise administering USOF — and then only subject to
customary undertakings of confidentiality. USOF and the General Partner do
not
disclose nonpublic personal information about investors to anyone, except as
required by law. USOF and the General Partner restrict access to the nonpublic
personal information they collect from investors to those employees who need
access to this information to provide products and services to investors. USOF
and the General Partner each maintain physical, electronic and procedural
controls to safeguard this information. These standards are reasonably designed
to (1) ensure the security and confidentiality of investors’ records and
information, (2) protect against any anticipated threats or hazards to the
security or integrity of investors’ records and information, and (3) protect
against unauthorized access to or use of investors’ records or information that
could result in substantial harm or inconvenience to any investor.
U.S.
Federal Income Tax Considerations
The
following discussion summarizes the material U.S. federal income tax
consequences of the purchase, ownership and disposition of units in USOF, and
the U.S. federal income tax treatment of USOF, as of the date hereof. This
discussion is applicable to a beneficial owner of units who purchases units
in
the offering to which this Prospectus relates, including a beneficial owner
who
purchases units from an Authorized Purchaser. Except where noted
otherwise, it deals only with units held as capital assets and does not deal
with special situations, such as those of dealers in securities or currencies,
financial institutions, tax-exempt entities, insurance companies, persons
holding units as a part of a position in a “straddle” or as part of a “hedging,”
“conversion” or other integrated transaction for federal income tax purposes,
traders in securities or commodities that elect to use a mark-to-market method
of accounting, or holders of units whose “functional currency” is not the U.S.
dollar. Furthermore, the discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the “Code”), and regulations
(“Treasury Regulations”), rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified so as
to
result in U.S. federal income tax consequences different from those discussed
below.
Persons
considering the purchase, ownership or disposition of units should consult
their
own tax advisors concerning the United States federal income tax consequences
in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction. As used herein, a “U.S. unitholder”
of a unit means a beneficial owner of a unit that is, for United States federal
income tax purposes, (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income taxation regardless of
its
source or (iv) a trust (X) that is subject to the supervision of a court within
the United States and the control of one or more United States persons as
described in section 7701(a)(30) of the Code or (Y) that has a valid election
in
effect under applicable Treasury Regulations to be treated as a United States
person. A “Non-U.S. unitholder” is a holder that is not a U.S. unitholder. If a
partnership holds our units, the tax treatment of a partner will generally
depend upon the status of the partner and the activities of the partnership.
If
you are a partner of a partnership holding our units, you should consult your
own tax advisor regarding the tax consequences.
The
General Partner of USOF has received the opinion of Sutherland Asbill &
Brennan LLP, counsel to USOF, that the material U.S. federal income tax
consequences to USOF and to U.S. unitholders and Non-U.S. unitholders will
be as
described below. In rendering its opinion, Sutherland Asbill & Brennan LLP
has relied on the facts described in this Prospectus as well as certain factual
representations made by USOF and the General Partner. The opinion of Sutherland
Asbill & Brennan LLP is not binding on the Internal Revenue Service (“IRS”),
and as a result, the IRS may not agree with the tax positions taken by USOF.
If
challenged by the IRS, USOF’s tax positions might not be sustained by the
courts. No ruling has been requested from the IRS with respect to any matter
affecting USOF or prospective investors.
EACH
PROSPECTIVE INVESTOR IS ADVISED TO CONSULT ITS OWN TAX ADVISOR AS TO HOW THE
U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN USOF APPLY TO YOU
AND
AS TO HOW APPLICABLE STATE, LOCAL OR FOREIGN TAXES APPLY TO YOU.
Tax
Status of USOF
USOF
is
organized and will be operated as a limited partnership in accordance with
the
provisions of the LP Agreement and applicable state law. Under the Code, an
entity classified as a partnership that is deemed to be a “publicly traded
partnership” is generally taxable as a corporation for federal income tax
purposes. The Code provides an exception to this general rule for a publicly
traded partnership whose gross income for each taxable year of its existence
consists of at least 90% “qualifying income” (“qualifying income exception”).
For this purpose, section 7704 defines “qualifying income” as including, in
pertinent part, interest (other than from a financial business), dividends
and
gains from the sale or disposition of capital assets held for the production
of
interest or dividends. In addition, in the case of a partnership a principal
activity of which is the buying and selling of commodities (other than as
inventory) or of futures, forwards and options with respect to commodities,
“qualifying income” includes income and gains from such commodities and futures,
forwards and options with respect to commodities. USOF and the General Partner
have represented the following to Sutherland Asbill & Brennan
LLP:
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·
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At
least 90% of USOF’s gross income for each taxable year will constitute
“qualifying income” within the meaning of Code section 7704 (as described
above);
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·
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USOF
will be organized and operated in accordance with its governing agreements
and applicable law;
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·
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USOF
has not elected, and will not elect, to be classified as a corporation
for
U.S. federal income tax purposes.
|
Based
in
part on these representations, Sutherland Asbill & Brennan LLP is of the
opinion that USOF will be classified as a partnership for federal income tax
purposes and that it will not be taxable as a corporation for such
purposes.
If
USOF
failed to satisfy the qualifying income exception in any year, other than a
failure that is determined by the IRS to be inadvertent and that is cured within
a reasonable time after discovery, USOF would be taxable as a corporation for
federal income tax purposes and would pay federal income tax on its income
at
regular corporate rates. In that event, unitholders would not report their
share
of USOF’s income or loss on their returns. In addition, distributions to
unitholders would be treated as dividends to the extent of USOF’s current and
accumulated earnings and profits. To the extent a distribution exceeded USOF’s
earnings and profits, the distribution would be treated as a return of capital
to the extent of a unitholder’s basis in its units, and thereafter as gain from
the sale of units. Accordingly, if USOF were to be taxable as a corporation,
it
would likely have a material adverse effect on the economic return from an
investment in USOF and on the value of the units.
The
remainder of this summary assumes that USOF will be classified as a partnership
for federal income tax purposes and that it will not be taxable as a
corporation.
U.S.
Unitholders
Tax
Consequences of Ownership of Units
Taxation
of USOF’s Income.
No U.S.
federal income tax will be paid by USOF on its income. Instead, USOF will file
annual information returns, and each U.S. unitholder will be required to report
on its U.S. federal income tax return its allocable share of the income, gain,
loss and deduction of USOF. For example, unitholders will take into account
their share of ordinary income realized by USOF from accruals of interest on
Treasuries and other investments, and their share of gain from Oil Futures
Contracts and Other Oil Interests. These items must be reported without regard
to the amount (if any) of cash or property the unitholder receives as a
distribution from USOF during the taxable year. Consequently, a unitholder
may
be allocated income or gain by USOF but receive no cash distribution with which
to pay its tax liability resulting from the allocation, or may receive a
distribution that is insufficient to pay such liability. Because the General
Partner currently does not intend to make distributions, it is likely that
in
any year USOF realizes net income and/or gain that a U.S. unitholder will be
required to pay taxes on its allocable share of such income or gain from sources
other than USOF distributions.
Allocations
of USOF’s Profit and Loss.
Under
Code section 704, the determination of a partner’s distributive share of any
item of income, gain, loss, deduction or credit is governed by the applicable
organizational document unless the allocation provided by such document lacks
“substantial economic effect.” An allocation that lacks substantial economic
effect nonetheless will be respected if it is in accordance with the partners’
interests in the partnership, determined by taking into account all facts and
circumstances relating to the economic arrangements among the
partners.
In
general, USOF will apply a monthly closing-of-the-books convention in
determining allocations of economic profit or loss to unitholders. Income,
gain,
loss and deduction will be determined on a monthly “mark-to-market” basis,
taking into account our accrued income and deductions and realized and
unrealized gains and losses for the month. These items will be allocated among
the holders of units in proportion to the number of units owned by them as
of
the close of business on the last business day of the month. Items of taxable
income, deduction, gain, loss and credit recognized by USOF for federal income
tax purposes for any taxable year will be allocated among holders in a manner
that equitably reflects the allocation of economic profit or loss. USOF intends
to make the election permitted by section 754 of the Code, which election will
be irrevocable without the consent of the Service. The effect of this election
will be that when a secondary market sale of our units occur, we will adjust
the
purchaser’s proportionate share of the tax basis of our assets to fair market
value, as reflected in the price paid for the units, as if the purchaser had
directly acquired an interest in our assets. The section 754 election is
intended to eliminate disparities between a partner’s basis in its partnership
interest and its share of the tax bases of the partnership’s assets, so that the
partner’s allocable share of taxable gain or loss on a disposition of an asset
will correspond to its share of the appreciation or depreciation in the value
of
the asset since it acquired its interest. Depending on the price paid for units
and the tax bases of USOF’s assets at the time of the purchase, the effect of
the section 754
election on a purchaser of units may be favorable or unfavorable.
USOF
will
apply certain assumptions and conventions in determining and allocating items
for tax purposes in order to reduce the complexity and costs of administration.
The General Partner believes that application of these assumptions and
conventions will be consistent with the intent of the partnership provisions
of
the Code, and that the resulting allocations will have substantial economic
effect or otherwise will be respected as being in accordance with unitholders’
interests in USOF for federal income tax purposes. However, the Code and
Treasury Regulations do not expressly permit adoption of these assumptions
and
conventions, and Sutherland Asbill & Brennan LLP is therefore unable to
opine on the validity of our allocation method. It is possible that the IRS
could successfully challenge this method and require a unitholder to report
a
greater or lesser share of items of income, gain, loss, deduction, or credit
than if our method were respected. The General Partner is authorized to revise
our allocation method to conform to any method permitted under future Treasury
Regulations.
The
assumptions and conventions used in making tax allocations may cause a
unitholder to be allocated more or less income or loss for federal income tax
purposes than its proportionate share of the economic income or loss realized
by
USOF during the period it held its units. This “mismatch” between taxable and
economic income or loss in some cases may be temporary, reversing itself in
a
later year when the units are sold, but could be permanent. For example, a
unitholder could be allocated income accruing before it purchased its units,
resulting in an increase in the basis of the units (see “Tax basis in units”,
below). On a subsequent disposition of the units, the additional basis might
produce a capital loss the deduction of which may be limited (see “Limitations
on Deductibility of Losses and Certain Expenses”,
below).
Mark
to market of certain exchange-traded contracts.
For
federal income tax purposes, USOF generally will be required to use a
“mark-to-market” method of accounting under which unrealized gains and losses on
instruments constituting “section 1256 contracts” are recognized currently. A
section 1256 contract is defined as: (1) a futures contract that is traded
on or
subject to the rules of a national securities exchange which is registered
with
the SEC, a domestic board of trade designated as a contract market by the CFTC,
or any other board of trade or exchange designated by the Secretary of the
Treasury, and with respect to which the amount required to be deposited and
the
amount that may be withdrawn depends on a system of “marking to market”; (2) a
forward contract on exchange-traded foreign currencies, where the contracts
are
traded in the interbank market; (3) a non-equity option traded on or subject
to
the rules of a qualified board or exchange; (4) a dealer equity option; or
(5) a
dealer securities futures contract.
Under
these rules, section 1256 contracts held by USOF at the end of each taxable
year, including for example Oil Futures Contracts and options on Oil Futures
Contracts traded on a U.S. exchange or board of trade or certain foreign
exchanges, will be treated as if they were sold by USOF for their fair market
value on the last business day of the taxable year. A unitholder’s distributive
share of USOF’s net gain or loss with respect to each section 1256 contract
generally will be treated as long-term capital gain or loss to the extent of
60
percent thereof, and as short-term capital gain or loss to the extent of 40
percent thereof, without regard to the actual holding period.
Limitations
on Deductibility of Losses and Certain Expenses.
A
number of different provisions of the Code may defer or disallow the deduction
of losses or expenses allocated to you by USOF, including but not limited to
those described below.
A
unitholder’s deduction of its allocable share of any loss of USOF will be
limited to the lesser of (1) the tax basis in its units or (2) in the case
of a
unitholder that is an individual or a closely held corporation, the amount
which
the unitholder is considered to have “at risk” with respect to our activities.
In general, the amount at risk will be your invested capital plus your share
of
any recourse debt of USOF for which you are liable. Losses in excess of the
amount at risk must be deferred until years in which USOF generates additional
taxable income against which to offset such carryover losses or until additional
capital is placed at risk.
Noncorporate
taxpayers are permitted to deduct capital losses only to the extent of their
capital gains for the taxable year plus $3,000 of other income. Unused capital
losses can be carried forward and used to offset capital gains in future years.
In addition, a noncorporate taxpayer may elect to carry back net losses on
section 1256 contracts to each of the three preceding years and use them to
offset section 1256 contract losses in those years, subject to certain
limitations. Corporate taxpayers generally may deduct capital losses only to
the
extent of capital gains, subject to special carryback and carryforward
rules.
Otherwise
deductible expenses incurred by noncorporate taxpayers constituting
“miscellaneous itemized deductions,” generally including investment-related
expenses (other than interest and certain other specified expenses), are
deductible only to the extent they exceed 2 percent of the taxpayer’s adjusted
gross income for the year.
Although the matter is not free from doubt, we believe management fees we pay
to
the General Partner and other expenses we incur will constitute
investment-related expenses subject to the miscellaneous itemized deduction
limitation, rather than expenses incurred in connection with a trade or
business.
Noncorporate
unitholders generally may deduct “investment interest expense” only to the
extent of their “net investment income.” Investment interest expense of a
unitholder will generally include any interest accrued by USOF and any interest
paid or accrued on direct borrowings by a unitholder to purchase or carry its
units, such as interest with respect to a margin account. Net investment income
generally includes gross income from property held for investment (including
“portfolio income” under the passive loss rules but not, absent an election,
long-term capital gains or certain qualifying dividend income) less deductible
expenses other than interest directly connected with the production of
investment income.
To
the
extent that we allocate losses or expenses to you that must be deferred or
disallowed as a result of these or other limitations in the Code, you may be
taxed on income in excess of your economic income or distributions (if any)
on
your units. As one example, you could be allocated and required to pay tax
on
your share of interest income accrued by USOF for a particular taxable year,
and
in the same year allocated a share of a capital loss that you cannot deduct
currently because you have insufficient capital gains against which to offset
the loss. As another example, you could be allocated and required to pay tax
on
your share of interest income and capital gain for a year, but be unable to
deduct some or all of your share of management fees and/or margin account
interest incurred by you with respect to your units. Unitholders are urged
to
consult their own professional tax advisors regarding the effect of limitations
under the Code on your ability to deduct your allocable share of USOF’s losses
and expenses.
Tax
Basis of Units
A
unitholder’s tax basis in its units is important in determining (1) the amount
of taxable gain it will realize on the sale or other disposition of its units,
(2) the amount of non-taxable distributions that it may receive from USOF and
(3) its ability to utilize its distributive share of any losses of USOF on
its
tax return. A unitholder’s initial tax basis of its units will equal its cost
for the units plus its share of USOF’s liabilities (if any) at the time of
purchase. In general, a unitholder’s “share” of those liabilities will equal the
sum of (i) the entire amount of any otherwise nonrecourse liability of USOF
as
to which the unitholder or an affiliate is the creditor (a “partner nonrecourse
liability”) and (ii) a pro
rata
share of
any nonrecourse liabilities of USOF that are not partner nonrecourse liabilities
as to any unitholder.
A
unitholder’s tax basis in its units generally will be (1) increased by (a) its
allocable share of USOF’s taxable income and gain and (b) any additional
contributions by the unitholder to USOF and (2) decreased (but not below zero)
by (a) its allocable share of USOF’s tax deductions and losses and (b) any
distributions by USOF to the unitholder. For this purpose, an increase in a
unitholder’s share of USOF’s liabilities will be treated as a contribution of
cash by the unitholder to USOF and a decrease in that share will be treated
as a
distribution of cash by USOF to the unitholder. Pursuant to certain IRS rulings,
a unitholder will be required to maintain a single, “unified” basis in all units
that it owns. As a result, when a unitholder that acquired its units at
different prices sells less than all of its units, such unitholder will not
be
entitled to specify particular units ( e.g. , those with a higher basis) as
having been sold. Rather, it must determine its gain or loss on the sale by
using an “equitable apportionment” method to allocate a portion of its unified
basis in its units to the units sold.
Treatment
of Fund Distributions.
If USOF
makes non-liquidating distributions to unitholders, such distributions generally
will not be taxable to the unitholders for federal income tax purposes except
to
the extent that the sum of (i) the amount of cash and (ii) the fair market
value
of marketable securities distributed exceeds the unitholder’s adjusted basis of
its interest in USOF immediately before the distribution. Any cash distributions
in excess of a unitholder’s tax basis generally will be treated as gain from the
sale or exchange of units.
Constructive
Termination of the Partnership.
We will
be considered to have been terminated for tax purposes if there is a sale or
exchange of 50 percent or more of the total interests in our units within a
12-month period. A termination would result in the closing of our taxable year
for all unitholders. In the case of a unitholder reporting on a taxable year
other than a fiscal year ending December 31, the closing of our taxable year
may
result in more than 12 months of our taxable income or loss being includable
in
its taxable income for the year of termination. We would be required to make
new
tax elections after a termination. A termination could result in tax penalties
if we were unable to determine that the termination had occurred. Moreover,
a
termination might either accelerate the application of, or subject us to, any
tax legislation enacted before the termination.
Tax
Consequences of Disposition of Units
If
a
unitholder sells it units, it will recognize gain or loss equal to the
difference between the amount realized and its adjusted tax basis for the units
sold. A unitholder’s amount realized will be the sum of the cash or the fair
market value of other property received plus its share of any USOF debt
outstanding.
Gain
or
loss recognized by a unitholder on the sale or exchange of units held for more
than one year will generally be taxable as long-term capital gain or loss;
otherwise, such gain or loss will generally be taxable as short-term capital
gain or loss. A special election is available under the Treasury Regulations
that will allow unitholders to identify and use the actual holding periods
for
the units sold for purposes of determining whether the gain or loss recognized
on a sale of units will give rise long-term or short-term capital gain or loss.
It is expected that most unitholders will be eligible to elect, and generally
will elect, to identify and use the actual holding period for units sold. If
a
unitholder fails to make the election or is not able to identify the holding
periods of the units sold, the unitholder will have a split holding period
in
the units sold. Under such circumstances, a unitholder will be required to
determine its holding period in the units sold by first determining the portion
of its entire interest in USOF that would give rise to long-term capital gain
or
loss if its entire interest were sold and the portion that would give rise
to
short-term capital gain or loss if the entire interest were sold. The unitholder
would then treat each unit sold as giving rise to long-term capital gain or
loss
and short-term capital gain or loss in the same proportions as if it had sold
its entire interest in USOF.
Under
Section 751 of the Code, a portion of a unitholder’s gain or loss from the sale
of units (regardless of the holding period for such units), will be separately
computed and taxed as ordinary income or loss to the extent attributable to
“unrealized receivables” or “inventory” owned by USOF. The term “unrealized
receivables” includes, among other things, market discount bonds and short-term
debt instruments to the extent such items would give rise to ordinary income
if
sold by USOF.
If
some
or all of your units are lent by your broker or other agent to a third party
—
for example, for use by the third party in covering a short sale — you may be
considered as having made a taxable disposition of the loaned units, in which
case —
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you
may recognize taxable gain or loss to the same extent as if you had
sold
the units for cash;
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any
of USOF’s income, gain, loss or deduction allocable to those units during
the period of the loan will not be reportable by you for tax purposes;
and
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any
distributions you receive with respect to the units will be fully
taxable,
most likely as ordinary income.
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Unitholders
desiring to avoid these and other possible consequences of a deemed disposition
of their units should consider modifying any applicable brokerage account
agreements to prohibit the lending of their units.
Other
Tax Matters
Information
Reporting.
We
intend to report tax information to the beneficial owners of units. Unitholders
who have become additional limited partners will be treated as partners for
federal income tax purposes. The IRS has ruled that assignees of partnership
interests who have not been admitted to a partnership as partners but who have
the capacity to exercise substantial dominion and control over the assigned
partnership interests will be considered partners for federal income tax
purposes. On the basis of such ruling, except as otherwise provided herein,
we
intend to treat the following persons as partners for federal income tax
purposes: (1) assignees of units who are pending admission as limited partners,
and (2) unitholders whose units are held in street name or by another nominee
and who have the right to direct the nominee in the exercise of all substantive
rights attendant to the ownership of their units. USOF will furnish unitholders
each year with tax information on IRS Schedule K-1 (Form 1065), which will
be
used by the unitholders in completing their tax returns.
Persons
who hold an interest in USOF as a nominee for another person are required to
furnish to us the following information: (1) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (2) whether
the
beneficial owner is (a) a person that is not a U.S. person, (b) a foreign
government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing, or (c) a tax-exempt entity; (3)
the
amount and description of units acquired or transferred for the beneficial
owner; and (4) certain information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales. Brokers and
financial institutions are
required to furnish additional information, including whether they are U.S.
persons and certain information on units they acquire, hold or transfer for
their own account. A penalty of $50 per failure, up to a maximum of $100,000
per
calendar year, is imposed by the Internal Revenue Code of 1986, as amended
for
failure to report such information to us. The nominee is required to supply
the
beneficial owner of the units with the information furnished to us.
Partnership
Audit Procedures.
The IRS
may audit the federal income tax returns filed by USOF. Adjustments resulting
from any such audit may require each unitholder to adjust a prior year’s tax
liability and could result in an audit of the unitholder’s own return. Any audit
of a unitholder’s return could result in adjustments of non-partnership items as
well as USOF items. Partnerships are generally treated as separate entities
for
purposes of federal tax audits, judicial review of administrative adjustments
by
the IRS, and tax settlement proceedings. The tax treatment of partnership items
of income, gain, loss and deduction are determined at the partnership level
in a
unified partnership proceeding rather than in separate proceedings with the
unitholders. The Code provides for one unitholder to be designated as the “tax
matters partner” and represent the partnership purposes of these proceedings.
The LP Agreement appoints the General Partner as the tax matters partner of
USOF.
Tax
Shelter Disclosure Rules.
In
certain circumstances the Code and Treasury Regulations require that the IRS
be
notified of taxable transactions through a disclosure statement attached to
a
taxpayer’s United States federal income tax return. In addition, certain
“material advisers” must maintain a list of persons participating in such
transactions and furnish the list to the IRS upon written request. These
disclosure rules may apply to transactions irrespective of whether they are
structured to achieve particular tax benefits. They could require disclosure
by
USOF or unitholders (1) if a unitholder incurs a loss in excess a specified
threshold from a sale or redemption of its units, (2) if USOF engages in
transactions producing differences between its taxable income and its income
for
financial reporting purposes, or (3) possibly in other circumstances. While
these rules generally do not require disclosure of a loss recognized on the
disposition of an asset in which the taxpayer has a “qualifying basis”
(generally a basis equal to the amount of cash paid by the taxpayer for such
asset), they apply to a loss recognized with respect to interests in a
passthrough entity, such as the units, even if the taxpayer’s basis in such
interests is equal to the amount of cash it paid. In addition, under recently
enacted legislation, significant penalties may be imposed in connection with
a
failure to comply with these reporting requirements. Investors
should consult their own tax advisors concerning the application of these
reporting requirements to their specific situation.
Tax-Exempt
Organizations.
Subject
to numerous exceptions, qualified retirement plans and individual retirement
accounts, charitable organizations and certain other organizations that
otherwise are exempt from federal income tax (collectively “exempt
organizations”) nonetheless are subject to the tax on unrelated business taxable
income (“UBTI”). Generally, UBTI means the gross income derived by an exempt
organization from a trade or business that it regularly carries on, the conduct
of which is not substantially related to the exercise or performance of its
exempt purpose or function, less allowable deductions directly connected with
that trade or business. If USOF were to regularly carry on (directly or
indirectly) a trade or business that is unrelated with respect to an exempt
organization unitholder, then in computing its UBTI, the unitholder must include
its share of (1) USOF’s gross income from the unrelated trade or business,
whether or not distributed, and (2) USOF’s allowable deductions directly
connected with that gross income.
UBTI
generally does not include dividends, interest, or payments with respect to
securities loans and gains from the sale of property (other than property held
for sale to customers in the ordinary course of a trade or business).
Nonetheless, income on, and gain from the disposition of, “debt-financed
property” is UBTI. Debt-financed property generally is income-producing property
(including securities), the use of which is not substantially related to the
exempt organization’s tax-exempt purposes, and with respect to which there is
“acquisition indebtedness” at any time during the taxable year (or, if the
property was disposed of during the taxable year, the 12-month period ending
with the disposition). Acquisition indebtedness includes debt incurred to
acquire property, debt incurred before the acquisition of property if the debt
would not have been incurred but for the acquisition, and debt incurred
subsequent to the acquisition of property if the debt would not have been
incurred but for the acquisition and at the time of acquisition the incurrence
of debt was foreseeable. The portion of the income from debt-financed property
attributable to acquisition indebtedness is equal to the ratio of the average
outstanding principal amount of acquisition indebtedness over the average
adjusted basis of the property for the year. USOF currently does not anticipate
that it will borrow money to acquire investments; however, USOF cannot be
certain that it will not borrow for such purpose in the future. In addition,
an
exempt organization unitholder that incurs acquisition indebtedness to purchase
its units in USOF may have UBTI.
The
federal tax rate applicable to an exempt organization unitholder on its UBTI
generally will be either the corporate or trust tax rate, depending upon the
unitholder’s form of organization. USOF may report to each such unitholder
information as to the portion, if any, of the unitholder’s income and gains from
USOF for any year that will be treated as UBTI; the calculation of that amount
is complex, and there can be no assurance that USOF’s calculation of UBTI will
be accepted by the Service. An exempt organization unitholder will be required
to make payments of estimated federal income tax with respect to its
UBTI.
Regulated
Investment Companies.
Under
recently enacted legislation, interests in and income from “qualified publicly
traded partnerships” satisfying certain gross income tests are treated as
qualifying assets and income, respectively, for purposes of determining
eligibility for regulated investment company (“RIC”) status. A RIC may invest up
to 25% of its assets in interests in a qualified publicly traded partnership.
The determination of whether a publicly traded partnership such as USOF is
a
qualified publicly traded partnership is made on an annual basis. USOF expects
to be a qualified publicly traded partnership in each of its taxable years.
However, such qualification is not assured.
Non-U.S.
Unitholders
Generally,
non-U.S. persons who derive U.S. source income or gain from investing or
engaging in a U.S. business are taxable on two categories of income. The first
category consists of amounts that are fixed, determinable, annual and periodic
income, such as interest, dividends and rent that are not connected with the
operation of a U.S. trade or business (“FDAP”). The second category is income
that is effectively connected with the conduct of a U.S. trade or business
(“ECI”). FDAP income (other than interest that is considered “portfolio
interest”) is generally subject to a 30 percent withholding tax, which may be
reduced for certain categories of income by a treaty between the U.S. and the
recipient’s country of residence. In contrast, ECI is generally subject to U.S.
tax on a net basis at graduated rates upon the filing of a U.S. tax return.
Where a non-U.S. person has ECI as a result of an investment in a partnership,
the ECI is subject to a withholding tax at a rate of 35 percent for both
individual and corporate unitholders.
Withholding
on Allocations and Distributions.
The
Code provides that a non-U.S. person who is a partner in a partnership that
is
engaged in a U.S. trade or business during a taxable year will also be
considered to be engaged in a U.S. trade or business during that year.
Classifying an activity by a partnership as an investment or an operating
business is a factual determination. Under certain safe harbors in the Code,
an
investment fund whose activities consist of trading in stocks, securities,
or
commodities for its own account generally will not be considered to be engaged
in a U.S. trade or business unless it is a dealer is such stocks, securities,
or
commodities. This safe harbor applies to investments in commodities only if
the
commodities are of a kind customarily dealt in on an organized commodity
exchange and if the transaction is of a kind customarily consummated at such
place. Although the matter is not free from doubt, USOF believes that the
activities directly conducted by USOF will not result in USOF being engaged
in a
trade or business within in the United States. However, there can be no
assurance that the IRS would not successfully assert that USOF’s activities
constitute a U.S. trade or business.
In
the
event that USOF’s activities were considered to constitute a U.S. trade or
business, USOF would be required to withhold at the highest rate specified
in
Code section 1 (currently 35 percent) on allocations of our income to non-U.S.
unitholders. A non-U.S. unitholder with ECI will generally be required to file
a
U.S. federal income tax return, and the return will provide the non-U.S.
unitholder with the mechanism to seek a refund of any withholding in excess
of
such unitholder’s actual U.S. federal income tax liability. Any amount withheld
by USOF will be treated as a distribution to the non-U.S.
unitholder.
If
USOF
is not treated as engaged in a U.S. trade or business, a non-U.S. unitholder
may
nevertheless be treated as having FDAP income, which would be subject to a
30
percent withholding tax (possibly subject to reduction by treaty), with respect
to some or all of its distributions from USOF or its allocable share of USOF
income. Amounts withheld on behalf of a non-U.S. unitholder will be treated
as
being distributed to such unitholder.
To
the
extent any interest income allocated to a non-U.S. unitholder that otherwise
constitutes FDAP is considered “portfolio interest,” neither the allocation of
such interest income to the non-U.S. unitholder nor a subsequent distribution
of
such interest income to the non-U.S. unitholder will be subject to withholding,
provided that the non-U.S. unitholder is not otherwise engaged in a trade or
business in the U.S. and provides USOF with a timely and properly completed
and
executed IRS Form W-8BEN or other applicable form. In general, “portfolio
interest”
is interest paid on debt obligations issued in registered form, unless the
“recipient” owns 10 percent or more of the voting power of the
issuer.
USOF
expects that most of its interest income will qualify as “portfolio interest.”
In order for USOF to avoid withholding on any interest income allocable to
non-U.S. unitholders that would qualify as “portfolio interest,” it will be
necessary for all non-U.S. unitholders to provide USOF with a timely and
properly completed and executed Form W-8BEN (or other applicable form). If
a
non-U.S. unitholder fails to provide a properly completed Form W-8BEN, the
General Partner may request that the non-U.S. unitholder provide, within 15
days
after the request by the General Partner, a properly completed Form W-8BEN.
If a
non-U.S. unitholder fails to comply with this request, the units owned by such
non-U.S. unitholder will be subject to redemption.
Gain
from Sale of Units.
Gain
from the sale or exchange of the units may be taxable to a non-U.S. unitholder
if the non-U.S. unitholder is a nonresident alien individual who is present
in
the U.S. for 183 days or more during the taxable year. In such case, the
nonresident alien individual will be subject to a 30 percent withholding tax
on
the amount of such individual’s gain.
Branch
Profits Tax on Corporate Non-U.S. Unitholders.
In
addition to the taxes noted above, any non-U.S. unitholders that are
corporations may also be subject to an additional tax, the branch profits tax,
at a rate of 30 percent. The branch profits tax is imposed on a non-U.S.
corporation’s dividend equivalent amount, which generally consists of the
corporation’s after-tax earnings and profits that are effectively connected with
the corporation’s U.S. trade or business but are not reinvested in a U.S.
business. This tax may be reduced or eliminated by an income tax treaty between
the United States and the country in which the non-U.S. unitholder is a
“qualified resident.”
Prospective
non-U.S. unitholders should consult their tax advisor with regard to these
and
other issues unique to non-U.S. unitholders.
Backup
Withholding
USOF
may
be required to withhold U.S. federal income tax (“backup withholding”) at a rate
of 28 percent from all taxable distributions payable to: (1) any unitholder
who
fails to furnish USOF with his, her or its correct taxpayer identification
number or a certificate that the unitholder is exempt from backup withholding,
and (2) any unitholder with respect to whom the IRS notifies USOF that the
unitholder has failed to properly report certain interest and dividend income
to
the IRS and to respond to notices to that effect. Backup withholding is not
an
additional tax and may be returned or credited against a taxpayer’s regular
federal income tax liability if appropriate information is provided to the
IRS.
Other
Tax Considerations
In
addition to federal income taxes, unitholders may be subject to other taxes,
such as state and local income taxes, unincorporated business taxes, business
franchise taxes, and estate, inheritance or intangible taxes that may be imposed
by the various jurisdictions in which USOF does business or owns property or
where the unitholders reside. Although an analysis of those various taxes is
not
presented here, each prospective unitholder should consider their potential
impact on its investment in USOF. It is each unitholder’s responsibility to file
the appropriate U.S. federal, state, local, and foreign tax returns. Sutherland
Asbill & Brennan LLP has not provided an opinion concerning any aspects of
state, local or foreign tax or U.S. federal tax other than those U.S. federal
income tax issues discussed herein.
Investment
By ERISA Accounts
General
Most
employee benefit plans and individual retirement accounts (“IRAs”) are subject
to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or
the Internal Revenue Code of 1986, as amended (the “Code”), or both. This
section discusses certain considerations that arise under ERISA and the Code
that a fiduciary of an employee benefit plan as defined in ERISA or a plan
as
defined in Section 4975 of the Code who has investment discretion should take
into account before deciding to invest the plan’s assets in USOF. Employee
benefit plans and plans are collectively referred to below as plans, and
fiduciaries with investment discretion are referred to below as plan
fiduciaries.
This
summary is based on the provisions of ERISA and the Code as of the date hereof.
This summary is not intended to be complete, but only to address certain
questions under ERISA and the Code likely to be raised by your advisors. The
summary does not include state or local law.
Potential
plan investors are urged to consult with their own professional advisors
concerning the appropriateness of an investment in USOF and the manner in which
units should be purchased.
Special
Investment Considerations
Each
plan
fiduciary must consider the facts and circumstances that are relevant to an
investment in USOF, including the role that an investment in USOF would play
in
the plan’s overall investment portfolio. Each plan fiduciary, before deciding to
invest in USOF, must be satisfied that the investment is prudent for the plan,
that the investments of the plan are diversified so as to minimize the risk
of
large losses and that an investment in USOF complies with the terms of the
plan.
USOF
and Plan Assets
A
regulation issued under ERISA contains rules for determining when an investment
by a plan in an equity interest of a limited partnership will result in the
underlying assets of the partnership being deemed plan assets for purposes
of
ERISA and Section 4975 of the Code. Those rules provide that assets of a limited
partnership will not be plan assets of a plan that purchases an equity interest
in the partnership if the equity interest purchased is a publicly-offered
security. If the underlying assets of a partnership are considered to be assets
of any plan for purposes of ERISA or Section 4975 of the Code, the operations
of
that partnership would be subject to and, in some cases, limited by, the
provisions of ERISA and Section 4975 of the Code.
The
publicly-offered security exception described above applies if the equity
interest is a security that is:
1.
freely
transferable (determined based on the relevant facts and
circumstances);
2.
part
of a class of securities that is widely held (meaning that the class of
securities is owned by 100 or more investors independent of the issuer and
of
each other); and
3.
either
(a) part of a class of securities registered under Section 12(b) or 12(g) of
the
Exchange Act or (b) sold to the plan as part of a public offering pursuant
to an
effective registration statement under the Securities Act of 1933 and the class
of which such security is a part is registered under the Exchange Act within
120
days (or such later time as may be allowed by the SEC) after the end of the
fiscal year of the issuer in which the offering of such security
occurred.
The
plan
asset regulations under ERISA state that the determination of whether a security
is freely transferable is to be made based on all the relevant facts and
circumstances. In the case of a security that is part of an offering in which
the minimum investment is $10,000 or less, the following requirements, alone
or
in combination, ordinarily will not affect a finding that the security is freely
transferable: (1) a requirement that no transfer or assignment of the security
or rights relating to the security be made that would violate any federal or
state law, (2) a requirement that no transfer or assignment be made without
advance written notice given to the entity that issued the security, and (3)
any
restriction on the substitution of assignee as a limited partner of a
partnership, including a general partner consent requirement, provided that
the
economic benefits of ownership of the assignor may be transferred or assigned
without regard to such restriction or consent (other than compliance with any
of
the foregoing restrictions).
The
General Partner believes that the conditions described above will be satisfied
with respect to the units. The General Partner believes that the units should
therefore constitute publicly-offered securities, and the underlying assets
of
USOF should not be considered to constitute plan assets of any plan that
purchases units.
Prohibited
Transactions
ERISA
and
the Code generally prohibit certain transactions involving the plan and persons
who have certain specified relationships to the plan.
In
general, units may not be purchased with the assets of a plan if the General
Partner, the clearing brokers, the trading advisors (if any), or any of their
affiliates, agents or employees either:
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exercise
any discretionary authority or discretionary control with respect
to
management of the plan;
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exercise
any authority or control with respect to management or disposition
of the
assets of the plan;
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render
investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of the
plan;
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have
any authority or responsibility to render investment advice with
respect
to any monies or other property of the plan;
or
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have
any discretionary authority or discretionary responsibility in the
administration of the plan.
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Also,
a
prohibited transaction may occur under ERISA or the Code when circumstances
indicate that (1) the investment in a unit is made or retained for the purpose
of avoiding application of the fiduciary standards of ERISA, (2) the investment
in a unit constitutes an arrangement under which USOF is expected to engage
in
transactions that would otherwise be prohibited if entered into directly by
the
plan purchasing the unit, (3) the investing plan, by itself, has the authority
or influence to cause USOF to engage in such transactions, or (4) a person
who
is prohibited from transacting with the investing plan may, but only with the
aid of certain of its affiliates and the investing plan, cause USOF to engage
in
such transactions with such person.
Special
IRA Rules
IRAs
are
not subject to ERISA’s fiduciary standards, but are subject to their own rules,
including the prohibited transaction rules of Section 4975 of the Code, which
generally mirror ERISA’s prohibited transaction rules. For example, IRAs are
subject to special custody rules and must maintain a qualifying IRA custodial
arrangement separate and distinct from USOF and its custodial arrangement.
Otherwise, if a separate qualifying custodial arrangement is not maintained,
an
investment in the units will be treated as a distribution from the IRA. Second,
IRAs are prohibited from investing in certain commingled investments, and the
General Partner makes no representation regarding whether an investment in
units
is an inappropriate commingled investment for an IRA. Third, in applying the
prohibited transaction provisions of Section 4975 of the Code, in addition
to
the rules summarized above, the individual for whose benefit the IRA is
maintained is also treated as the creator of the IRA. For example, if the owner
or beneficiary of an IRA enters into any transaction, arrangement, or agreement
involving the assets of his or her IRA to benefit the IRA owner or beneficiary
(or his or her relatives or business affiliates) personally, or with the
understanding that such benefit will occur, directly or indirectly, such
transaction could give rise to a prohibited transaction that is not exempted
by
any available exemption. Moreover, in the case of an IRA, the consequences
of a
non-exempt prohibited transaction are that the IRA’s assets will be treated as
if they were distributed, causing immediate taxation of the assets (including
any early distribution penalty tax applicable under Section 72 of the Code),
in
addition to any other fines or penalties that may apply.
Exempt
Plans
Certain
employee benefit plans may be governmental plans or church plans. Governmental
plans and church plans are generally not subject to ERISA, nor do the
above-described prohibited transaction provisions described above apply to
them.
These plans are, however, subject to prohibitions against certain related-party
transactions under Section 503 of the Code, which operate similar to the
prohibited transaction rules described above. In addition, the fiduciary of
any
governmental or church plan must consider any applicable state or local laws
and
any restrictions and duties of common law imposed upon the plan.
No
view
is expressed as to whether an investment in USOF (and any continued investment
in USOF), or the operation and administration of USOF, is appropriate or
permissible for any governmental plan or church plan under Code Section 503,
or
under any state, county, local or other law relating to that type of
plan.
Allowing
an investment in USOF is not to be construed as a representation by USOF, its
General Partner, any trading advisor, any clearing broker, the Marketing Agent
or legal counsel or other advisors to such parties or any other party that
this
investment meets some or all of the relevant legal requirements with respect
to
investments by any particular plan or that this investment is appropriate for
any such particular plan. The person with investment discretion should consult
with the plan’s attorney and financial advisors as to the propriety of an
investment in USOF in light of the circumstances of the particular plan, current
tax law and ERISA.
INFORMATION
YOU SHOULD KNOW
This
Prospectus contains information you should consider when making an investment
decision about the units. You may rely on the information contained in this
Prospectus. Neither USOF nor its General Partner has authorized any person
to
provide you with different information and, if anyone provides you with
different or inconsistent information, you should not rely on it. This
Prospectus is not an offer to sell the units in any jurisdiction where the
offer
or sale of the units is not permitted.
The
information contained in this Prospectus was obtained from us and other sources
believed by us to be reliable.
You
should rely only on the information contained in this Prospectus or any
applicable prospectus supplement or any information incorporated by reference
to
this Prospectus. We have not authorized anyone to provide you with any
information that is different. If you receive any unauthorized information,
you
must not rely on it. You should disregard anything we said in an earlier
document that is inconsistent with what is included in this Prospectus or any
applicable prospectus supplement or any information incorporated by reference
to
this Prospectus. Where the context requires, when we refer to this “Prospectus,”
we are referring to this Prospectus and (if applicable) the relevant prospectus
supplement.
You
should not assume that the information in this Prospectus or any applicable
prospectus supplement is current as of any date other than the date on the
front
page of this Prospectus or the date on the front page of any applicable
prospectus supplement.
We
include cross references in this Prospectus to captions in these materials
where
you can find further related discussions. The table of contents tells you where
to find these captions.
SUMMARY
OF PROMOTIONAL AND SALES MATERIAL
USOF
has
or intends to use the following sales material it has prepared:
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USOF’s
website,
www.unitedstatesoilfund.com;
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Press
release dated the effective date of USOF’s initial registration statement;
and
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Brochure
dated April 3, 2006.
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The
materials described above are not a part of this Prospectus or the registration
statement of which this Prospectus is a part and have been submitted to the
staff of the Securities and Exchange Commission for their review pursuant to
Industry Guide 5.
PATENT
APPLICATION PENDING
A
patent
application by the General Partner directed to the creation and operation of
the
United States Oil Fund, LP is pending and the General Partner’s registration of
USOF’s trademarks is in process at the United States Patent and Trademark
Office.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the Securities and Exchange Commission a Post-Effective Amendment
on
Form S-3 to Form S-1 under the Securities Act, with respect to the units offered
hereby. This prospectus is part of such registration statement. This prospectus
does not contain all the information set forth in the registration statement
and
the exhibits and schedules thereto, to which reference is hereby made for
further information. This prospectus does not contain all the information
included in a registration statement because we have omitted parts of the
registration statement as permitted by the SEC’s rules and regulations. For
further information about us, you should refer to the registration statement
and
the exhibits filed with the registration statement. You may inspect and copy
all
or any portion of the registration statement or any reports, proxy statements,
or other information at the Securities and Exchange Commission’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can request
copies of these documents by writing to the Securities and Exchange Commission
and paying a fee for the copying cost. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for more information about the operation of the
public reference room. In addition, such information may be accessed
electronically at the Securities and Exchange Commission’s web site on the
Internet at www.sec.gov.
INCORPORATION
BY REFERENCE OF CERTAIN INFORMATION
We
are a
reporting company and file annual, quarterly and current reports and other
information with the Securities and Exchange Commission. The rules of the
Securities and Exchange Commission allow us to “incorporate by reference”
information that we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus, and
information that we file later with the Securities and Exchange Commission
will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings we will make with the
Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d)
of
the Securities Exchange Act of 1934 from the date of this Post-Effective
Amendment until our offering is completed:
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Annual
Report on Form 10-K for the year ended December 31, 2006 filed March
30,
2007;
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Current
Reports on Form 8-K filed January 19, 2007 (as amended on January
19,
2007), January 29, 2007, February 14, 2007, March 19, 2007, April
4, 2007
and April 20, 2007, and
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·
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The
description of our units contained in the registration statement
on Form
8-A filed with the Securities and Exchange Commission on March 13,
2006
pursuant to Section 12(b) of the Securities Exchange Act of 1934,
together
with all amendments or reports filed for the purpose of updating
such
description.
|
We
will
provide to each person to whom a prospectus is delivered, including any
beneficial owner, a copy of these filings at no cost, upon written or oral
request at the following address or telephone number:
United
States Oil Fund, LP
Attention:
Nicholas D. Gerber
1320
Harbor Bay Parkway, Suite 145
Alameda,
CA 94502
(510)
522-3336
STATEMENT
OF ADDITIONAL INFORMATION
UNITED
STATES OIL FUND, LP
Before
you decide whether to invest, you should read this entire Prospectus carefully
and consider the risk factors beginning on page 10.
This
Prospectus is in two parts: a disclosure document and a statement of additional
information. These parts are bound together, and both parts contain important
information.
This
statement of additional information and accompanying disclosure document
are
both dated May 1, 2007.
TABLE
OF CONTENTS
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Page
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The
Commodity Interest
Markets
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SAI-3
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Potential
Advantages of Investment
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SAI-10
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CFTC
Annual Report
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SAI-12
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The
Commodity Interest Markets
General
The
Commodity Exchange Act or CEA governs the regulation of commodity interest
transactions, markets and intermediaries. In December 2000, the CEA was amended
by the Commodity Futures Modernization Act of 2000, or CFMA, which substantially
revised the regulatory framework governing certain commodity interest
transactions and the markets on which they trade. The CEA, as amended by the
CFMA, now provides for varying degrees of regulation of commodity interest
transactions depending upon the variables of the transaction. In general, these
variables include (1) the type of instrument being traded (e.g., contracts
for
future delivery, options, swaps or spot contracts), (2) the type of commodity
underlying the instrument (distinctions are made between instruments based
on
agricultural commodities, energy and metals commodities and financial
commodities), (3) the nature of the parties to the transaction (retail, eligible
contract participant, or eligible commercial entity), (4) whether the
transaction is entered into on a principal-to-principal or intermediated basis,
(5) the type of market on which the transaction occurs, and (6) whether the
transaction is subject to clearing through a clearing organization. Information
regarding commodity interest transactions, markets and intermediaries, and
their
associated regulatory environment, is provided below.
Futures
Contracts
A
futures
contract such as an Oil Futures Contract is a standardized contract traded
on,
or subject to the rules of, an exchange that calls for the future delivery
of a
specified quantity and type of a commodity at a specified time and place.
Futures contracts are traded on a wide variety of commodities, including
agricultural products, bond, stock index, interest rate, currency, energy and
metal markets. The size and terms of futures contracts on a particular commodity
are identical and are not subject to any negotiation, other than with respect
to
price and the number of contracts traded between the buyer and
seller.
The
contractual obligations of a buyer or seller may generally be satisfied by
taking or making physical delivery of the underlying of 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. The difference between
the price at which the futures contract is purchased or sold and the price
paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts, such
as
stock index contracts, settle in cash (reflecting the difference between the
contract purchase/sale price and the contract settlement price) rather than
by
delivery of the underlying commodity.
In
market
terminology, a trader who purchases a futures contract is long in the market
and
a trader who sells a futures contract is short in the market. Before a trader
closes out his long or short position by an offsetting sale or purchase, his
outstanding contracts are known as open trades or open positions. The aggregate
amount of open positions held by traders in a particular contract is referred
to
as the open interest in such contract.
Forward
Contracts
A
forward
contract is a contractual obligation to purchase or sell a specified quantity
of
a commodity at or before a specified date in the future at a specified price
and, therefore, is economically similar to a futures contract. Unlike futures
contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward contracts
for a given commodity are generally available for various amounts and maturities
and are subject to individual negotiation between the parties involved.
Moreover, generally there is no direct means of offsetting or closing out a
forward contract by taking an offsetting position as one would a futures
contract on a U.S. exchange. If a trader desires to close out a forward contract
position, he generally will establish an opposite position in the contract
but
will settle and recognize the profit or loss on both positions simultaneously
on
the delivery date. Thus, unlike in the futures contract market where a trader
who has offset positions will recognize profit or loss immediately, in the
forward market a trader with a position that has been offset at a profit will
generally not receive such profit until the delivery date, and likewise a trader
with a position that has been offset at a loss will generally not have to pay
money until the delivery date. In recent years, however, the terms of forward
contracts have become more standardized, and in some instances such contracts
now provide a right of offset or cash settlement as an alternative to making
or
taking delivery of the underlying commodity.
The
forward markets provide what has typically been a highly liquid market for
foreign exchange trading, and in certain cases the prices quoted for foreign
exchange forward contracts may be more favorable than the prices for foreign
exchange futures contracts traded on U.S. exchanges. The forward markets are
largely unregulated. Forward contracts are, in general, not cleared or
guaranteed by a third party. Commercial banks participating in trading foreign
exchange forward contracts often do not require margin deposits, but rely upon
internal credit limitations and their judgments regarding the creditworthiness
of their counterparties. In recent years, however, many over-the-counter market
participants in foreign exchange trading have begun to require that their
counterparties post margin.
Further,
as the result of the CFMA, over-the-counter derivative instruments such as
forward contracts and swap agreements (and options on forwards and physical
commodities) may begin to be traded on lightly-regulated exchanges or electronic
trading platforms that may, but are not required to, provide for clearing
facilities. Exchanges and electronic trading platforms on which over-the-counter
instruments may be traded and the regulation and criteria for that trading
are
more fully described below under “Futures Exchanges and Clearing Organizations.”
Nonetheless, absent a clearing facility, USOF’s trading in foreign exchange and
other forward contracts is exposed to the creditworthiness of the counterparties
on the other side of the trade.
Options
on Futures Contracts
Options
on futures contracts are standardized contracts traded on an exchange. An option
on futures contract gives the buyer of the option the right, but not the
obligation, to take a position at a specified price (the striking, strike,
or
exercise price) in the underlying futures contract or underlying interest.
The
buyer of a call option acquires the right, but not the obligation, to purchase
or take a long position in the underlying interest, and the buyer of a put
option acquires the right, but not the obligation, to sell or take a short
position in the underlying interest.
The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer if the
option is exercised. Thus, the seller of a call option must stand ready to
take
a short position in the underlying interest at the strike price if the buyer
should exercise the option. The seller of a put option, on the other hand,
must
stand ready to take a long position in the underlying interest at the strike
price.
A
call
option is said to be in-the-money if the strike price is below current market
levels and out-of-the-money if the strike price is above current market levels.
Conversely, a put option is said to be in-the-money if the strike price is
above
the current market levels and out-of-the-money if the strike price is below
current market levels.
Options
have limited life spans, usually tied to the delivery or settlement date of
the
underlying interest. Some options, however, expire significantly in advance
of
such date. The purchase price of an option is referred to as its premium, which
consists of its intrinsic value (which is related to the underlying market
value) plus its time value. As an option nears its expiration date, the time
value shrinks and the market and intrinsic values move into parity. An option
that is out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options simply
become worthless after their expiration date.
Regardless
of how much the market swings, the most an option buyer can lose is the option
premium. The option buyer deposits his premium with his broker, and the money
goes to the option seller. Option sellers, on the other hand, face risks similar
to participants in the futures markets. For example, since the seller of a
call
option is assigned a short futures position if the option is exercised, his
risk
is the same as someone who initially sold a futures contract. Because no one
can
predict exactly how the market will move, the option seller posts margin to
demonstrate his ability to meet any potential contractual
obligations.
Options
on Forward Contracts or Commodities
Options
on forward contracts or commodities operate in a manner similar to options
on
futures contracts. An option on a forward contract or commodity gives the buyer
of the option the right, but not the obligation, to take a position at a
specified price in the underlying forward contract or commodity. However,
similar to forward contracts, options on forward contracts or on commodities
are
individually negotiated contracts between counterparties and are typically
traded in the over-the-counter market. Therefore, options on forward contracts
and physical commodities possess many of the same characteristics of forward
contracts with respect to offsetting positions and credit risk that are
described above.
Swap
Contracts
Swap
transactions generally involve contracts between two parties to exchange
a
stream of payments computed by reference to a notional amount and the price
of
the asset that is the subject of the swap. Swap contracts are principally
traded
off-exchange, although recently, as a result of regulatory changes enacted
as
part of the CFMA, certain swap contracts are now being traded in electronic
trading facilities and cleared through clearing
organizations.
Swaps
are
usually entered into on a net basis, that is, the two payment streams are
netted
out in a cash settlement on the payment date or dates specified in the
agreement, with the parties receiving or paying, as the case may be, only
the
net amount of the two payments. Swaps do not generally involve the delivery
of
underlying assets or principal. Accordingly, the risk of loss with respect
to
swaps is generally limited to the net amount of payments that the party is
contractually obligated to make. In some swap transactions one or both parties
may require collateral deposits from the counterparty to support that
counterparty’s obligation under the swap agreement. If the counterparty to such
a swap defaults, the risk of loss consists of the net amount of payments
that
the party is contractually entitled to receive less to any collateral deposits
it is holding.
Participants
The
two
broad classes of persons who trade commodities are hedgors and speculators.
Hedgors include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios, and
commercial market participants, such as farmers and manufacturers, that market
or process commodities. Hedging is a protective procedure designed to lock
in
profits that could otherwise be lost due to an adverse movement in the
underlying commodity, for example, the adverse price movement between the time
a
merchandiser or processor enters into a contract to buy or sell a raw or
processed commodity at a certain price and the time he must perform the
contract. In such a case, at the time the hedgor contracts to physically sell
the commodity at a future date he will simultaneously buy a futures or forward
contract for the necessary equivalent quantity of the commodity. At the time
for
performance of the contract, the hedgor may accept delivery under his futures
contract and sell the commodity quantity as required by his physical contract
or
he may buy the actual commodity, sell if under the physical contract and close
out his position by making an offsetting sale of a futures
contract.
The
commodity interest markets enable the hedgor to shift the risk of price
fluctuations. The usual objective of the hedgor is to protect the profit that
he
expects to earn from farming, merchandising, or processing operations rather
than to profit from his trading. However, at times the impetus for a hedge
transaction may result in part from speculative objectives.
Unlike
the hedgor, the speculator generally expects neither to make nor take delivery
of the underlying commodity. Instead, the speculator risks his capital with
the
hope of making profits from price fluctuations in the commodities. The
speculator is, in effect, the risk bearer who assumes the risks that the hedgor
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior to the
delivery date. Because the speculator may take either a long or short position
in commodities, it is possible for him to make profits or incur losses
regardless of whether prices go up or down.
Futures
Exchanges and Clearing Organizations
Futures
exchanges provide centralized market facilities in which multiple persons have
the ability to execute or trade contracts by accepting bids and offers from
multiple participants. Futures exchanges may provide for execution of trades
at
a physical location utilizing trading pits and/or may provide for trading to
be
done electronically through computerized matching of bids and offers pursuant
to
various algorithms. Members of a particular exchange and the trades executed
on
such exchanges are subject to the rules of that exchange. Futures exchanges
and
clearing organizations are given reasonable latitude in promulgating rules
and
regulations to control and regulate their members. Examples of regulations
by
exchanges and clearing organizations include the establishment of initial margin
levels, rules regarding trading practices, contract specifications, speculative
position limits, daily price fluctuation limits, and execution and clearing
fees.
Clearing
organizations provide services designed to mutualize or transfer the credit
risk
arising from the trading of contracts on an exchange or other electronic trading
facility. Once trades made between members of an exchange or electronic trading
facility have been confirmed, the clearing organization becomes substituted
for
the clearing member acting on behalf of each buyer and each seller of contracts
traded on the exchange or trading platform and in
effect
becomes the other party to the trade. Thereafter, each clearing member party
to
the trade looks only to the clearing organization for performance. The clearing
organization generally establishes some sort of security or guarantee fund
to
which all clearing members of the exchange must contribute; this fund acts
as an
emergency buffer that is intended to enable the clearing organization to meet
its obligations with regard to the other side of an insolvent clearing member’s
contracts. Furthermore, the clearing organization requires margin deposits
and
continuously marks positions to market to provide some assurance that its
members will be able to fulfill their contractual obligations. Thus, a central
function of the clearing organization is to ensure the integrity of trades,
and
members effecting transactions on an exchange need not concern themselves with
the solvency of the party on the opposite side of the trade; their only
remaining concerns are the respective solvencies of their own customers, their
clearing broker and the clearing organization. The clearing organizations do
not
deal with customers, but only with their member firms and the guarantee of
performance for open positions provided by the clearing organization does not
run to customers.
U.S.
Futures Exchanges
Futures
exchanges in the United States are subject to varying degrees of regulation
by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt board
of trade or an electronic trading facility.
A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail customers
on
an unrestricted basis. To be designated as a contract market, the exchange
must
demonstrate that it satisfies specified general criteria for designation, such
as having the ability to prevent market manipulation, rules and procedures
to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection of market
participants. Among the principal designated contract markets in the United
States are the Chicago Board of Trade, the Chicago Mercantile Exchange and
the
New York Mercantile Exchange. Each of the designated contract markets in the
United States must provide for the clearance and settlement of transactions
with
a CFTC-registered derivatives clearing organization.
A
derivatives transaction execution facility, or DTEF, is a new type of exchange
that is subject to fewer regulatory requirements than a designated contract
market but is subject to both commodity interest and participant limitations.
DTEFs limit access to eligible traders that qualify as either eligible contract
participants or eligible commercial entities for futures and option contracts
on
commodities that have a nearly inexhaustible deliverable supply, are highly
unlikely to be susceptible to the threat of manipulation, or have no cash
market, security futures products, and futures and option contracts on
commodities that the CFTC may determine, on a case-by-case basis, are highly
unlikely to be susceptible to the threat of manipulation. In addition, certain
commodity interests excluded or exempt from the CEA, such as swaps, etc. may
be
traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures contracts,
in
which case the clearing organization must be a securities clearing agency.
However, if futures contracts and options on futures contracts on a DTEF are
cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded on a DTEF
may be cleared through a clearing organization other than one registered with
the CFTC.
An
exempt
board of trade is also a newly designated form of exchange. An exempt board
of
trade is substantially unregulated, subject only to CFTC anti-fraud and
anti-manipulation authority. An exempt board of trade is permitted to trade
futures contracts and options on futures contracts provided that the underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board of trade
must qualify as eligible contract participants. Contracts deemed eligible to
be
traded on an exempt board of trade include contracts on interest rates, exchange
rates, currencies, credit risks or measures, debt instruments, measures of
inflation, or other macroeconomic indices or measures. There is no requirement
that an exempt board of trade use a clearing organization. However, if contracts
on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade electing
to
operate as an exempt board of trade must file a written notification with the
CFTC.
An
electronic trading facility is a new form of exchange that operates by means
of
an electronic or telecommunications network and maintains an automated audit
trail of bids, offers, and the matching of orders or the execution of
transactions on the electronic trading facility. The CEA does not apply to,
and
the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject only to
CFTC
anti-fraud and anti-manipulation authority. In general, excluded commodities
include interest rates, currencies, securities, securities indices or other
financial, economic or commercial indices or measures.
The
General Partner intends to monitor the development of and opportunities and
risks presented by the new less-regulated exchanges and exempt boards and may,
in the future, allocate a percentage of USOF’s assets to trading in products on
these exchanges. Provided USOF maintains assets exceeding $5 million, USOF
would
qualify as an eligible contract participant and thus would be able to trade
on
such exchanges.
Non-U.S.
Futures Exchanges
Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation by the
CFTC, but rather are regulated by their home country regulator. In contrast
to
U.S. designated contract markets, some non-U.S. exchanges are principals’
markets, where trades remain the liability of the traders involved, and the
exchange or an affiliated clearing organization, if any, does not become
substituted for any party. Due to the absence of a clearing system, such
exchanges are significantly more susceptible to disruptions. Further,
participants in such markets must often satisfy themselves as to the individual
creditworthiness of each entity with which they enter into a trade. Trading
on
non-U.S. exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, USOF is subject to the additional risk of fluctuations in the
exchange rate between such currencies and U.S. dollars and the possibility
that
exchange controls could be imposed in the future. Trading on non-U.S. exchanges
may differ from trading on U.S. exchanges in a variety of ways and, accordingly,
may subject USOF to additional risks.
Speculative
Position Limits
The
CFTC
and U.S. designated contract markets have established accountability levels
and
position limits on the maximum net long or net short Oil Futures Contracts
that
any person or group of persons under common trading control (other than a
hedgor, which USOF is not) may hold, own or control in commodity interests.
Among the purposes of accountability levels and position limits is to prevent
a
corner or squeeze on a market or undue influence on prices by any single trader
or group of traders. The position limits currently established by the CFTC
apply
to certain agricultural commodity interests, such as grains (oats, barley,
and
flaxseed), soybeans, corn, wheat, cotton, eggs, rye, and potatoes, but not
to
interests in energy products. In addition, U.S. exchanges may set accountability
levels and position limits for all commodity interests traded on that exchange.
For example, the current accountability level for investments at any one time
in
Oil Futures Contracts (including investments in the Benchmark Oil Futures
Contract) on the New York Mercantile Exchange is 20,000 contracts. The New
York
Mercantile Exchange also imposes position limits on contracts held in the last
few days of trading in the near month contract to expire. Certain exchanges
or
clearing organizations also set limits on the total net positions that may
be
held by a clearing broker. In general, no position limits are in effect in
forward or other over-the-counter contract trading or in trading on non-U.S.
futures exchanges, although the principals with which USOF and the clearing
brokers may trade in such markets may impose such limits as a matter of credit
policy. For purposes of determining accountability levels and position limits
USOF’s commodity interest positions will not be attributable to investors in
their own commodity interest trading.
Daily
Price Limits
Most
U.S.
futures exchanges (but generally not non-U.S. exchanges) may limit the amount
of
fluctuation in some futures contract or options on a futures contract prices
during a single trading day by regulations. These regulations specify what
are
referred to as daily price fluctuation limits or more commonly, daily limits.
The daily limits establish the maximum amount that the price of a futures or
options on futures contract may vary either up or down from the previous day’s
settlement price. Once the daily limit has been reached in a particular futures
or options on futures contract, no trades may be made at a price beyond the
limit. Positions in the futures or options contract may then be taken or
liquidated, if at all, only at inordinate expense or if traders are willing
to
effect trades at or within the limit during the period for trading on such
day.
Because the daily limit rule governs price movement only for a particular
trading day, it does not limit losses and may in fact substantially increase
losses because it may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved the daily limit for several consecutive
trading days, thus preventing prompt liquidation of positions and subjecting
the
trader to substantial losses for those days. The concept of daily price limits
is not relevant to over-the-counter contracts, including forwards and swaps,
and
thus such limits are not imposed by banks and others who deal in those
markets.
In
contrast, the New York Mercantile Exchange does not impose daily limits but
rather limits the amount of price fluctuation for Oil Futures Contracts. For
example, the New York Mercantile Exchange imposes a $10.00 per barrel ($10,000
per contract) price fluctuation limit for Oil Futures Contracts. This limit
is
initially based off the previous trading day’s settlement price. If any Oil
Futures Contract is traded, bid, or offered at the limit for five minutes,
trading is halted for five minutes. When trading resumes it begins at the point
where the limit was imposed and the limit is reset to be $10.00 per barrel
in
either direction of that point. If another halt were triggered, the market
would
continue to be expanded by $10.00 per barrel in either direction after each
successive five-minute trading halt. There is no maximum price fluctuation
limits during any one trading session.
Commodity
Prices
Commodity
prices are volatile and, although ultimately determined by the interaction
of
supply and demand, are subject to many other influences, including the
psychology of the marketplace and speculative assessments of future world and
economic events. Political climate, interest rates, treaties, balance of
payments, exchange controls and other governmental interventions as well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader to predict
reliably commodity prices.
Regulation
Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or ETF. Derivatives clearing organizations
are also subject to the CEA and CFTC regulation. The CFTC is the governmental
agency charged with responsibility for regulation of futures exchanges and
commodity interest trading conducted on those exchanges. The CFTC’s function is
to implement the CEA’s objectives of preventing price manipulation and excessive
speculation and promoting orderly and efficient commodity interest markets.
In
addition, the various exchanges and clearing organizations themselves exercise
regulatory and supervisory authority over their member firms.
The
CFTC
possesses exclusive jurisdiction to regulate the activities of commodity pool
operators and commodity trading advisors and has adopted regulations with
respect to the activities of those persons and/or entities. Under the CEA,
a
registered commodity pool operator, such as the General Partner, is required
to
make annual filings with the CFTC describing its organization, capital
structure, management and controlling persons. In addition, the CEA authorizes
the CFTC to require and review books and records of, and documents prepared
by,
registered commodity pool operators. Pursuant to this authority, the CFTC
requires commodity pool operators to keep accurate, current and orderly records
for each pool that they operate. The CFTC may suspend the registration of a
commodity pool operator (1) if the CFTC finds that the operator’s trading
practices tend to disrupt orderly market conditions, (2) if any controlling
person of the operator is subject to an order of the CFTC denying such person
trading privileges on any exchange, and (3) in certain other circumstances.
Suspension, restriction or termination of the General Partner’s registration as
a commodity pool operator would prevent it, until that registration were to
be
reinstated, from managing USOF, and might result in the termination of USOF.
USOF itself is not required to be registered with the CFTC in any
capacity.
The
CEA
gives the CFTC similar authority with respect to the activities of commodity
trading advisors. If a trading advisor’s commodity trading advisor registration
were to be terminated, restricted or suspended, the trading advisor would be
unable, until the registration were to be reinstated, to render trading advice
to USOF.
The
CEA
requires all futures commission merchants, such as USOF’s clearing brokers, to
meet and maintain specified fitness and financial requirements, to segregate
customer funds from proprietary funds and account separately for all customers’
funds and positions, and to maintain specified books and records open to
inspection by the staff of the CFTC. The CFTC has similar authority over
introducing brokers, or persons who solicit or accept orders for commodity
interest trades but who do not accept margin deposits for the execution of
trades. The CEA authorizes the CFTC to regulate trading by futures commission
merchants and by their officers and directors, permits the CFTC to require
action by exchanges in the event of market emergencies, and establishes an
administrative procedure under which customers may institute complaints for
damages arising from alleged violations of the CEA. The CEA also gives the
states powers to enforce its provisions and the regulations of the
CFTC.
USOF’s
investors are afforded prescribed rights for reparations under the CEA.
Investors may also be able to maintain a private right of action for violations
of the CEA. The CFTC has adopted rules implementing the reparation provisions
of
the CEA, which provide that any person may file a complaint for a reparations
award with the CFTC for violation of the CEA against a floor broker or a futures
commission merchant, introducing broker, commodity trading advisor, commodity
pool operator, and their respective associated persons.
Pursuant
to authority in the CEA, the NFA has been formed and registered with the CFTC
as
a registered futures association. At the present time, the NFA is the only
self-regulatory organization for commodity interest professionals, other than
futures exchanges. The CFTC has delegated to the NFA responsibility for the
registration of commodity trading advisors, commodity pool operators, futures
commission merchants, introducing brokers, and their respective associated
persons and floor brokers. The General Partner, each trading advisor, the
selling agents and the clearing brokers are members of the NFA. As such, they
are subject to NFA standards relating to fair trade practices, financial
condition and consumer protection. USOF itself is not required to become a
member of the NFA. As the self-regulatory body of the commodity interest
industry, the NFA promulgates rules governing the conduct of professionals
and
disciplines those professionals that do not comply with these rules. The NFA
also arbitrates disputes between members and their customers and conducts
registration and fitness screening of applicants for membership and audits
of
its existing members.
The
regulations of the CFTC and the NFA prohibit any representation by a person
registered with the CFTC or by any member of the NFA, that registration with
the
CFTC, or membership in the NFA, in any respect indicates that the CFTC or the
NFA, as the case may be, has approved or endorsed that person or that person’s
trading program or objectives. The registrations and memberships of the parties
described in this summary must not be considered as constituting any such
approval or endorsement. Likewise, no futures exchange has given or will give
any similar approval or endorsement.
The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made in this
summary are subject to modification by legislative action and changes in the
rules and regulations of the CFTC, the NFA, the futures exchanges, clearing
organizations and other regulatory bodies.
The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among other
things, provides that the trading of commodity interest contracts generally
must
be upon exchanges designated as contract markets or DTEFs and that all trading
on those exchanges must be done by or through exchange members. Under the CFMA,
commodity interest trading in some commodities between sophisticated persons
may
be traded on a trading facility not regulated by the CFTC. As a general matter,
trading in spot contracts, forward contracts, options on forward contracts
or
commodities, or swap contracts between eligible contract participants is not
within the jurisdiction of the CFTC and may therefore be effectively
unregulated. The trading advisors may engage in those transactions on behalf
of
USOF in reliance on this exclusion from regulation.
In
general, the CFTC does not regulate the interbank and forward foreign currency
markets with respect to transactions in contracts between certain sophisticated
counterparties such as USOF or between certain regulated institutions and retail
investors. Although U.S. banks are regulated in various ways by the Federal
Reserve Board, the Comptroller of the Currency and other U.S. federal and state
banking officials, banking authorities do not regulate the forward
markets.
While
the
U.S. government does not currently impose any restrictions on the movements
of
currencies, it could choose to do so. The imposition or relaxation of exchange
controls in various jurisdictions could significantly affect the market for
that
and other jurisdictions’ currencies. Trading in the interbank market also
exposes USOF to a risk of default since failure of a bank with which USOF had
entered into a forward contract would likely result in a default and thus
possibly substantial losses to USOF.
The
CFTC
is 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 in the United States. These regulations
permit certain contracts traded on non-U.S. exchanges to be offered and sold
in
the United States.
Commodity
Margin
Original
or initial margin is the minimum amount of funds that must be deposited by
a
commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount (generally
less than the original margin) to which a trader’s account may decline before he
must deliver additional margin. A margin deposit is like a cash performance
bond. It helps assure the trader’s performance of the futures contracts that he
or she purchases or sells. Futures contracts are customarily bought and sold
on
initial margin that represents a very small percentage (ranging upward from
less
than 2%) of the aggregate purchase or sales price of the contract. Because
of
such low margin requirements, price fluctuations occurring in the futures
markets may create profits and losses that, in relation to the amount invested,
are greater than are customary in other forms of investment or speculation.
As
discussed below, adverse price changes in the futures contract may result in
margin requirements that greatly exceed the initial margin. In addition, the
amount of margin required in connection with a particular futures contract
is
set from time to time by the exchange on which the contract is traded and may
be
modified from time to time by the exchange during the term of the
contract.
Brokerage
firms, such as USOF’s clearing brokers, carrying accounts for traders in
commodity interest contracts may not accept lower, and generally require higher,
amounts of margin as a matter of policy to further protect themselves. The
clearing brokers require USOF to make margin deposits equal to exchange minimum
levels for all commodity interest contracts. This requirement may be altered
from time to time in the clearing brokers’ discretion.
Trading
in the over-the-counter markets where no clearing facility is provided generally
does not require margin but generally does require the extension of credit
between counterparties.
When
a
trader purchases an option, there is no margin requirement; however, the option
premium must be paid in full. When a trader sells an option, on the other hand,
he or she is required to deposit margin in an amount determined by the margin
requirements established for the underlying interest and, in addition, an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the selling of options, although adjusted to reflect
the
probability that out-of-the-money options will not be exercised, can in fact
be
higher than those imposed in dealing in the futures markets directly.
Complicated margin requirements apply to spreads and conversions, which are
complex trading strategies in which a trader acquires a mixture of options
positions and positions in the underlying interest.
Margin
requirements are computed each day by a trader’s clearing broker. When the
market value of a particular open commodity interest position changes to a
point
where the margin on deposit does not satisfy maintenance margin requirements,
a
margin call is made by the broker. If the margin call is not met within a
reasonable time, the broker may close out the trader’s position. With respect to
USOF’s trading, USOF (and not its investors personally) is subject to margin
calls.
Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions held
in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the total risk
of
the combined positions.
Potential
Advantages of Investment
The
Advantages of Non-Correlation
Given
that historically, the price of oil and of Oil Futures Contracts and Other
Oil
Interests has had very little correlation to the stock and bond markets, the
General Partner believes that the performance of USOF should also exhibit a
substantial degree of non-correlation with the performance of traditional equity
and debt portfolio components, in part because of the ease of selling commodity
interests short. This feature of many commodity interest contracts — being able
to be long or short a commodity interest position with similar ease — means that
profit and loss from commodity interest trading is not dependent upon economic
prosperity or stability.
However,
non-correlation will not provide any diversification advantages unless the
non-correlated assets are outperforming other portfolio assets, and it is
entirely possible that USOF may not outperform other sectors of an investor’s
portfolio, or may produce losses. Additionally, although adding USOF’s units to
an investor’s portfolio may provide diversification, USOF is not a hedging
mechanism vis-à-vis traditional debt and equity portfolio components
and you should not assume that USOF units will appreciate during periods of
inflation or stock and bond market declines.
Non-correlated
performance should not be confused with negatively correlated performance.
Negative correlation occurs when the performance of two asset classes are in
opposite direction to each other. Non-correlation means only that USOF’s
performance will likely have little relation to the performance of equity and
debt instruments, reflecting the General Partner’s belief that certain factors
that affect equity and debt prices may affect USOF differently and that certain
factors that affect equity and debt prices may not affect USOF at all. USOF’s
net asset value per unit may decline or increase more or less than equity and
debt instruments during both rising and falling cash markets. The General
Partner does not expect that USOF’s performance will be negatively correlated to
general debt and equity markets.
Interest
Income
Unlike
some alternative investment funds, USOF does not borrow money in order to obtain
leverage, so USOF does not incur any interest expense. Rather, USOF’s margin
deposits are maintained in Treasuries and interest is earned on 100% of USOF’s
available assets, which include unrealized profits credited to USOF’s
accounts.
CFTC
Annual Report
PRIVACY
NOTICE
Victoria
Bay Asset Management, LLC and United States Oil Fund, LP (collectively, the
“Partnership”)
are
providing this notice to explain our information collection practices and other
important information.
Collection
of Investor Information
The
Partnership collects personal information about its investors mainly through
the
following sources:
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Authorized
Purchasers, information required in connection with preparing
tax filings,
trading history, financial information and other information
provided by
the investor in writing, in person, by telephone, electronically
or by any
other means. This information includes name, address, nationality,
tax
identification number, and financial and investment qualifications;
and
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Transactions
within the Partnership, including account balances, investments
and
withdrawals.
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Disclosure
of Nonpublic Personal Information
The
Partnership does not sell or rent investor information. The Partnership does
not
disclose nonpublic personal information about its investors to nonaffiliated
third parties or to affiliated entities, except as permitted by law. For
example, the Partnership may share nonpublic personal information in the
following situations:
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· |
To
service providers in connection with the administration and servicing
of
the Partnership, which may include attorneys, accountants, auditors
and
other professionals. The Partnership may also share information in
connection with the servicing or processing of Partnership
transactions;
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·
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To
affiliated companies, i.e., any company that controls, is controlled
by,
or is under common control with the Partnership, in order to provide
you
with ongoing personal advice and assistance with respect to the products
and services you have purchased through the Partnership and to introduce
you to other products and services that may be of value to
you;
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·
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To
respond to a subpoena or court order, judicial process or regulatory
authorities;
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·
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To
protect against fraud, unauthorized transactions (such as money
laundering), claims or other liabilities;
and
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·
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Upon
consent of an investor to release such information, including
authorization to disclose such information to persons acting in a
fiduciary or representative capacity on behalf of the
investor.
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You
may
opt out of any disclosure we may make of nonpublic personal information to
non-affiliated third parties. The Partnership will facilitate your right to
opt
out of any disclosure through one of the following methods by: (1) designating
check-off boxes in a prominent position on the relevant forms with the opt
out
notice; (2) including a reply form together with the opt out notice; (3)
providing an electronic means to opt out, such as a form that can be sent via
electronic mail or a process at the Partnership’s website, if you agree to the
electronic delivery or information; or (4) providing a toll-free telephone
number that you may call to opt out.
Protection
of Investor Information
The
Partnership holds its investor information in the strictest confidence.
Accordingly, the Partnership’s policy is to require that all employees,
financial professionals and companies providing services on its behalf keep
client information confidential.
The
Partnership maintains safeguards that comply with federal standards to protect
investor information. The Partnership restricts access to the personal and
account information of investors to those employees who need to know that
information in the course of their job responsibilities. Third parties with
whom
the Partnership shares investor information must agree to follow appropriate
standards of security and confidentiality, which includes safeguarding such
information physically, electronically and procedurally.
The
Partnership’s privacy policy applies to both current and former investors. The
Partnership would only disclose nonpublic personal information about a former
investor to the same extent as for a current investor.
Changes
to Privacy Policy
The
Partnership may make changes to its privacy policy in the future. The
Partnership will not make any change affecting you without first sending you
a
revised privacy policy describing the change. In any case, the Partnership
will
send you a current privacy policy at least once a year as long as you continue
to be an investor in the Partnership.
UNITED
STATES OIL FUND, LP
A
Delaware Limited Partnership
FINANCIAL
STATEMENTS
For
the Period From (April 10, 2006) Commencement of Operations to December 31,
2006
and
the Period From (May 12, 2005) Inception to December 31,
2005
AFFIRMATION
OF THE COMMODITY POOL OPERATOR
To
the
Partners of United States Oil Fund, LP
To
the
best of the knowledge and belief of the undersigned, the information contained
in this Annual Report for the year ended December 31, 2006 and the period from
(May 12, 2005) inception to December 31, 2005 is accurate and
complete.
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By: /s/
Nicholas D. Gerber
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United
States Oil Fund, LP
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President
& CEO of Victoria Bay Asset Management, LLC
(General
Partner of United States Oil Fund, LP)
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CERTIFIED
PUBLIC ACCOUNTANTS
5251
SOUTH QUEBEC STREET I SUITE 200
GREENWOOD
VILLAGE, COLORADO 80111
TELEPHONE:
(303) 753-1959
FAX:
(303) 753-0338
www.spicerjeffries.com
To
the
Partners of
United
States Oil Fund, LP (formerly New York Oil ETF, LP)
We
have
audited the accompanying statements of financial condition of United States
Oil
Fund, LP, (formerly New York Oil ETF, LP) (the “Fund”) as of December 31, 2006
and 2005, including the schedule of investments as of December 31, 2006, and
the
related financial statements of operations, changes in partners’ capital and
cash flows for the year ended December 31, 2006 and the period from inception
(May 12, 2005) through December 31, 2005. These financial statements are the
responsibility of the Fund’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of United States Oil Fund, LP
(formerly New York Oil ETF, LP) as of December 31, 2006 and 2005, and the
results of its operations and its cash flows for the year ended December 31,
2006 and the period from inception (May 12, 2005) through December 31, 2005
in
conformity with accounting principles generally accepted in the United States
of
America.
Greenwood
Village, Colorado
March
15,
2007
UNITED
STATES OIL FUND, LP
STATEMENTS
OF FINANCIAL CONDITION
December
31, 2006 and 2005
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2006
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2005
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Assets
|
|
|
|
|
|
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Cash
and cash
equivalents
|
|
$
|
712,883,812
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|
$
|
1,000
|
|
Equity
in UBS Securities LLC trading accounts:
|
|
|
|
|
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Cash
|
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87,123,636
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|
|
—
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Unrealized
loss on open commodity futures contracts
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(34,383,000
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)
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Receivable
for units sold
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36,080,896
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—
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Interest
receivable
|
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2,626,230
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|
|
—
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Other
assets
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|
|
17,000
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|
|
—
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Total
assets
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