Item 1. Condensed Financial Statements.
Index to Condensed Financial Statements
United States 12 Month Oil Fund, LP
|
|
Condensed Statements of Financial Condition
|
|
At March 31, 2020 (Unaudited) and December 31, 2019
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (at cost $35,029,959 and $45,166,882, respectively)
(Notes 2 and 5)
|
|
$
|
35,029,959
|
|
|
$
|
45,166,882
|
|
Equity in trading accounts:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (at cost $33,231,357 and $6,440,093, respectively)
|
|
|
33,231,357
|
|
|
|
6,440,093
|
|
Unrealized gain (loss) on open commodity futures contracts
|
|
|
(20,758,656
|
)
|
|
|
3,602,591
|
|
Receivable for shares sold
|
|
|
6,079,630
|
|
|
|
—
|
|
Dividends receivable
|
|
|
3,379
|
|
|
|
12,950
|
|
Interest receivable
|
|
|
744
|
|
|
|
6,320
|
|
Prepaid insurance
|
|
|
5,921
|
|
|
|
1,441
|
|
ETF transaction fees receivable
|
|
|
350
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,592,684
|
|
|
$
|
55,230,277
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Partners' Capital
|
|
|
|
|
|
|
|
|
General Partner management fees payable (Note 3)
|
|
$
|
20,197
|
|
|
$
|
28,094
|
|
Professional fees payable
|
|
|
65,771
|
|
|
|
119,417
|
|
Brokerage commissions payable
|
|
|
4,502
|
|
|
|
3,422
|
|
Directors' fees payable
|
|
|
1,480
|
|
|
|
1,953
|
|
License fees payable
|
|
|
—
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
91,950
|
|
|
|
153,238
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 3, 4 and 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' Capital
|
|
|
|
|
|
|
|
|
General Partner
|
|
|
—
|
|
|
|
—
|
|
Limited Partners
|
|
|
53,500,734
|
|
|
|
55,077,039
|
|
Total Partners' Capital
|
|
|
53,500,734
|
|
|
|
55,077,039
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners' capital
|
|
$
|
53,592,684
|
|
|
$
|
55,230,277
|
|
|
|
|
|
|
|
|
|
|
Limited Partners' shares outstanding
|
|
|
4,400,000
|
|
|
|
2,400,000
|
|
Net asset value per share
|
|
$
|
12.16
|
|
|
$
|
22.95
|
|
Market value per share
|
|
$
|
12.27
|
|
|
$
|
22.99
|
|
See accompanying notes to condensed financial statements.
United States 12 Month Oil Fund, LP
Condensed Schedule of Investments (Unaudited)
At March 31, 2020
|
|
|
|
Notional
Amount
|
|
|
Number of
Contracts
|
|
|
Value/
Unrealized Gain (Loss) on Open Commodity Contracts
|
|
|
% of
Partners'
Capital
|
|
Open Futures Contracts - Long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMEX WTI Crude Oil Futures CL May 2020 contracts, expiring April 2020
|
|
$
|
6,302,918
|
|
|
|
144
|
|
|
$
|
(3,353,798
|
)
|
|
|
(6.27
|
)
|
NYMEX WTI Crude Oil Futures CL June 2020 contracts, expiring May 2020
|
|
|
6,270,789
|
|
|
|
144
|
|
|
|
(2,741,349
|
)
|
|
|
(5.12
|
)
|
NYMEX WTI Crude Oil Futures CL July 2020 contracts, expiring June 2020
|
|
|
5,867,637
|
|
|
|
144
|
|
|
|
(1,880,277
|
)
|
|
|
(3.52
|
)
|
NYMEX WTI Crude Oil Futures CL August 2020 contracts, expiring July 2020
|
|
|
6,246,384
|
|
|
|
144
|
|
|
|
(1,956,624
|
)
|
|
|
(3.66
|
)
|
NYMEX WTI Crude Oil Futures CL September 2020 contracts, expiring August 2020
|
|
|
6,065,947
|
|
|
|
144
|
|
|
|
(1,584,667
|
)
|
|
|
(2.96
|
)
|
NYMEX WTI Crude Oil Futures CL October 2020 contracts, expiring September 2020
|
|
|
6,166,157
|
|
|
|
144
|
|
|
|
(1,546,637
|
)
|
|
|
(2.89
|
)
|
NYMEX WTI Crude Oil Futures CL November 2020 contracts, expiring October 2020
|
|
|
6,049,599
|
|
|
|
144
|
|
|
|
(1,310,559
|
)
|
|
|
(2.45
|
)
|
NYMEX WTI Crude Oil Futures CL December 2020 contracts, expiring November 2020
|
|
|
6,231,847
|
|
|
|
144
|
|
|
|
(1,396,327
|
)
|
|
|
(2.61
|
)
|
NYMEX WTI Crude Oil Futures CL January 2021 contracts, expiring December 2020
|
|
|
6,411,286
|
|
|
|
144
|
|
|
|
(1,493,686
|
)
|
|
|
(2.79
|
)
|
NYMEX WTI Crude Oil Futures CL February 2021 contracts, expiring January 2021
|
|
|
6,646,054
|
|
|
|
144
|
|
|
|
(1,657,894
|
)
|
|
|
(3.10
|
)
|
NYMEX WTI Crude Oil Futures CL March 2021 contracts, expiring February 2021
|
|
|
6,225,658
|
|
|
|
144
|
|
|
|
(1,171,258
|
)
|
|
|
(2.19
|
)
|
NYMEX WTI Crude Oil Futures CL April 2021 contracts, expiring March 2021
|
|
|
5,780,460
|
|
|
|
144
|
|
|
|
(665,580
|
)
|
|
|
(1.24
|
)
|
Total Open Futures Contracts*
|
|
$
|
74,264,736
|
|
|
|
1,728
|
|
|
$
|
(20,758,656
|
)
|
|
|
(38.80
|
)
|
United States 12 Month Oil Fund, LP
Condensed Schedule of Investments (Unaudited)(Continued)
At March 31, 2020
|
|
|
Principal
Amount
|
|
|
Market
Value
|
|
|
% of
Partners'
Capital
|
|
Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Treasury Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills:
|
|
|
|
|
|
|
|
|
|
|
|
|
1.70%, 4/02/2020
|
|
$
|
2,000,000
|
|
|
$
|
1,999,906
|
|
|
|
3.74
|
|
1.64%, 4/09/2020
|
|
|
2,000,000
|
|
|
|
1,999,275
|
|
|
|
3.74
|
|
1.60%, 4/16/2020
|
|
|
2,000,000
|
|
|
|
1,998,675
|
|
|
|
3.74
|
|
1.60%, 4/23/2020
|
|
|
2,000,000
|
|
|
|
1,998,057
|
|
|
|
3.74
|
|
1.59%, 4/30/2020
|
|
|
2,000,000
|
|
|
|
1,997,462
|
|
|
|
3.73
|
|
1.54%, 5/07/2020
|
|
|
2,000,000
|
|
|
|
1,996,950
|
|
|
|
3.73
|
|
1.55%, 5/14/2020
|
|
|
1,000,000
|
|
|
|
998,160
|
|
|
|
1.87
|
|
1.55%, 5/21/2020
|
|
|
1,000,000
|
|
|
|
997,868
|
|
|
|
1.87
|
|
1.58%, 5/28/2020
|
|
|
1,000,000
|
|
|
|
997,514
|
|
|
|
1.86
|
|
1.53%, 6/04/2020
|
|
|
1,000,000
|
|
|
|
997,298
|
|
|
|
1.86
|
|
1.53%, 6/11/2020
|
|
|
1,000,000
|
|
|
|
996,997
|
|
|
|
1.86
|
|
1.54%, 6/18/2020
|
|
|
1,000,000
|
|
|
|
996,685
|
|
|
|
1.86
|
|
1.57%, 6/25/2020
|
|
|
1,000,000
|
|
|
|
996,317
|
|
|
|
1.86
|
|
1.54%, 7/02/2020
|
|
|
1,000,000
|
|
|
|
996,103
|
|
|
|
1.86
|
|
1.51%, 7/09/2020
|
|
|
1,000,000
|
|
|
|
995,868
|
|
|
|
1.86
|
|
1.54%, 7/16/2020
|
|
|
1,000,000
|
|
|
|
995,495
|
|
|
|
1.86
|
|
1.53%, 7/23/2020
|
|
|
1,000,000
|
|
|
|
995,245
|
|
|
|
1.86
|
|
1.53%, 7/30/2020
|
|
|
1,000,000
|
|
|
|
994,933
|
|
|
|
1.86
|
|
1.53%, 8/06/2020
|
|
|
1,000,000
|
|
|
|
994,638
|
|
|
|
1.86
|
|
1.52%, 8/13/2020
|
|
|
1,000,000
|
|
|
|
994,391
|
|
|
|
1.86
|
|
1.52%, 8/20/2020
|
|
|
1,000,000
|
|
|
|
994,086
|
|
|
|
1.86
|
|
1.42%, 8/27/2020
|
|
|
2,000,000
|
|
|
|
1,988,407
|
|
|
|
3.72
|
|
0.67%, 9/03/2020
|
|
|
1,000,000
|
|
|
|
997,115
|
|
|
|
1.86
|
|
Total Cash Equivalents
|
|
|
|
|
|
$
|
29,917,445
|
|
|
|
55.92
|
|
*
|
Collateral amounted to $33,231,357 on open futures contracts.
|
See accompanying notes to condensed financial statements.
United States 12 Month Oil Fund, LP
|
Condensed Statements of Operations (Unaudited)
|
For the three months ended March 31, 2020 and 2019
|
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2019
|
|
Income
|
|
|
|
|
|
|
|
|
Gain (loss) on trading of commodity futures contracts:
|
|
|
|
|
|
|
|
|
Realized gain (loss) on closed futures contracts
|
|
$
|
(837,283
|
)
|
|
$
|
(1,433,368
|
)
|
Change in unrealized gain (loss) on open futures contracts
|
|
|
(24,361,247
|
)
|
|
|
14,594,318
|
|
Realized gain (loss) on short-term investments
|
|
|
1,240
|
|
|
|
—
|
|
Dividend income
|
|
|
30,245
|
|
|
|
70,220
|
|
Interest income*
|
|
|
146,528
|
|
|
|
272,033
|
|
ETF transaction fees
|
|
|
5,950
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Total income (loss)
|
|
|
(25,014,567
|
)
|
|
|
13,503,903
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
General Partner management fees (Note 3)
|
|
|
68,271
|
|
|
|
88,614
|
|
Professional fees
|
|
|
27,145
|
|
|
|
38,096
|
|
Brokerage commissions
|
|
|
5,146
|
|
|
|
1,872
|
|
Directors' fees and insurance
|
|
|
3,122
|
|
|
|
3,267
|
|
License fees
|
|
|
1,707
|
|
|
|
2,215
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
105,391
|
|
|
|
134,064
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(25,119,958
|
)
|
|
$
|
13,369,839
|
|
Net income (loss) per limited partnership share
|
|
$
|
(10.79
|
)
|
|
$
|
4.70
|
|
Net income (loss) per weighted average limited partnership share
|
|
$
|
(10.03
|
)
|
|
$
|
4.70
|
|
Weighted average limited partnership shares outstanding
|
|
|
2,503,846
|
|
|
|
2,842,222
|
|
|
*
|
Interest income does not exceed paid in kind of 5%.
|
See accompanying notes to condensed financial statements.
United States 12 Month Oil Fund, LP
|
Condensed Statement of Changes in Partners' Capital (Unaudited)
|
For the three months ended March 31, 2020
|
|
|
General Partner
|
|
|
Limited Partners
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balances, at December 31, 2019
|
|
$
|
—
|
|
|
$
|
55,077,039
|
|
|
$
|
55,077,039
|
|
Addition of 2,150,000 partnership shares
|
|
|
—
|
|
|
|
26,939,982
|
|
|
|
26,939,982
|
|
Redemption of 150,000 partnership shares
|
|
|
—
|
|
|
|
(3,396,329
|
)
|
|
|
(3,396,329
|
)
|
Net income (loss)
|
|
|
—
|
|
|
|
(25,119,958
|
)
|
|
|
(25,119,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, at March 31, 2020
|
|
$
|
—
|
|
|
$
|
53,500,734
|
|
|
$
|
53,500,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
|
|
|
|
$
|
22.95
|
|
At March 31, 2020
|
|
|
|
|
|
|
|
|
|
$
|
12.16
|
|
See accompanying notes to condensed financial statements.
United States 12 Month Oil Fund, LP
|
|
|
Condensed Statements of Cash Flows (Unaudited)
|
|
|
For the three months ended March 31, 2020 and 2019
|
|
|
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2019
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(25,119,958
|
)
|
|
$
|
13,369,839
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on open futures contracts
|
|
|
24,361,247
|
|
|
|
(14,594,318
|
)
|
(Increase) decrease in dividends receivable
|
|
|
9,571
|
|
|
|
(31,772
|
)
|
(Increase) decrease in interest receivable
|
|
|
5,576
|
|
|
|
(744
|
)
|
(Increase) decrease in prepaid insurance
|
|
|
(4,480
|
)
|
|
|
1,433
|
|
(Increase) decrease in ETF transaction fees receivable
|
|
|
(350
|
)
|
|
|
—
|
|
Increase (decrease) in General Partner management fees payable
|
|
|
(7,897
|
)
|
|
|
(1,042
|
)
|
Increase (decrease) in professional fees payable
|
|
|
(53,646
|
)
|
|
|
(45,275
|
)
|
Increase (decrease) in brokerage commissions payable
|
|
|
1,080
|
|
|
|
—
|
|
Increase (decrease) in directors' fees payable
|
|
|
(473
|
)
|
|
|
(57
|
)
|
Increase (decrease) in insurance payable
|
|
|
—
|
|
|
|
6
|
|
Increase (decrease) in license fees payable
|
|
|
(352
|
)
|
|
|
(701
|
)
|
Net cash provided by (used in) operating activities
|
|
|
(809,682
|
)
|
|
|
(1,302,631
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Addition of partnership shares
|
|
|
20,860,352
|
|
|
|
—
|
|
Redemption of partnership shares
|
|
|
(3,396,329
|
)
|
|
|
(2,237,484
|
)
|
Net cash provided by (used in) financing activities
|
|
|
17,464,023
|
|
|
|
(2,237,484
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
16,654,341
|
|
|
|
(3,540,115
|
)
|
|
|
|
|
|
|
|
|
|
Total Cash, Cash Equivalents and Equity in Trading Accounts, beginning of period
|
|
|
51,606,975
|
|
|
|
66,728,725
|
|
Total Cash, Cash Equivalents and Equity in Trading Accounts, end of period
|
|
$
|
68,261,316
|
|
|
$
|
63,188,610
|
|
|
|
|
|
|
|
|
|
|
Components of Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
35,029,959
|
|
|
$
|
53,096,379
|
|
Equity in Trading Accounts:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
33,231,357
|
|
|
|
10,092,231
|
|
Total Cash, Cash Equivalents and Equity in Trading Accounts
|
|
$
|
68,261,316
|
|
|
$
|
63,188,610
|
|
See accompanying notes to condensed financial statements.
United States 12 Month Oil Fund, LP
Notes to Condensed Financial Statements
For the period ended March 31, 2020 (Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
The United States 12 Month Oil Fund, LP
(“USL”) was organized as a limited partnership under the laws of the state of Delaware on June 27, 2007. USL is a commodity
pool that issues limited partnership shares (“shares”) that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE
Arca”). Prior to November 25, 2008, USL’s shares traded on the American Stock Exchange (the “AMEX”). USL
will continue in perpetuity, unless terminated sooner upon the occurrence of one or more events as described in its Third Amended
and Restated Agreement of Limited Partnership dated as of December 15, 2017 (the “LP Agreement”). The investment objective
of USL is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect
the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by
the daily changes in the average of the prices of 12 futures contracts for light, sweet crude oil traded on the New York Mercantile
Exchange (the “NYMEX”) that is the near month contract to expire and the contracts for the following 11 months for
a total of 12 consecutive months’ contracts, except when the near month contract is within two weeks of expiration, in which
case it will be measured by the futures contract that is the next month contract to expire and the contracts for the following
11 consecutive months (the “Benchmark Oil Futures Contracts”), plus interest earned on USL’s collateral holdings,
less USL’s expenses. When calculating the daily movement of the average price of the 12 contracts, each contract month will
be equally weighted.
USL’s investment objective is not
for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil or any particular futures
contract based on light, sweet crude oil, nor is USL’s investment objective for the percentage change in its NAV to
reflect the percentage change of the price of any particular futures contract as measured over a time period greater than one
day.
United States Commodity Funds LLC (“USCF”),
the general partner of USL, believes that it is not practical to manage the portfolio to achieve such an investment goal when investing
in Oil Futures Contracts (as defined below) and Other Oil-Related Investments (as defined below). USL accomplishes its objective
through investments in futures contracts for light, sweet crude oil and other types of crude oil, diesel-heating oil, gasoline,
natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively,
“Oil Futures Contracts”) and other oil-related investments such as cash-settled options on Oil Futures Contracts, forward
contracts for oil, cleared swap contracts and over-the-counter (“OTC”) transactions that are based on the price of
crude oil, diesel-heating oil, gasoline, natural gas and other petroleum-based fuels, Oil Futures Contracts and indices based on
the foregoing (collectively, “Other Oil-Related Investments”). As of March 31, 2020, USL held 1,728 Oil Futures Contracts
for light, sweet crude oil traded on the NYMEX and did not hold any Oil Futures Contracts traded on the ICE Futures.
USL commenced investment operations on
December 6, 2007 and has a fiscal year ending on December 31. USCF is responsible for the management of USL. USCF is a member of
the National Futures Association (the “NFA”) and became registered as a commodity pool operator with the Commodity
Futures Trading Commission (the “CFTC”) effective December 1, 2005 and a swaps firm on August 8, 2013.
USCF is also the general partner of the
United States Oil Fund, LP (“USO”), the United States Natural Gas Fund, LP (“UNG”) and the United States
Gasoline Fund, LP (“UGA”), which listed their limited partnership shares on the American Stock Exchange (the “AMEX”)
under the ticker symbols “USO” on April 10, 2006, “UNG” on April 18, 2007 and “UGA” on February
26, 2008, respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each of USO’s, UNG’s and UGA’s
shares commenced trading on the NYSE Arca on November 25, 2008. USCF is also the general partner of the United States 12 Month
Natural Gas Fund, LP (“UNL”) and the United States Brent Oil Fund, LP (“BNO”), which listed their limited
partnership shares on the NYSE Arca under the ticker symbols “UNL” on November 18, 2009 and “BNO” on June
2, 2010, respectively. USCF previously served as the general partner for the United States Short Oil Fund, LP (“DNO”)
and the United States Diesel-Heating Oil Fund, LP (“UHN”), both of which were liquidated in 2018.
USCF is also the sponsor of the United
States Commodity Index Fund (“USCI”), the United States Copper Index Fund (“CPER”) and the USCF Crescent
Crypto Index Fund (“XBET”), each a series of the United States Commodity Index Funds Trust (“USCIFT”).
USCF previously served as the sponsor for the United States Agricultural Index Fund (“USAG”) a series of USCIFT which
was liquidated in 2018. XBET is currently in registration and has not commenced operations. USCI and CPER listed their shares on
the NYSE Arca under the ticker symbols “USCI” on August 10, 2010 and “CPER” on November 15, 2011, respectively.
In addition, USCF was the sponsor of the
USCF Funds Trust, a Delaware statutory trust, and each of its series, the United States 3x Oil Fund (“USOU”) and the
United States 3x Short Oil Fund (“USOD”), which listed their shares on the NYSE Arca on July 20, 2017 under the ticker
symbols “USOU” and “USOD”, respectively. Each of USOU and USOD liquidated all of its assets and distributed
cash pro rata to all remaining shareholders in December 2019.
USO, UNG, UGA, UNL, USL, BNO, USCI and
CPER are referred to collectively herein as the “Related Public Funds.”
USL issues shares to certain authorized
purchasers (“Authorized Participants”) by offering baskets consisting of 50,000 shares (“Creation Baskets”)
through ALPS Distributors, Inc., as the marketing agent (the “Marketing Agent”). The purchase price for a Creation
Basket is based upon the NAV of a share calculated shortly after the close of the core trading session on the NYSE Arca on the
day the order to create the basket is properly received.
Authorized Participants pay USL a $350
transaction fee for each order placed to create one or more Creation Baskets or to redeem one or more baskets (“Redemption
Baskets”), consisting of 50,000 shares. Shares may be purchased or sold on a nationally recognized securities exchange in
smaller increments than a Creation Basket or Redemption Basket. Shares purchased or sold on a nationally recognized securities
exchange are not purchased or sold at the per share NAV of USL but rather at market prices quoted on such exchange.
On December 4, 2007, USL initially registered
11,000,000 shares on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”). On December 6, 2007, USL
listed its shares on the AMEX under the ticker symbol “USL” and switched to trading on the NYSE Arca under the same
ticker symbol on November 25, 2008. On that day, USL established its initial per share NAV by setting the price at $50.00 and issued
300,000 shares in exchange for $15,000,000. USL also commenced investment operations on December 6, 2007, by purchasing Oil Futures
Contracts traded on the NYMEX based on light, sweet crude oil. As of March 31, 2020, USL had registered a total of 111,000,000
shares.
The accompanying unaudited condensed financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated
by the SEC and, therefore, do not include all information and footnote disclosure required under generally accepted accounting
principles in the United States of America (“U.S. GAAP”). The financial information included herein is unaudited; however,
such financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion
of USCF, necessary for the fair presentation of the condensed financial statements for the interim period.
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The condensed financial statements have
been prepared in conformity with U.S. GAAP as detailed in the Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification. USL is an investment company and follows the accounting and reporting guidance in FASB
Topic 946.
Revenue Recognition
Commodity futures contracts, forward contracts,
physical commodities and related options are recorded on the trade date. All such transactions are recorded on the identified cost
basis and marked to market daily. Unrealized gains or losses on open contracts are reflected in the condensed statements of
financial condition and represent the difference between the original contract amount and the market value (as determined by exchange
settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts,
physical commodities, and their related options) as of the last business day of the year or as of the last date of the condensed
financial statements. Changes in the unrealized gains or losses between periods are reflected in the condensed statements of operations. USL
earns income on funds held at the custodian or a futures commission merchant (“FCM”) at prevailing market rates
earned on such investments.
Brokerage Commissions
Brokerage commissions on all open commodity
futures contracts are accrued on a full-turn basis.
Income Taxes
USL is not subject to federal income
taxes; each partner reports his/her allocable share of income, gain, loss deductions or credits on his/her own income tax
return.
In accordance with U.S. GAAP, USL is required
to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority,
including resolution of any tax related appeals or litigation processes, based on the technical merits of the position. USL files
an income tax return in the U.S. federal jurisdiction and may file income tax returns in various U.S. states. USL is not subject
to income tax return examinations by major taxing authorities for years before 2016. The tax benefit recognized is measured as
the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition
of a tax benefit previously recognized results in USL recording a tax liability that reduces net assets. However, USL's conclusions
regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going
analysis of and changes to tax laws, regulations and interpretations thereof. USL recognizes interest accrued related to unrecognized
tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or
penalties have been recognized as of and for the period ended March 31, 2020.
Creations and Redemptions
Authorized Participants may purchase
Creation Baskets or redeem Redemption Baskets only in blocks of 50,000 shares at a price equal to the NAV of the shares calculated
shortly after the close of the core trading session on the NYSE Arca on the day the order is placed.
USL receives or pays the proceeds
from shares sold or redeemed within two business days after the trade date of the purchase or redemption. The amounts due from
Authorized Participants are reflected in USL's condensed statements of financial condition as receivable for shares sold and amounts
payable to Authorized Participants upon redemption are reflected as payable for shares redeemed.
Authorized Participants pay USL a $350 transaction fee for each order placed to create one or more Creation Baskets or to redeem
one or more Redemption Baskets.
Partnership Capital and Allocation of Partnership
Income and Losses
Profit or loss shall be allocated among
the partners of USL in proportion to the number of shares each partner holds as of the close of each month. USCF may
revise, alter or otherwise modify this method of allocation as described in the LP Agreement.
Calculation of Per Share NAV
USL's per share NAV is calculated on each
NYSE Arca trading day by taking the current market value of its total assets, subtracting any liabilities and dividing that amount
by the total number of shares outstanding. USL uses the closing price for the contracts on the relevant exchange on that day to
determine the value of contracts held on such exchange.
Net Income (Loss) Per Share
Net income (loss) per share is the difference
between the per share NAV at the beginning of each period and at the end of each period. The weighted average number of shares
outstanding was computed for purposes of disclosing net income (loss) per weighted average share. The weighted average shares are
equal to the number of shares outstanding at the end of the period, adjusted proportionately for shares added and redeemed based
on the amount of time the shares were outstanding during such period. There were no shares held by USCF at March 31, 2020.
Offering Costs
Offering costs incurred in connection with
the registration of additional shares after the initial registration of shares are borne by USL. These costs include registration
fees paid to regulatory agencies and all legal, accounting, printing and other expenses associated with such offerings. These
costs are accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or
a shorter period if warranted.
Cash Equivalents
Cash equivalents include money market funds
and overnight deposits or time deposits with original maturity dates of six months or less.
Reclassification
Certain amounts in the accompanying
condensed financial statements were reclassified to conform to the current presentation.
Use of Estimates
The preparation of condensed financial
statements in conformity with U.S. GAAP requires USCF to make estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements, and the
reported amounts of the revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
NOTE 3 — FEES PAID BY THE FUND AND
RELATED PARTY TRANSACTIONS
USCF Management Fee
Under the LP Agreement, USCF is responsible
for investing the assets of USL in accordance with the objectives and policies of USL. In addition, USCF has arranged for
one or more third parties to provide administrative, custody, accounting, transfer agency and other necessary services to USL.
For these services, USL is contractually obligated to pay USCF a fee, which is paid monthly, equal to 0.60% per
annum of average daily total net assets.
Ongoing Registration Fees and Other Offering Expenses
USL pays all costs and expenses associated
with the ongoing registration of its shares subsequent to the initial offering. These costs include registration or other fees
paid to regulatory agencies in connection with the offer and sale of shares, and all legal, accounting, printing and other expenses
associated with such offer and sale. For the three months ended March 31, 2020 and 2019, USL did not incur registration fees and
other offering expenses.
Independent Directors’ and Officers’
Expenses
USL is responsible for paying its portion
of the directors’ and officers’ liability insurance for USL and the Related Public Funds and the fees and expenses
of the independent directors who also serve as audit committee members of USL and the Related Public Funds. USL shares the
fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative assets of each Related
Public Fund computed on a daily basis. These fees and expenses for the year ending December 31, 2020 are estimated to
be a total of $12,000 for USL and, in the aggregate for USL and the Related Public Funds, $574,000.
Licensing Fees
As discussed in Note 4 below, USL entered into a licensing agreement with the NYMEX on April 10, 2006, as amended on October 20,
2011. Pursuant to the agreement, USL and the Related Public Funds, other than BNO, USCI and CPER, pay a licensing fee that is equal
to 0.015% on all net assets. During the three months ended March 31, 2020 and 2019, USL incurred $1,707 and $2,215, respectively,
under this arrangement.
Investor Tax Reporting Cost
The fees and expenses associated with USL's
audit expenses and tax accounting and reporting requirements are paid by USL. These costs are estimated to be $124,000 for the
year ending December 31, 2020. Tax reporting costs fluctuate between years due to the number of shareholders during any given year.
Other Expenses and Fees
In addition to the fees described above,
USL pays all brokerage fees and other expenses in connection with the operation of USL, excluding costs and expenses paid by USCF
as outlined in Note 4 – Contracts and Agreements below.
NOTE 4 — CONTRACTS AND AGREEMENTS
Marketing Agent Agreement
USL is party to a marketing agent agreement,
dated as of November 13, 2007, as amended from time to time, with the Marketing Agent and USCF, whereby the Marketing Agent provides
certain marketing services for USL as outlined in the agreement. The fee of the Marketing Agent, which is borne by USCF, is equal
to 0.06% on USL's assets up to $3 billion and 0.04% on USL's assets in excess of $3 billion. In no event may the aggregate compensation
paid to the Marketing Agent and any affiliate of USCF for distribution-related services exceed 10% of the gross proceeds of USL's
offering.
The above fee does not include website
construction and development, which are also borne by USCF.
Custody, Transfer Agency and Fund Administration
and Accounting Services Agreements
USL is also party to a custodian
agreement, dated October 5, 2007, as amended from time to time, with Brown Brothers Harriman & Co. (“BBH&Co.”)
and USCF, whereby BBH&Co. holds investments on behalf of USL. USCF pays the fees of the custodian, which are determined
by the parties from time to time. In addition, USL is party to an administrative agency agreement, dated October 5, 2007,
as amended from time to time, with USCF and BBH&Co., whereby BBH&Co. acts as the administrative agent, transfer agent and
registrar for USL. USCF also pays the fees of BBH&Co. for its services under such agreement and such fees are determined
by the parties from time to time.
Currently, USCF pays BBH&Co. for
its services, in the foregoing capacities, a minimum amount of $75,000 annually for its custody, fund accounting and fund administration
services rendered to USL and each of the Related Public Funds, as well as a $20,000 annual fee for its transfer agency services.
In addition, USCF pays BBH&Co. an asset-based charge of (a) 0.06% for the first $500 million of the Related Public Funds’
combined net assets, (b) 0.0465% for the Related Public Funds’ combined net assets greater than $500 million but less than
$1 billion, and (c) 0.035% once the Related Public Funds’ combined net assets exceed $1 billion. The annual minimum amount
will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000. USCF also pays BBH&Co. transaction
fees ranging from $7 to $15 per transaction. The custody and transfer agency services rendered by BBH&Co. to USL and each
of the Related Public Funds terminated on March 31, 2020 and fund accounting and fund administration services rendered by BBH&Co.
to USL and each of the Related Public Funds will terminate on May 31, 2020 to allow for certain reporting and other services
to continue in connection with the transition to The Bank of New York Mellon.
USCF has engaged The Bank of New York Mellon,
a New York corporation authorized to do a banking business (“BNY Mellon”), to provide USL and each of the Related Public
Funds with certain custodial, administrative and accounting, and transfer agency services, pursuant to the following agreements
with BNY Mellon dated as of March 20, 2020 (together, the “BNY Mellon Agreements”), which were effective as of April
1, 2020: (i) a Custody Agreement; (ii) a Fund Administration and Accounting Agreement; and (iii) a Transfer Agency and Service
Agreement.
Brokerage and Futures Commission Merchant
Agreements
On October 8, 2013, USL entered into a
brokerage agreement with RBC Capital Markets LLC (“RBC”) to serve as USL's FCM effective October 10, 2013. The
agreement with RBC requires it to provide services to USL in connection with the purchase and sale of Oil Futures Contracts
and Other Oil-Related Investments that may be purchased and sold by or through RBC for USL's account. In accordance with the
agreement, RBC charges USL commissions of approximately $7 to $8 per round-turn trade, including applicable exchange,
clearing and NFA fees for Oil Futures Contracts and options on Oil Futures Contracts. Such fees include those incurred
when purchasing Oil Futures Contracts and options on Oil Futures Contracts when USL issues shares as a result of a Creation
Basket, as well as fees incurred when selling Oil Futures Contracts and options on Oil Futures Contracts when USL redeems
shares as a result of a Redemption Basket. Such fees are also incurred when Oil Futures Contracts and options on Oil
Futures Contracts are purchased or redeemed for the purpose of rebalancing the portfolio. USL also incurs commissions to brokers
for the purchase and sale of Oil Futures Contracts, Other Oil-Related Investments or short-term obligations of the United States
of two years or less (“Treasuries”).
|
|
For the three months ended
March 31, 2020
|
|
|
For the three months ended
March 31, 2019
|
|
Total commissions accrued to brokers
|
|
$
|
5,146
|
|
|
$
|
1,872
|
|
Total commissions as annualized percentage of average total net assets
|
|
|
0.05
|
%
|
|
|
0.01
|
%
|
Commissions accrued as a result of rebalancing
|
|
$
|
2,701
|
|
|
$
|
1,823
|
|
Percentage of commissions accrued as a result of rebalancing
|
|
|
52.49
|
%
|
|
|
97.38
|
%
|
Commissions accrued as a result of creation and redemption activity
|
|
$
|
2,445
|
|
|
$
|
49
|
|
Percentage of commissions accrued as a result of creation and redemption activity
|
|
|
47.51
|
%
|
|
|
2.62
|
%
|
The increase in total commissions accrued
to brokers for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily
to a higher number of crude oil futures contracts being held and traded.
NYMEX Licensing Agreement
USL and the NYMEX entered into a licensing agreement on April 10, 2006, as amended on October 20, 2011, whereby USL was granted
a non-exclusive license to use certain of the NYMEX’s settlement prices and service marks. Under the licensing agreement,
USL and the Related Public Funds, other than BNO, USCI and CPER, pay the NYMEX an asset-based fee for the license, the terms of
which are described in Note 3. USL expressly disclaims any association with the NYMEX or endorsement of USL by the NYMEX and acknowledges
that “NYMEX” and “New York Mercantile Exchange” are registered trademarks of the NYMEX.
NOTE 5 — FINANCIAL INSTRUMENTS,
OFF-BALANCE SHEET RISKS AND CONTINGENCIES
USL may engage in the trading of futures
contracts, options on futures contracts, cleared swaps and OTC swaps (collectively, “derivatives”). USL is exposed
to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the
risk of failure by another party to perform according to the terms of a contract.
USL may enter into futures contracts, options
on futures contracts and cleared swaps to gain exposure to changes in the value of an underlying commodity. A futures contract
obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity
at a specified time and place. Some futures contracts may call for physical delivery of the asset, while others are settled in
cash. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the
underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange
before the designated date of delivery. Cleared swaps are agreements that are eligible to be cleared by a clearinghouse, e.g.,
ICE Clear Europe, and provide the efficiencies and benefits that centralized clearing on an exchange offers to traders of futures
contracts, including credit risk intermediation and the ability to offset positions initiated with different counterparties.
The purchase and sale of futures contracts,
options on futures contracts and cleared swaps require margin deposits with an FCM. Additional deposits may be necessary for any
loss on contract value. The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s
proprietary activities.
Futures contracts, options on futures contracts
and cleared swaps involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss
in excess of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure USL has
in the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation
between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of
an illiquid market for a futures contract. Buying and selling options on futures contracts exposes investors to the risks of purchasing
or selling futures contracts.
All of the futures contracts held by USL
through March 31, 2020 were exchange-traded. The risks associated with exchange-traded contracts are generally perceived to be
less than those associated with OTC swaps since, in OTC swaps, a party must rely solely on the credit of its respective individual
counterparties. However, in the future, if USL were to enter into non-exchange traded contracts, it would be subject to the credit
risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments
is the net unrealized gain, if any, on the transaction. USL has credit risk under its futures contracts since the sole counterparty
to all domestic and foreign futures contracts is the clearinghouse for the exchange on which the relevant contracts are traded.
In addition, USL bears the risk of financial failure by the clearing broker.
USL's cash and other property, such
as Treasuries, deposited with an FCM are considered commingled with all other customer funds, subject to the FCM’s segregation
requirements. In the event of an FCM’s insolvency, recovery may be limited to a pro rata share of segregated funds available.
It is possible that the recovered amount could be less than the total of cash and other property deposited. The insolvency of an
FCM could result in the complete loss of USL's assets posted with that FCM; however, the majority of USL's assets are held
in investments in Treasuries, cash and/or cash equivalents with USL's custodian and would not be impacted by the insolvency
of an FCM. The failure or insolvency of USL's custodian, however, could result in a substantial loss of USL's assets.
USCF invests a portion of USL's cash
in money market funds that seek to maintain a stable per share NAV. USL is exposed to any risk of loss associated with an
investment in such money market funds. As of March 31, 2020, USL did not hold any investments in money market funds. As of December
31, 2019, USL held investments in money market funds in the amount of $13,000,000. USL also holds cash deposits
with its custodian. Pursuant to a written agreement with BBH&Co., uninvested overnight cash balances are swept to offshore
branches of U.S. regulated and domiciled banks located in Toronto, Canada; London, United Kingdom; Grand Cayman, Cayman Islands;
and Nassau, Bahamas; which are subject to U.S. regulation and regulatory oversight. As of March 31, 2020 and December 31, 2019,
USL held cash deposits and investments in Treasuries in the amounts of $68,261,316 and $38,606,975, respectively, with the custodian
and FCM. Some or all of these amounts may be subject to loss should USL's custodian and/or FCM cease operations.
For derivatives, risks arise from changes
in the market value of the contracts. Theoretically, USL is exposed to market risk equal to the value of futures contracts
purchased and unlimited liability on such contracts sold short. As both a buyer and a seller of options, USL pays or receives a
premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option.
USL's policy is to continuously monitor
its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting
controls and procedures. In addition, USL has a policy of requiring review of the credit standing of each broker or counterparty
with which it conducts business.
The financial instruments held by USL are
reported in its condensed statements of financial condition at market or fair value, or at carrying amounts that approximate fair
value, because of their highly liquid nature and short-term maturity.
NOTE 6 — FINANCIAL HIGHLIGHTS
The following table presents per share
performance data and other supplemental financial data for the three months ended March 31, 2020 and 2019 for the shareholders.
This information has been derived from information presented in the condensed financial statements.
|
|
For the three months ended
March 31, 2020
(Unaudited)
|
|
|
For the three months ended
March 31, 2019
(Unaudited)
|
|
Per Share Operating Performance:
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
22.95
|
|
|
$
|
17.82
|
|
Total income (loss)
|
|
|
(10.75
|
)
|
|
|
4.75
|
|
Total expenses
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
Net increase (decrease) in net asset value
|
|
|
(10.79
|
)
|
|
|
4.70
|
|
Net asset value, end of period
|
|
$
|
12.16
|
|
|
$
|
22.52
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
(47.02
|
)%
|
|
|
26.37
|
%
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
Total income (loss)
|
|
|
(54.66
|
)%
|
|
|
22.55
|
%
|
Management fees*
|
|
|
0.60
|
%
|
|
|
0.60
|
%
|
Expenses excluding management fees*
|
|
|
0.33
|
%
|
|
|
0.31
|
%
|
Net income (loss)
|
|
|
(54.89
|
)%
|
|
|
22.32
|
%
|
Total returns are calculated based on the
change in value during the period. An individual shareholder’s total return and ratio may vary from the above total returns
and ratios based on the timing of contributions to and withdrawals from USL.
NOTE 7 — FAIR VALUE OF FINANCIAL
INSTRUMENTS
USL values its investments in accordance
with Accounting Standards Codification 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines
fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurement. The changes to past practice resulting from the application of ASC 820 relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement. ASC 820 establishes
a fair value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained from
sources independent of USL (observable inputs) and (2) USL's own assumptions about market participant assumptions developed
based on the best information available under the circumstances (unobservable inputs). The three levels defined by the ASC 820
hierarchy are as follows:
Level I – Quoted prices (unadjusted)
in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement
date.
Level II – Inputs other than quoted
prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include
the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability,
and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated
inputs).
Level III – Unobservable pricing
input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent
that observable inputs are not available.
In some instances, the inputs used to measure
fair value might fall within different levels of the fair value hierarchy. The level in the fair value hierarchy within which the
fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair
value measurement in its entirety.
The following table summarizes the valuation of USL’s securities at March 31, 2020 using the fair value hierarchy:
At March 31, 2020
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Short-Term Investments
|
|
$
|
29,917,445
|
|
|
$
|
29,917,445
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Exchange-Traded Futures Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
(20,758,656
|
)
|
|
|
(20,758,656
|
)
|
|
|
—
|
|
|
|
—
|
|
The following table summarizes the valuation of USL’s securities at December 31, 2019 using the fair value hierarchy:
At December 31, 2019
|
|
Total
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
Short-Term Investments
|
|
$
|
50,852,898
|
|
|
$
|
50,852,898
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Exchange-Traded Futures Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Contracts
|
|
|
3,602,591
|
|
|
|
3,602,591
|
|
|
|
—
|
|
|
|
—
|
|
Effective January 1, 2009, USL adopted
the provisions of Accounting Standards Codification 815 – Derivatives and Hedging, which require presentation of qualitative
disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains
and losses on derivatives.
Fair Value of Derivative Instruments
Derivatives not
Accounted for
as Hedging
Instruments
|
|
Condensed
Statements of
Financial
Condition Location
|
|
Fair Value
At March 31,
2020
|
|
|
Fair Value
At December 31,
2019
|
|
Futures - Commodity Contracts
|
|
Assets
|
|
$
|
(20,758,656
|
)
|
|
$
|
3,602,591
|
|
The Effect of Derivative Instruments on the Condensed Statements of Operations
|
|
|
|
For the three months ended
March 31, 2020
|
|
|
For the three months ended
March 31, 2019
|
|
Derivatives not
Accounted for
as Hedging
Instruments
|
|
Location of
Gain (Loss)
on Derivatives
Recognized in
Income
|
|
Realized
Gain (Loss)
on Derivatives
Recognized in
Income
|
|
|
Change in
Unrealized
Gain (Loss) on
Derivatives
Recognized in
Income
|
|
|
Realized
Gain (Loss)
on Derivatives
Recognized in
Income
|
|
|
Change in
Unrealized
Gain (Loss) on
Derivatives
Recognized in
Income
|
|
Futures - Commodity Contracts
|
|
Realized gain (loss) on
closed positions
|
|
$
|
(837,283
|
)
|
|
|
|
|
|
$
|
(1,433,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
gain (loss) on open
positions
|
|
|
|
|
|
$
|
(24,361,247
|
)
|
|
|
|
|
|
$
|
14,594,318
|
|
NOTE 8 — RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the FASB issued Accounting
Standards Update (“ASU”) No. 2018-13, which changes certain fair value measurement disclosure requirements. The new
ASU, in addition to other modifications and additions, removes the requirement to disclose the amount and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, and the Funds’ policy for the timing of transfers between levels.
The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. The Fund has evaluated the implications of certain provisions of the ASU and has determined that there
will be no material impacts to the financial statements.
NOTE 9 — SUBSEQUENT EVENTS
USL has performed an evaluation of subsequent
events through the date the condensed financial statements were issues. This evaluation resulted in the following disclosures.
USCF received letters from the CME on behalf
of the NYMEX Market Regulation Department on April 16, 2020 (the “April 16 CME Letter”) and on April 23, 2020 (the
“April 23 CME Letter”, and together with the April 16 CME Letter, the “CME Letters”). The CME Letters ordered
USCF, USL and the Related Public Funds not to exceed accountability levels in specified light, sweet crude oil futures contracts
and not to assume any positions in the specified light, sweet crude oil futures contract in excess of the exchange established
position limits. The current accountability levels and position limits are set forth in the April 23 CME Letter which superseded
the April 16 CME Letter. The April 23 CME Letter ordered USCF, USL and the Related Public Funds not to exceed accountability
levels in excess of 10,000 futures contracts in the light, sweet crude oil futures contract for June 2020 and not to assume a position
in the light, sweet crude oil futures contract for June 2020 in excess of 15,000 long futures contracts, for July 2020 in 78,000
long futures contracts, for August 2020 in 50,000 long futures contracts, for September 2020 in 35,000 long futures contracts.
The foregoing accountability levels and position limits are subject to change. Due to evolving market conditions, a change
in regulator accountability levels and position limits imposed on USL with respect to its investment in Oil Futures Contracts
as discussed in the CME Letters, additional or different risk mitigation measures taken by USL’s FCM with respect to USL
acquiring additional Oil Futures contracts, USL intends to invest in other permitted investments, beyond the Benchmark Oil Futures
Contract.
An outbreak of infectious respiratory illness
caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now been detected globally.
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Subsequently, COVID-19 has resulted in
numerous deaths, travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere,
disruption of and delays in healthcare service preparation and delivery, prolonged quarantines and the imposition of both local
and more widespread “work from home” measures, cancellations, supply chain disruptions, and lower consumer demand,
as well as general concern and uncertainty. The ongoing spread of COVID-19 has had, and is expected to continue to have, a material
adverse impact on local economies in the affected jurisdictions and also on the global economy, as cross border commercial activity
and market sentiment are increasingly impacted by the outbreak and government and other measures seeking to contain its spread.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect individual
issuers and capital markets in ways that cannot necessarily be foreseen. In addition, actions taken by government and quasi-governmental
authorities and regulators throughout the world in response to the COVID-19 outbreak, including significant fiscal and monetary
policy changes, may affect the value, volatility, pricing and liquidity of some investments or other assets, including those held
by or invested in by the USL. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political,
social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its ultimate impact on USL
and, on the global economy, cannot be determined with certainty. The COVID-19 pandemic and its effects may last for an extended
period of time, and could result in significant and continued market volatility, exchange trading suspensions and closures, declines
in global financial markets, higher default rates, and a substantial economic downturn or recession. The foregoing could impair
USL's ability to maintain operational standards (such as with respect to satisfying redemption requests), disrupt the operations
of USL's service providers, adversely affect the value and liquidity of USL's investments, and negatively impact USL's performance
and your investment in USL. The extent to which COVID-19 will affect USL and USL's service providers and portfolio investments
will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge
concerning the severity of COVID-19 and the actions taken to contain COVID-19. Given the significant economic and financial market
disruptions associated with the COVID-19 pandemic, the valuation and performance of USL's investments could be impacted adversely.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion should be read
in conjunction with the condensed financial statements and the notes thereto of the United States 12 Month Oil Fund, LP (“USL”)
included elsewhere in this quarterly report on Form 10-Q.
Forward-Looking Information
This quarterly report on Form 10-Q, including
this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking
statements regarding the plans and objectives of management for future operations. This information may involve known and unknown
risks, uncertainties and other factors that may cause USL’s actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe USL’s future plans, strategies and expectations, are generally identifiable
by use of the words “may,” “will,” “should,” “expect,” “anticipate,”
“estimate,” “believe,” “intend” or “project,” the negative of these words, other
variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect,
and USL cannot assure investors that the projections included in these forward-looking statements will come to pass. USL’s
actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various
factors.
USL has based the forward-looking statements
included in this quarterly report on Form 10-Q on information available to it on the date of this quarterly report on Form 10-Q,
and USL assumes no obligation to update any such forward-looking statements. Although USL undertakes no obligation to revise or
update any forward-looking statements, whether as a result of new information, future events or otherwise, investors are advised
to consult any additional disclosures that USL may make directly to them or through reports that USL files in the future with the
U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K.
Introduction
USL, a Delaware limited partnership, is
a commodity pool that issues shares that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”). The investment
objective of USL is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”)
to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as
measured by the daily changes in the average of the prices of 12 futures contracts for light, sweet crude oil traded on the New
York Mercantile Exchange (the “NYMEX”) that is the near month contract to expire and the contracts for the following
11 months for a total of 12 consecutive months’ contracts, except when the near month contract is within two weeks of expiration,
in which case it will be measured by the futures contract that is the next month contract to expire and the contracts for the following
11 consecutive months (the “Benchmark Oil Futures Contracts”), plus interest earned on USL’s collateral holdings,
less USL’s expenses. “Near month contract” means the next contract traded on the NYMEX due to expire. “Next
month contract” means the first contract traded on the NYMEX due to expire after the near month contract. When calculating
the daily movement of the average price of the 12 contracts, each contract month will be equally weighted.
USL’s investment objective is not
for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil or any particular
futures contract based on light, sweet crude oil, nor is USL’s investment objective for the percentage change in its
NAV to reflect the percentage change of the price of any particular futures contract as measured over a time period greater
than one day. The general partner of USL, United States Commodity Funds LLC (“USCF”), believes that it is not practical
to manage the portfolio to achieve such an investment goal when investing in Oil Futures Contracts (as defined below) and Other
Oil-Related Investments (as defined below).
USL invests primarily in futures contracts
for light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are
traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Oil Futures Contracts”) and to
a lesser extent, in order to comply with regulatory requirements or in view of market conditions, other oil-related investments
such as cash-settled options on Oil Futures Contracts, forward contracts for oil, cleared swap contracts and over-the-counter (“OTC”)
swaps that are based on the price of oil, other petroleum-based fuels, Oil Futures Contracts and indices based on the foregoing
(collectively, “Other Oil-Related Investments”). For convenience and unless otherwise specified, Oil Futures Contracts
and Other Oil-Related Investments collectively are referred to as “Oil Interests” in this quarterly report on Form
10-Q.
USCF believes that market arbitrage opportunities
will cause daily changes in USL’s share price on the NYSE Arca on a percentage basis to closely track daily changes in USL’s
per share NAV on a percentage basis. USCF further believes that daily changes in prices of the Benchmark Oil Futures Contracts
have historically closely tracked the daily changes in spot prices of light, sweet crude oil. USCF believes that the net effect
of these relationships will be that the daily changes in the price of USL’s shares on the NYSE Arca on a percentage basis
will closely track, the daily changes in the spot price of a barrel of light, sweet crude oil on a percentage basis, plus interest
earned on USL’s collateral holdings, less USL’s expenses.
USL seeks to achieve its investment objective
by investing so that the average daily percentage change in USL’s NAV for any period of 30 successive valuation days will
be within plus/minus ten percent (10%) of the average daily percentage change in the price of the Benchmark Oil Futures Contract
over the same period.
Regulatory Disclosure
Accountability Levels, Position Limits
and Price Fluctuation Limits. Designated contract markets (“DCMs”), such as the NYMEX and ICE Futures, have established
accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any
person or group of persons under common trading control (other than as a hedge, which an investment by USL is not) may hold, own
or control. These levels and position limits apply to the futures contracts that USL invests in to meet its investment objective.
In addition to accountability levels and position limits, the NYMEX and ICE Futures also set daily price fluctuation limits on
futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a
particular futures contract, no trades may be made at a price beyond that limit.
The accountability levels for the Benchmark
Oil Futures Contracts and other Oil Futures Contracts traded on U.S.-based futures exchanges, such as the NYMEX, are not a fixed
ceiling, but rather a threshold above which the NYMEX may exercise greater scrutiny and control over an investor’s positions.
The current accountability level for investments for any one month in the Benchmark Oil Futures Contracts is 10,000 contracts.
In addition, the NYMEX imposes an accountability level for all months of 20,000 net futures contracts for light, sweet crude oil.
In addition, ICE Futures maintains accountability levels, position limits and monitoring authority for its futures contracts for
light, sweet crude oil. If USL and the Related Public Funds exceed these accountability levels for investments in the futures contracts
for light, sweet crude oil, the NYMEX and ICE Futures will monitor such exposure and may ask for further information on their activities
including the total size of all positions, investment and trading strategy, and the extent of liquidity resources of USL and the
Related Public Funds. If deemed necessary by the NYMEX and/or ICE Futures, USL could be ordered to reduce its net futures contracts
back to the accountability level. As of March 31, 2020, USL held 1,728 futures contracts for light, sweet crude oil traded on the
NYMEX and did not hold any Oil Futures Contracts traded on the ICE Futures. For the three months ended March 31, 2020 USL did not
exceed the accountability levels imposed by the NYMEX or ICE Futures, however, the aggregated total of certain of the Related Public
Funds did exceed the accountability levels. No action was taken by NYMEX and USL did not reduce the number of Oil Futures Contracts
held as a result. On April 16, 2020, USCF received a letter from the CME Group, Inc. (the “CME Letter”) noting that
USL and the Related Public Funds could not exceed accountability levels in the light, sweet crude oil futures contracts for June
in excess of 10,000 futures contracts. None of USL or the Related Public Funds were required to reduce their positions as a result
of the order and maintain positions below this accountability level as required by the CME Letter.
Position limits differ from accountability
levels in that they represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow
such limits to be exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that
may apply at any time, the NYMEX and ICE Futures impose position limits on contracts held in the last few days of trading in the
near month contract to expire. It is unlikely that USL will run up against such position limits because USL’s investment
strategy is to close out its positions and “roll” from the near month contract to expire and the eleven following months
to the next month contract to expire and the eleven following months during a one day each month. For the three months ended March
31, 2020, USL did not exceed any position limits imposed by the NYMEX and ICE Futures. The CME Letter received by USCF also noted
that USL and the Related Public Funds could not assume a position in light, sweet crude oil futures contracts for June in excess
of the established position limit of 150,000 futures contracts None of USL or the Related Public Funds were required to reduce
their positions as a result of the order and maintained positions that were below this position limit as required by the CME Letter.
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 SEC, Financial Industry Regulatory Authority
(“FINRA”), CFTC, NFA, the futures exchanges, clearing organizations and other regulatory bodies.
Futures Contracts and Position Limits
The CFTC is generally prohibited by statute
from regulating trading on non-U.S. futures exchanges and markets. The CFTC, however, has adopted regulations relating to the marketing
of non-U.S. futures contracts in the United States. These regulations permit certain contracts on non-U.S. exchanges to be offered
and sold in the United States.
The CFTC has proposed to adopt limits
on speculative positions in 25 physical commodity futures and option contracts as well as swaps that are economically
equivalent to such contracts in the agriculture, energy and metals markets, which rules were recently re-proposed in January
2020 (the “Position Limit Rules”). The Position Limit Rules would, among other things: identify which contracts
are subject to speculative position limits; set thresholds that restrict the size of speculative positions that a person may
hold in the spot month, other individual months, and all months combined; create an exemption for positions that constitute
bona fide hedging transactions; impose responsibilities on DCMs and swap execution facilities (“SEFs”) to
establish position limits or, in some cases, position accountability rules; and apply to both futures and swaps across four
relevant venues: OTC, DCMs, SEFs as well as certain non-U.S. located platforms. The CFTC’s first attempt at finalizing
the Position Limit Rules, in 2011, was successfully challenged by market participants in 2012 and, since then, the CFTC has
re-proposed them and solicited comments from market participants multiple times. At this time, it is unclear how the Position
Limit Rules may affect USL, but the effect may be substantial and adverse. By way of example, the Position Limit Rules may
negatively impact the ability of USL to meet its investment objectives through limits that may inhibit USCF’s
ability to sell additional Creation Baskets of USL.
Until such time as the Position Limit Rules
are adopted, the regulatory architecture in effect prior to the adoption of the Position Limit Rules will govern transactions in
commodities and related derivatives. Under that system, the CFTC enforces federal limits on speculation in nine agricultural
products (e.g., corn, wheat and soy), while futures exchanges establish and enforce position limits and accountability levels for
other agricultural products and certain energy products (e.g., oil and natural gas). As a result, USL may be limited
with respect to the size of its investments in any commodities subject to these limits.
Under existing and recently adopted CFTC
regulations, for the purpose of position limits, a market participant is generally required, subject to certain narrow exceptions,
to aggregate all positions for which that participant controls the trading decisions with all positions for which that participant
has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting
pursuant to an express or implied agreement or understanding with that participant (the “Aggregation Rules”). The Aggregation
Rules will also apply with respect to the Position Limit Rules if and when such Position Limit Rules are adopted.
OTC Swaps
In October 2015, the Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Farm Credit Administration, and the Federal
Housing Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules
to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap
dealers, and major security-based swap participants (“Swap Entities”) that are subject to the jurisdiction of one of
the Agencies (such entities, “Covered Swap Entities”, and the joint final rules, the “Final Margin Rules”).
The Final Margin Rules will subject non-cleared
swaps and non-cleared security-based swaps between Covered Swap Entities and Swap Entities, and between Covered Swap Entities and
financial end users that have material swaps exposure (i.e., an average daily aggregate notional of $8 billion or more in non-cleared
swaps calculated in accordance with the Final Margin Rules), to a mandatory two-way minimum initial margin requirement. The minimum
amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity
using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a
percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming
to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap
Entity. The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin for non-cleared
swaps and non-cleared security-based swaps with financial end users (generally cash, certain government, government-sponsored enterprise
securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold); and sets forth haircuts
for certain collateral asset classes.
The Final Margin Rules require minimum
variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities
and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular
financial end-user). The minimum variation margin amount is the daily mark-to-market change in the value of the swap to the Covered
Swap Entity, taking into account variation margin previously posted or collected. For non-cleared swaps and security-based swaps
between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral
that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party
custodian, and may, if permitted by contract, be rehypothecated.
The initial margin requirements of the
Final Margin Rules are being phased in over time, and the variation margin requirements of the Final Margin Rules are currently
in effect. The Fund is not a Covered Swap Entity under the Final Margin Rules, but it is a financial end-user. Accordingly, the
Fund is currently subject to the variation margin requirements of the Final Margin Rules. However, the Fund does not have
material swaps exposure and, accordingly, the Fund will not be subject to the initial margin requirements of the Final Margin Rules.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) required the CFTC and the SEC to adopt their own margin rules to apply to
a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap
participants that are not subject to the jurisdiction of one of the Agencies. On December 16, 2015 the CFTC finalized its margin
rules, which are substantially the same as the Final Margin Rules and have the same implementation timeline. The SEC adopted margin
rules for security-based swap dealers and major security-based swap participants on June 21, 2019. The SEC’s margin rules
are generally aligned with the Final Margin Rules and the CFTC’s margin rules, but they differ in a few key respects relating
to timing for compliance and the manner in which initial margin must be segregated. USL does not currently engage in security-based
swap transactions and, therefore, the SEC’s margin rules are not expected to apply to USL.
Mandatory Trading and Clearing of Swaps
CFTC regulations require that certain swap
transactions be executed on organized exchanges or “swap execution facilities” and cleared through regulated clearing
organizations (“derivative clearing organizations” (“DCOs”)), if the CFTC mandates the central clearing
of a particular class of swap and such swap is “made available to trade” on a swap execution facility. Currently, swap
dealers, major swap participants, commodity pools, certain private funds and entities predominantly engaged in activities that
are financial in nature are required to execute on a swap execution facility, and clear, certain interest rate swaps and index-based
credit default swaps. As a result, if USL enters into an interest rate or index-based credit default swap that is subject
to these requirements, such swap will be required to be executed on a swap execution facility and centrally cleared. Mandatory
clearing and “made available to trade” determinations with respect to additional types of swaps are expected in the
future, and, when finalized, could require USL to electronically execute and centrally clear certain OTC instruments presently
entered into and settled on a bi-lateral basis. If a swap is required to be cleared, initial and variation margin requirements
are set by the relevant clearing organization, subject to certain regulatory requirements and guidelines. Additional margin may
be required and held by USL's FCM.
Other Requirements for Swaps
In addition to the margin requirements
described above, swaps that are not required to be cleared and executed on a SEF but that are executed bilaterally are also subject
to various requirements pursuant to CFTC regulations, including, among other things, reporting and recordkeeping requirements and,
depending on the status of the counterparties, trading documentation requirements and dispute resolution requirements.
Derivatives Regulations in Non-U.S.
Jurisdictions
In addition to U.S. laws and regulations, USL
may be subject to non-U.S. derivatives laws and regulations if it engages in futures and/or swap transactions with non-U.S. persons.
For example, USL may be impacted by European laws and regulations to the extent that it engages in futures transactions on
European exchanges or derivatives transactions with European entities. Other jurisdictions impose requirements applicable to futures
and derivatives that are similar to those imposed by the U.S., including position limits, margin, clearing and trade execution
requirements.
Money Market Funds
The SEC adopted amendments to Rule 2a-7
under the Investment Company Act of 1940, as amended ("1940 Act") which became effective in 2016, to reform money
market funds (“MMFs”). While the rule applies only to MMFs, it may indirectly affect institutional investors such as
USL. A portion of USL's assets that are not used for margin or collateral in the Futures Contracts currently are invested
in government MMFs. USL does not hold any non-government MMFs and does not anticipate investing in any non-government
MMFs. However, if USL invests in other types of MMFs besides government MMFs in the future, USL could be negatively impacted by
investing in an MMF that does not maintain a stable $1.00 NAV or that has the potential to impose redemption fees and gates
(temporary suspension of redemptions).
Although such government money market funds
seek to preserve the value of an investment at $1.00 per share, there is no guarantee that they will be able to do so and USL
may lose money by investing in a government money market fund. An investment in a government money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation, referred to herein as the FDIC, or any other government agency. The share
price of a government money market fund can fall below the $1.00 share price. USL cannot rely on or expect a government money
market fund’s adviser or its affiliates to enter into support agreements or take other actions to maintain the government
money market fund’s $1.00 share price. The credit quality of a government money market fund’s holdings can change rapidly
in certain markets, and the default of a single holding could have an adverse impact on the government money market fund’s
share price. Due to fluctuations in interest rates, the market value of securities held by a government money market fund may vary.
A government money market fund’s share price can also be negatively affected during periods of high redemption pressures
and/or illiquid markets.
Price Movements
Crude oil futures prices were volatile
during the three months ended March 31, 2020. The average price of the Benchmark Oil Futures Contracts started the
period at $58.60 per barrel. The high of the period was on January 6, 2020 when the average price reached $60.66 per barrel.
The average low price of the period was on March 18, 2020 when the average price dropped to $26.48 per barrel. The period
ended with the average price of the Benchmark Oil Futures Contracts at $30.96 per barrel, a decrease of approximately
(47.17)% over the period. USL’s per share NAV began the period at $22.95 and ended the period at $12.16 on
March 31, 2020, a decrease of approximately (47.02)% over the period. USL’s per share NAV reached its high for
the period on January 6, 2020 at $23.76 and reached its low for the period on March 18, 2020 at $10.40. The average
Benchmark Oil Futures Contracts prices listed above began with the February 2020 to December 2020 contracts and ended with
the May 2020 to April 2021 contracts. The decrease of approximately (47.17)% on the average price of the Benchmark
Oil Futures Contracts listed above is a hypothetical return only and could not actually be achieved by an investor holding Oil
Futures Contracts. An investment in Oil Futures Contracts would need to be rolled forward during the time period described
in order to simulate such a result. Furthermore, the change in the nominal price of these differing Oil Futures Contracts, measured
from the start of the period to the end of the period, does not represent the actual benchmark results that USL seeks to track,
which are more fully described below in the section titled “Tracking USL's Benchmark.”
During the three months ended March 31,
2020, the crude oil futures market was in states of both contango and backwardation. During periods of contango the price of the
near month crude Oil Futures Contract is lower than the price of the next month crude Oil Futures Contract, or contracts further
away from expiration. During periods of backwardation, the price of the near month crude Oil Futures Contract is higher than the
price of the next month crude Oil Futures Contract or contracts further away from expiration. For a discussion of the impact of
backwardation and contango on total returns, see “Term Structure of Crude Oil Prices and the Impact on Total Returns”
below.
Valuation of Oil Futures Contracts and
the Computation of the Per Share NAV
The per share NAV of USL’s shares
is calculated once each NYSE Arca trading day. The per share NAV for a particular trading day is released after 4:00 p.m. New York
time. Trading during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. USL’s administrator
uses the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time) for the contracts
held on the NYMEX, but calculates or determines the value of all other USL investments, including ICE Futures contracts or other
futures contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York time.
Results of Operations and the Crude
Oil Market
Results of Operations. On December
6, 2007, USL listed its shares on the American Stock Exchange (the “AMEX”) under the ticker symbol “USL.”
On that day, USL established its initial offering price at $50.00 per share and issued 300,000 shares to the initial Authorized
Participant in exchange for $15,000,000 in cash. As a result of the acquisition of the AMEX by NYSE Euronext, USL’s shares
ceased trading on the AMEX and commenced trading on the NYSE Arca on November 25, 2008.
Since its initial offering of
11,000,000 shares, USL has registered two subsequent offering of its shares: 100,000,000 shares which were registered with
the SEC on March 31, 2009 and 100,000,000 shares which were registered with the SEC on April 24, 2020. Shares offered by
USL in the subsequent offerings were sold by it for cash at the shares’ per share NAV as described in the applicable
prospectus. As of March 31, 2020, USL had issued 25,450,000 shares, 4,400,000 of which were outstanding. As of March 31,
2020, there were 85,550,000 shares registered but not yet issued.
More shares may have been issued by USL
than are outstanding due to the redemption of shares. Unlike funds that are registered under the 1940 Act, shares that have been
redeemed by USL cannot be resold by USL. As a result, USL contemplates that additional offerings of its shares will be registered
with the SEC in the future in anticipation of additional issuances and redemptions.
As of March 31, 2020, USL had the following
Authorized Participants: Citadel Securities LLC, Citigroup Global Markets Inc., Goldman Sachs & Company, JP Morgan Securities
Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Company Inc., Nomura Securities International Inc., RBC Capital
Markets LLC, SG Americas Securities LLC, and Virtu Financial BD LLC.
For the Three Months Ended March 31,
2020 Compared to the Three Months Ended March 31, 2019
|
|
For the three
months ended
March 31, 2020
|
|
|
For the three
months ended
March 31, 2019
|
|
Average daily total net assets
|
|
$
|
45,764,254
|
|
|
$
|
59,896,609
|
|
Dividend and interest income earned on Treasuries, cash and/or cash equivalents
|
|
$
|
176,773
|
|
|
$
|
342,253
|
|
Annualized yield based on average daily total net assets
|
|
|
1.55
|
%
|
|
|
2.32
|
%
|
Management fee
|
|
$
|
68,271
|
|
|
$
|
88,614
|
|
Total fees and other expenses excluding management fees
|
|
$
|
37,120
|
|
|
$
|
45,450
|
|
Total commissions accrued to brokers
|
|
$
|
5,146
|
|
|
$
|
1,872
|
|
Total commissions as annualized percentage of average total net assets
|
|
|
0.05
|
%
|
|
|
0.01
|
%
|
Commissions accrued as a result of rebalancing
|
|
$
|
2,701
|
|
|
$
|
1,823
|
|
Percentage of commissions accrued as a result of rebalancing
|
|
|
52.49
|
%
|
|
|
97.38
|
%
|
Commissions accrued as a result of creation and redemption activity
|
|
$
|
2,445
|
|
|
$
|
49
|
|
Percentage of commissions accrued as a result of creation and redemption activity
|
|
|
47.51
|
%
|
|
|
2.62
|
%
|
Portfolio Expenses. USL’s
expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, registration
fees, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements.
The management fee that USL pays to USCF is calculated as a percentage of the total net assets of USL. The fee is accrued
daily and paid monthly.
Average interest rates earned on short-term
investments held by USL, including cash, cash equivalents and Treasuries, were lower during the three months ended March 31,
2020, compared to the three months ended March 31, 2019. As a result, the amount of income earned by USL as a percentage
of average daily total net assets was lower during the three months ended March 31, 2020, compared to the three
months ended March 31, 2019.
The decrease in total fees and other
expenses excluding management fees for the three months ended March 31, 2020, compared to the three months ended March
31, 2019 was due primarily to USL’s smaller size as measured by total net assets.
The increase in total commissions accrued
to brokers for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was due primarily
to a higher number of Oil Futures Contracts being held and traded.
Tracking USL's Benchmark
USCF seeks to manage USL's portfolio such
that changes in its average daily per share NAV, on a percentage basis, closely track the daily changes in the average of
the prices of the Benchmark Oil Futures Contracts, also on a percentage basis. Specifically, USCF seeks to manage the portfolio
such that over any rolling period of 30-valuation days, the average daily change in USL's per share NAV is within a range
of 90% to 110% (0.9 to 1.1) of the average daily change in the prices of the Benchmark Oil Futures Contracts. As an example,
if the average daily movement of the average of the prices of the Benchmark Oil Futures Contracts for a particular 30-valuation
day time period was 0.50% per day, USCF would attempt to manage the portfolio such that the average daily movement of the per share
NAV during that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of the benchmark’s results). USL's
portfolio management goals do not include trying to make the nominal price of USL's per share NAV equal to the average of
the nominal prices of the current Benchmark Oil Futures Contracts or the spot price for light, sweet crude oil. USCF believes
that it is not practical to manage the portfolio to achieve such an investment goal when investing in Oil Futures Contracts
and Other Oil-Related Investments.
For the 30-valuation days ended March 31,
2020, the simple average daily change in the Benchmark Oil Futures Contracts was (1.567)%, while the simple average daily
change in the per share NAV of USL over the same time period was (1.564)%. The average daily difference was 0.003% (or 0.3
basis points, where 1 basis point equals 1/100 of 1%). As a percentage of the daily movement of the Benchmark Oil Futures Contracts,
the average error in daily tracking by the per share NAV was 0.074%, meaning that over this time period USL’s tracking error was
within the plus or minus 10% range established as its benchmark tracking goal. A significant portion of the level of USL's relative
tracking error as a percentage of the benchmark was due to periods of flat price returns.
Since the commencement of the offering
of USL’s shares to the public on December 6, 2007 to March 31, 2020, the simple average daily change in the Benchmark
Oil Futures Contracts was (0.023)%, while the simple average daily change in the per share NAV of USL over the same time period
was (0.024)%. The average daily difference was (0.001)% (or (0.1) basis points, where 1 basis point equals 1/100 of 1%). As
a percentage of the daily movement of the Benchmark Oil Futures Contracts, the average error in daily tracking by the per share
NAV was (0.538)%, meaning that over this time period USL’s tracking error was within the plus or minus 10% range established
as its benchmark tracking goal. The following two graphs demonstrate the correlation between the changes in USL’s NAV and
the changes in the Benchmark Oil Futures Contracts. The first graph exhibits the daily changes in the last 30 valuation days ended
March 31, 2020. The second graph measures monthly changes since March 31, 2015 through March 31, 2020.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An alternative tracking measurement of
the return performance of USL versus the return of its Benchmark Oil Futures Contracts can be calculated by comparing
the actual average of the prices of its return of USL, measured by changes in its per share NAV, versus the expected changes in
its per share NAV under the assumption that USL’s returns had been exactly the same as the daily changes in the average of
the prices of its Benchmark Oil Futures Contracts.
For the three months ended March 31,
2020, the actual total return of USL as measured by changes in its per share NAV was (47.02)%. This is based on an initial
per share NAV of $22.95 as of December 31, 2019 and an ending per share NAV as of March 31, 2020 of $12.16. During this
time period, USL made no distributions to its shareholders. However, if USL’s daily changes in its per share NAV had
instead exactly tracked the changes in the daily total return of the Benchmark Oil Futures Contracts, USL would have had an
estimated per share NAV of $12.14 as of March 31, 2020, for a total return over the relevant time period of (47.10)%. The difference
between the actual per share NAV total return of USL of (47.02)% and the expected total return based on the Benchmark Oil Futures
Contracts of (47.10)% was an error over the time period of 0.08%, which is to say that USL’s actual total return outperformed
its benchmark by that percentage. USL incurs expenses primarily composed of the management fee, brokerage commissions
for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend
income, and net of positive or negative execution, tends to cause daily changes in the per share NAV of USL to track slightly
lower or higher than daily changes in the price of the Benchmark Oil Futures Contracts.
By comparison, for the three months
ended March 31, 2019, the actual total return of USL as measured by changes in its per share NAV was 26.37%. This was based
on an initial per share NAV of $17.82 as of December 31, 2018 and an ending per share NAV as of March 31, 2019 of $22.52.
During this time period, USL made no distributions to its shareholders. However, if USL’s daily changes in its per share
NAV had instead exactly tracked the changes in the daily total return of the Benchmark Oil Futures Contracts, USL would have
had an estimated per share NAV of $22.44 as of March 31, 2019, for a total return over the relevant time period of 25.93%. The
difference between the actual per share NAV total return of USL of 26.37% and the expected total return based on the Benchmark
Oil Futures Contracts of 25.93% was an error over the time period of 0.44%, which is to say that USL’s actual total return
outperformed its benchmark by that percentage. USL incurred expenses primarily composed of the management fee, brokerage commissions
for the buying and selling of futures contracts, and other expenses. The impact of these expenses, offset by interest and dividend
income, and net of positive or negative execution, tended to cause daily changes in the per share NAV of USL to track slightly
lower or higher than daily changes in the price of the Benchmark Oil Futures Contracts.
There are currently three factors
that have impacted or are most likely to impact USL's ability to accurately track its Benchmark Oil Futures Contracts.
First, USL may buy or sell its
holdings in the then current Benchmark Oil Futures Contracts at a price other than the closing settlement price of that contract
on the day during which USL executes the trade. In that case, USL may pay a price that is higher, or lower, than that
of the Benchmark Oil Futures Contracts, which could cause the changes in the daily per share NAV of USL to either be too high
or too low relative to the daily changes in the average price of the Benchmark Oil Futures Contracts. During the three months
ended March 31, 2020, USCF attempted to minimize the effect of these transactions by seeking to execute its purchase or sale of
the Benchmark Oil Futures Contracts at, or as close as possible to, the end of the day settlement price. However, it may not
always be possible for USL to obtain the closing settlement price and there is no assurance that failure to obtain the closing
settlement price in the future will not adversely impact USL's attempt to track the Benchmark Oil Futures Contracts.
Second, USL incurs expenses primarily
composed of the management fee, brokerage commissions for the buying and selling of futures contracts, and other expenses. The
impact of these expenses tends to cause daily changes in the per share NAV of USL to track slightly lower than daily changes
in the price of the Benchmark Oil Futures Contracts. At the same time, USL earns dividend and interest income on its cash,
cash equivalents and Treasuries. USL is not required to distribute any portion of its income to its shareholders and did not
make any distributions to shareholders during the three months ended March 31, 2020. Interest payments, and any other income,
were retained within the portfolio and added to USL's NAV. When this income exceeds the level of USL's expenses for its
management fee, brokerage commissions and other expenses (including ongoing registration fees, licensing fees and the fees and
expenses of the independent directors of USCF), USL will realize a net yield that will tend to cause daily changes in the
per share NAV of USL to track slightly higher than daily changes in the average of the prices of the Benchmark Oil Futures
Contracts. If short-term interest rates rise above the current levels, the level of deviation created by the yield would increase.
Conversely, if short-term interest rates were to decline, the amount of error created by the yield would decrease. When short-term
yields drop to a level lower than the combined expenses of the management fee and the brokerage commissions, then the tracking
error becomes a negative number and would tend to cause the daily returns of the per share NAV to underperform the daily returns
of the Benchmark Oil Futures Contracts. USCF anticipates that interest rates may continue to stagnate over the near future
from historical lows. It is anticipated that fees and expenses paid by USL may be higher than interest earned by USL.
As such, USCF anticipates that USL could possibly underperform its benchmark so long as interest earned is less
than the fees and expenses paid by USL.
Third, USL may hold Other Oil-Related
Investments in its portfolio that may fail to closely track the Benchmark Oil Futures Contracts' total return movements. In
that case, the error in tracking the Benchmark Oil Futures Contracts could result in daily changes in the per share NAV of USL
that are either too high, or too low, relative to the daily changes in the average price of the Benchmark Oil Futures Contracts.
During the three months ended March 31, 2020, USL did not hold any Other Oil-Related Investments. If USL increases
in size, and due to its obligations to comply with regulatory limits, USL may invest in Other Oil-Related Investments which may
have the effect of increasing transaction related expenses and may result in increased tracking error.
Term Structure of Crude Oil Futures
Prices and the Impact on Total Returns. Several factors determine the total return from investing in futures contracts. One
factor arises from “rolling” futures contracts that will expire at the end of the current month (the “near”
or “front” month contract) forward each month prior to expiration. For a strategy that entails holding the near month
contract, the price relationship between that futures contract and the next month futures contract will impact returns. For example,
if the price of the near month futures contract is higher than the next futures month contract (a situation referred to as “backwardation”),
then absent any other change, the price of a next month futures contract tends to rise in value as it becomes the near month futures
contract and approaches expiration. Conversely, if the price of a near month futures contract is lower than the next month futures
contract (a situation referred to as “contango”), then absent any other change, the price of a next month futures contract
tends to decline in value as it becomes the near month futures contract and approaches expiration.
As an example, assume that the price of crude
oil for immediate delivery, is $50 per barrel, and the value of a position in the near month futures contract is also $50. Over
time, the price of crude oil will fluctuate based on a number of market factors, including demand for oil relative to
supply. The value of the near month futures contract will likewise fluctuate in reaction to a number of market factors. If an investor
seeks to maintain a position in a near month futures contract and not take delivery of physical barrels of crude oil, the
investor must sell the current near month futures contract as it approaches expiration and invest in the next month futures contract.
In order to continue holding a position in the current near month futures contract, this “roll” forward of the futures
contract must be executed every month.
Contango and backwardation are natural
market forces that have impacted the total return on an investment in USL’s shares during the past year relative to a hypothetical
direct investment in crude oil. In the future, it is likely that the relationship between the market price of USL’s shares
and changes in the spot prices of light, sweet crude oil will continue to be impacted by contango and backwardation. It is
important to note that this comparison ignores the potential costs associated with physically owning and storing crude oil, which
could be substantial.
If the futures market is in backwardation,
e.g., when the price of the near month futures contract is higher than the price of the next month futures contract, the investor
would buy a next month futures contract for a lower price than the current near month futures contract. Assuming the price of the
next month futures contract was $49 per barrel, or 2% cheaper than the $50 near month futures contract, then, hypothetically, and
assuming no other changes (e.g., to either prevailing crude oil prices or the price relationship between the spot price, the
near month contract and the next month contract, and, ignoring the impact of commission costs and the income earned on cash and/or
cash equivalents), the value of the $49 next month futures contract would rise to $50 as it approaches expiration. In this example,
the value of an investment in the next month futures contract would tend to outperform the spot price of crude oil. As a result,
it would be possible for the new near month futures contract to rise 12% while the spot price of crude oil may have risen
a lower amount, e.g., only 10%. Similarly, the spot price of crude oil could have fallen 10% while the value of an investment
in the futures contract might have fallen another amount, e.g., only 8%. Over time, if backwardation remained constant, this difference
between the spot price and the futures contract price would continue to increase.
If the futures market is in contango, an
investor would be buying a next month futures contract for a higher price than the current near month futures contract.
Again, assuming the near month futures contract is $50 per barrel, the price of the next month futures contract might be $51
per barrel, or 2% more expensive than the front month futures contract. Hypothetically, and assuming no other changes, the value
of the $51 next month futures contract would fall to $50 as it approaches expiration. In this example, the value of an investment
in the second month would tend to underperform the spot price of crude oil. As a result, it would be possible for the new near
month futures contract to rise only 10% while the spot price of crude oil may have risen a higher amount, e.g., 12%. Similarly,
the spot price of crude oil could have fallen 10% while the value of an investment in the second month futures contract might
have fallen another amount, e.g., 12%. Over time, if contango remained constant, this difference between the spot price and the
futures contract price would continue to increase.
The chart below compares the daily price
of the near month crude oil futures contract to the price of 13th month crude oil futures contract (i.e.,
a contract one year forward) over the last 10 years. When the price of the near month futures contract is higher than the price
of the 13th month futures contract, the market would be described as being in backwardation. When the price of the near
month futures contract is lower than the 13th month futures contract, the market would be described as being in contango.
Although the price of the near month futures contract and the price of the 13th month futures contract tend to
move together, it can be seen that at times the near month futures contract prices are higher than the 13th month futures contract
prices (backwardation) and, at other times, the near month futures contract prices are lower than the 13th month futures
contract prices (contango).
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An alternative way to view the same data
is to subtract the dollar price of the 13th month crude oil futures contract from the dollar price of the near
month crude oil futures contract, as shown in the chart below. When the difference is positive, the market is in backwardation.
When the difference is negative, the market is in contango. The crude oil market spent time in both backwardation and contango
during the last ten years.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
An investment in a portfolio that owned
only the near month crude oil futures contract would likely produce a different result than an investment in a portfolio that owned
an equal number of each of the near 12 months’ of crude oil futures contracts. Generally speaking, when the crude oil futures
market is in backwardation, a portfolio of only the near month crude oil futures contract may tend to have a higher total return
than a portfolio of 12 months’ of the crude oil futures contract. Conversely, if the crude oil futures market was in contango,
the portfolio containing only 12 months’ of crude oil futures contracts may tend to outperform the portfolio holding only
the near month crude oil futures contract.
Historically, the crude oil futures markets
have experienced periods of contango and backwardation, with backwardation being in place somewhat less often than contango since
oil futures trading started in 1983. Following the global financial crisis in the fourth quarter of 2008, the crude oil market
moved into contango and remained in contango for a period of several years. During parts of 2009, the level of contango was unusually
steep as a combination of slack U.S. and global demand for crude oil and issues involving the physical transportation and storage
of crude oil at Cushing, Oklahoma, the primary pricing point for oil traded in the U.S., led to unusually high inventories of crude
oil. A combination of improved transportation and storage capacity, along with growing demand for crude oil globally, moderated
the inventory build-up and led to reduced levels of contango by 2011. However, at the end of November 2014, global crude oil inventories
grew rapidly after OPEC voted to defend its market share against U.S. shale-oil producers, resulting in another period during which
the crude oil market remained primarily in contango. This period of contango continued through December 31, 2017. Declining global
crude oil inventories caused the market to flip into backwardation at the beginning of 2018 through late October 2018, at which
point ongoing supply growth in the U.S., combined with increased OPEC production, once again led market participants to fear another
global glut of crude oil. The crude oil market was primarily in contango the first half of 2019 and in backwardation from August
2019 through mid January 2020, when it flipped back into contango.
In March 2020, contango dramatically increased
and reached historic levels during the economic crisis arising from the COVID-19 pandemic and disputes among oil producing nations
regarding limits on oil production levels. This contango was due to significant market volatility that has occurred and is continuing
in the crude oil markets as well as the oil futures markets.
USCF believes that holding futures contracts whose expiration dates
are spread out over a 12 month period of time will cause the total return of such a portfolio to vary compared to a portfolio
that holds only a single month’s contract (such as the near month contract). In particular, USCF believes that the total
return of a portfolio holding contracts with a range of expiration months will be impacted differently by the price relationship
between different contract months of the same commodity future compared to the total return of a portfolio consisting of the near
month contract. USCF believes that based on historical evidence a portfolio that held futures contracts with a range of expiration
dates spread out over a 12 month period of time would typically be impacted less by the positive effect of backwardation, and
less by the negative effect of contango, compared to a portfolio that held contracts of a single near month. As a result, absent
the impact of any other factors, a portfolio of 12 different monthly contracts would tend to have a lower total return than a
near month only portfolio in a backwardation market and a higher total return in a contango market. However, there can be no assurance
that such historical relationships would provide the same or similar results in the future.
Prior to 2020, periods of contango or
backwardation have not materially impacted USL’s investment objective of having the daily percentage changes in its
per share NAV track the daily percentage changes in the price of the Benchmark Oil Futures Contract since the impact of
backwardation and contango tended to equally impact the daily percentage changes in price of both USL’s shares and the
Benchmark Oil Futures 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. Contango may persist for the foreseeable future, potentially at extreme levels, as a result of the unprecedented conditions
in the wake of the COVID-19 crisis described above (namely simultaneous oversupply and a collapse in demand for crude oil
combined with a lack of on-land storage for crude oil).
Contango may persist for the foreseeable
future, potentially at extreme levels, as a result of the unprecedented conditions in the wake of the COVID-19 crisis described
above (namely simultaneous oversupply and a collapse in demand for crude oil combined with a lack of on-land storage for crude
oil).
Crude Oil Market. During the
three months ended March 31, 2020, crude oil prices traded in a range $20.83 to $63.27. Crude oil declined 66.46% from the
end of 2019 through March 31, 2020 finishing the quarter at $20.48. Crude prices have collapsed in the wake of the COVID-19
demand shock, which reduced global petroleum consumption, and the price war launched by Saudi Arabia at the beginning of
March 2020 in response to Russia’s unwillingness to participate in extending previously agreed upon supply cuts. An
estimated twenty million barrels a day of crude demand evaporated as a result of quarantines and massive drops in industrial
and manufacturing activity. In addition, the United States, OPEC, Russia, and other oil producers around the world agreed to
a historic 9.7 million barrel per day cut to crude supply. In the short term, this cut does not close the gap relative to the
massive drop in demand. However, the duration of the agreement, lasting until 2022, should allow oil prices to slowly recover
as demand re-materializes. The supply cut may also reduce at least some of the unprecedented volatility oil markets
experienced in the Spring of 2020. As the crisis continues into the second quarter of 2020, and potentially beyond, demand
weakness and limited storage capacity will continue to put pressure on crude oil in the near term.
Crude Oil Price Movements in Comparison
to Other Energy Commodities and Investment Categories. USCF believes that investors frequently measure the degree to which
prices or total returns of one investment or asset class move up or down in value in concert with another investment or asset class.
Statistically, such a measure is usually done by measuring the correlation of the price movements of the two different investments
or asset classes over some period of time. The correlation is scaled between 1 and -1, where 1 indicates that the two investment
options move up or down in price or value together, known as “positive correlation,” and -1 indicates that they move
in completely opposite directions, known as “negative correlation.” A correlation of 0 would mean that the movements
of the two are neither positively nor negatively correlated, known as “non-correlation.” That is, the investment options
sometimes move up and down together and other times move in opposite directions.
For the ten-year time period between March
31, 2010 and March 31, 2020, the table below compares the monthly movements of crude oil prices versus the monthly movements of
the prices of several other energy commodities, such as natural gas, diesel-heating oil, and unleaded gasoline, as well as several
major non-commodity investment asset classes, such as large cap U.S. equities, U.S. government bonds and global equities. It can
be seen that over this particular time period, the movement of crude oil on a monthly basis exhibited strong correlation with unleaded
gasoline and diesel-heating oil, moderate correlation with the movements of large cap U.S. equities and global equities, limited
correlation with natural gas, and limited negative correlation with U.S. government bonds.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gov’t.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
|
(EFFAS
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cap U.S.
|
|
|
U.S.
|
|
|
Equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
Gov’t.
|
|
|
(FTSE
|
|
|
|
|
|
Diesel-
|
|
|
|
|
|
|
|
Correlation Matrix
|
|
(S&P
|
|
|
Bond
|
|
|
World
|
|
|
Unleaded
|
|
|
Heating
|
|
|
Natural
|
|
|
Crude
|
|
March 31, 2010
– March 31, 2020*
|
|
500)
|
|
|
Index)
|
|
|
Index)
|
|
|
Gasoline
|
|
|
Oil
|
|
|
Gas
|
|
|
Oil
|
|
Large
Cap U.S. Equities (S&P 500)
|
|
|
1.000
|
|
|
|
(0.444
|
)
|
|
|
0.961
|
|
|
|
0.450
|
|
|
|
0.413
|
|
|
|
0.144
|
|
|
|
0.501
|
|
U.S.
Gov’t. Bonds (EFFAS U.S. Gov’t. Bond Index)
|
|
|
|
|
|
|
1.000
|
|
|
|
(0.412
|
)
|
|
|
(0.300
|
)
|
|
|
(0.366
|
)
|
|
|
(0.064
|
)
|
|
|
(0.422
|
)
|
Global
Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.475
|
|
|
|
0.448
|
|
|
|
0.140
|
|
|
|
0.533
|
|
Unleaded
Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.669
|
|
|
|
0.137
|
|
|
|
0.651
|
|
Diesel-Heating
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.136
|
|
|
|
0.785
|
|
Natural
Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.100
|
|
Crude
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
Source: Bloomberg, NYMEX
The table below covers a more recent, but
much shorter, range of dates than the above table. Over the one year period ended March 31, 2020, movements of crude oil displayed
strong correlation with large cap U.S. equities, global equities, unleaded gasoline and diesel-heating oil and limited to negative
correlation with movements with natural gas and U.S. Government bonds.
*PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gov’t.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
|
(EFFAS
|
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cap U.S.
|
|
|
U.S.
|
|
|
Equities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
Gov’t.
|
|
|
(FTSE
|
|
|
|
|
|
Diesel-
|
|
|
|
|
|
|
|
Correlation Matrix
|
|
(S&P
|
|
|
Bond
|
|
|
World
|
|
|
Unleaded
|
|
|
Heating
|
|
|
Natural
|
|
|
Crude
|
|
12 Months ended
March 31, 2020*
|
|
500)
|
|
|
Index)
|
|
|
Index)
|
|
|
Gasoline
|
|
|
Oil
|
|
|
Gas
|
|
|
Oil
|
|
Large
Cap U.S. Equities (S&P 500)
|
|
|
1.000
|
|
|
|
(0.627
|
)
|
|
|
0.989
|
|
|
|
0.666
|
|
|
|
0.663
|
|
|
|
0.094
|
|
|
|
0.839
|
|
U.S.
Gov’t. Bonds (EFFAS U.S. Gov’t. Bond Index)
|
|
|
|
|
|
|
1.000
|
|
|
|
(0.669
|
)
|
|
|
(0.516
|
)
|
|
|
(0.778
|
)
|
|
|
(0.225
|
)
|
|
|
(0.652
|
)
|
Global
Equities (FTSE World Index)
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.667
|
|
|
|
0.701
|
|
|
|
0.182
|
|
|
|
0.847
|
|
Unleaded
Gasoline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.716
|
|
|
|
0.123
|
|
|
|
0.843
|
|
Diesel-Heating
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.356
|
|
|
|
0.899
|
|
Natural
Gas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
|
|
0.226
|
|
Crude
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.000
|
|
Source: Bloomberg, NYMEX
Investors are cautioned that the historical
price relationships between crude oil and various other energy commodities, as well as other investment asset classes, as measured
by correlation may not be reliable predictors of future price movements and correlation results. The results pictured above would
have been different if a different range of dates had been selected. USCF believes that crude oil has historically not demonstrated
a strong correlation with equities or bonds over long periods of time. However, USCF also believes that in the future it is possible
that crude oil could have long term correlation results that indicate prices of crude oil more closely track the movements of equities
or bonds. In addition, USCF believes that, when measured over time periods shorter than ten years, there will always be some periods
where the correlation of crude oil to equities and bonds will be either more strongly positively correlated or more strongly negatively
correlated than the long term historical results suggest.
The correlations between crude oil, natural
gas, diesel-heating oil and gasoline are relevant because USCF endeavors to invest USL’s assets in Oil Futures Contracts
and Other Oil-Related Investments so that daily changes in percentage terms in USL’s per share NAV correlate as closely as
possible with daily changes in percentage terms in the average price of the Benchmark Oil Futures Contracts. If certain other fuel-based
commodity futures contracts do not closely correlate with the crude-oil futures contracts, then their use could lead to greater
tracking error. As noted above, USCF also believes that the changes in percentage terms in the average price of the Benchmark Oil
Futures Contracts will closely correlate with changes in percentage terms in the spot price of light, sweet crude oil.
Critical Accounting Policies
Preparation of the condensed financial
statements and related disclosures in compliance with accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance, as well as the use of estimates. USL's application
of these policies involves judgments and actual results may differ from the estimates used.
USCF has evaluated the nature and types
of estimates that it makes in preparing USL's condensed financial statements and related disclosures and has determined that
the valuation of its investments, which are not traded on a United States or internationally recognized futures exchange (such
as forward contracts and OTC swaps) involves a critical accounting policy. The values which are used by USL for its Oil
Futures Contracts are provided by its commodity broker who uses market prices when available, while OTC swaps are valued based
on the present value of estimated future cash flows that would be received from or paid to a third party in settlement of these
derivative contracts prior to their delivery date and valued on a daily basis. In addition, USL estimates interest and dividend
income on a daily basis using prevailing rates earned on its cash and cash equivalents. These estimates are adjusted to the actual
amount received on a monthly basis and the difference, if any, is not considered material.
Liquidity and Capital Resources
USL has not made, and does not anticipate
making, use of borrowings or other lines of credit to meet its obligations. USL has met, and it is anticipated that USL
will continue to meet, its liquidity needs in the normal course of business from the proceeds of the sale of its investments, or
from the Treasuries, cash and/or cash equivalents that it intends to hold at all times. USL's liquidity needs include: redeeming
shares, providing margin deposits for its existing Oil Futures Contracts or the purchase of additional Oil Futures Contracts
and posting collateral for its OTC swaps, if applicable, and payment of its expenses, summarized below under “Contractual
Obligations.”
USL currently generates
cash primarily from: (i) the sale of baskets consisting of 50,000 shares (“Creation Baskets”) and (ii)
income earned on Treasuries, cash and/or cash equivalents. USL has allocated substantially all of its net assets to
trading in Oil Interests. USL invests in Oil Interests to the fullest extent possible without being
leveraged or unable to satisfy its current or potential margin or collateral obligations with respect to its investments
in Oil Futures Contracts and Other Oil-Related Investments. A significant portion of USL's NAV is held in cash and
cash equivalents that are used as margin and as collateral for its trading in Oil Interests. The balance of the
assets is held in USL's account at its custodian bank and in Treasuries at the FCM. Income received from USL's
investments in money market funds and Treasuries is paid to USL. During the three months ended March 31,
2020, USL's expenses did not exceed the income USL earned. During the three months ended March 31, 2020, USL did
not use other assets to pay expenses. To the extent expenses exceed income, USL's NAV will be negatively impacted.
USL's investments in Oil Interests
may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example,
most commodity exchanges limit the fluctuations in futures contracts prices during a single day by regulations referred to as “daily
limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract
has increased or decreased by an amount equal to the daily limit, positions in the contracts can neither be taken nor liquidated
unless the traders are willing to effect trades at or within the specified daily limit. Such market conditions could prevent USL
from promptly liquidating its positions in Oil Futures Contracts. During the three months ended March 31, 2020, USL did not
purchase or liquidate any of its positions while daily limits were in effect; however, USL cannot predict whether such
an event may occur in the future.
Prior to the initial offering of USL, all
payments with respect to USL’s expenses were paid by USCF. USL does not have an obligation or intention to refund such payments
by USCF. USCF is under no obligation to pay USL’s current or future expenses. Since the initial offering of shares, USL has
been responsible for expenses relating to: (i) management fees, (ii) brokerage fees and commissions, (iii) licensing fees for the
use of intellectual property, (iv) ongoing registration expenses in connection with offers and sales of its shares subsequent to
the initial offering, (v) other expenses, including tax reporting costs, (vi) fees and expenses of the independent directors of
USCF and (vii) other extraordinary expenses not in the ordinary course of business, while USCF has been responsible for expenses
relating to the fees of USL's Marketing Agent, Administrator and Custodian and registration expenses relating to the initial offering
of shares. If USCF and USL are unsuccessful in raising sufficient funds to cover these respective expenses or in locating any other
source of funding, USL will terminate and investors may lose all or part of their investment.
Market Risk
Trading in Oil Futures Contracts and
Other Oil-Related Investments, such as forwards, involves USL entering into contractual commitments to purchase or sell oil
at a specified date in the future. The aggregate market value of the contracts will significantly exceed USL's future cash
requirements since USL intends to close out its open positions prior to settlement. As a result, USL is generally only
subject to the risk of loss arising from the change in value of the contracts. USL considers the “fair value”
of its derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated with USL's commitments
to purchase oil is limited to the aggregate market value of the contracts held. However, should USL enter into a contractual
commitment to sell oil, it would be required to make delivery of the oil at the contract price, repurchase the contract at prevailing
prices or settle in cash. Since there are no limits on the future price of oil, the market risk to USL could be unlimited.
USL's exposure to market risk depends
on a number of factors, including the markets for oil, the volatility of interest rates and foreign exchange rates, the liquidity
of the Oil Futures Contracts and Other Oil-Related Investments markets and the relationships among the contracts held by USL.
Drastic market occurrences could ultimately lead to the loss of all or substantially all of an investor’s capital.
Credit Risk
When USL enters into Oil Futures
Contracts and Other Oil-Related Investments, it is exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Oil Futures Contracts traded on the NYMEX and on most other futures exchanges is
the clearinghouse associated with the particular exchange. In general, in addition to margin required to be posted by the clearinghouse
in connection with cleared trades, clearinghouses are backed by their members who may be required to share in the financial burden
resulting from the nonperformance of one of their members and, therefore, this additional member support should significantly reduce
credit risk. USL is not currently a member of any clearinghouse. Some foreign exchanges are not backed by their clearinghouse
members but may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty,
clearinghouse, or their members or their financial backers will satisfy their obligations to USL in such circumstances.
USCF attempts to manage the credit risk
of USL by following various trading limitations and policies. In particular, USL generally posts margin and/or holds
liquid assets that are approximately equal to the market value of its obligations to counterparties under the Oil Futures
Contracts and Other Oil-Related Investments it holds. USCF has implemented procedures that include, but are not limited to,
executing and clearing trades only with creditworthy parties and/or requiring the posting of collateral or margin by such parties
for the benefit of USL to limit its credit exposure. An FCM, when acting on behalf of USL in accepting orders to purchase
or sell Oil Futures Contracts on United States exchanges, is required by CFTC regulations to separately account for and segregate
as belonging to USL, all assets of USL relating to domestic Oil Futures Contracts trading. These FCMs are not allowed
to commingle USL's assets with their other assets. In addition, the CFTC requires FCMs to hold in a secure account USL's
assets related to foreign Oil Futures Contracts trading.
In the future, USL may purchase OTC swaps, see “Item
3. Quantitative and Qualitative Disclosures About Market Risk” in this quarterly report on Form 10-Q for a
discussion of OTC swaps.
As of March 31, 2020, USL held cash
deposits and investments in Treasuries and money market funds in the amount of $68,261,316 with the custodian and FCM. Some or
all of these amounts held by a custodian or an FCM, as applicable, may be subject to loss should USL's custodian or FCM, as
applicable, cease operations.
Off Balance Sheet Financing
As of March 31, 2020, USL had no loan
guarantee, credit support or other off-balance sheet arrangements of any kind other than agreements entered into in the normal
course of business, which may include indemnification provisions relating to certain risks that service providers undertake in
performing services which are in the best interests of USL. While USL's exposure under these indemnification provisions cannot
be estimated, they are not expected to have a material impact on USL's financial position.
European Sovereign Debt
USL had no direct exposure to European
sovereign debt as of March 31, 2020 and has no direct exposure to European sovereign debt as of the filing of this quarterly
report on Form 10-Q.
Redemption Basket Obligation
In order to meet its investment objective
and pay its contractual obligations described below, USL requires liquidity to redeem shares, which redemptions must be in
blocks of 50,000 shares called “Redemption Baskets.” USL has to date satisfied this obligation by paying
from the cash or cash equivalents it holds or through the sale of its Treasuries in an amount proportionate to the number of shares
being redeemed.
Contractual Obligations
USL's primary contractual obligations
are with USCF. In return for its services, USCF is entitled to a management fee calculated daily and paid monthly as a fixed percentage
of USL's NAV, currently 0.60% of NAV on its average daily total net assets.
USCF agreed to pay the start-up costs associated
with the formation of USL, primarily its legal, accounting and other costs in connection with USCF’s registration with the
CFTC as a CPO and the registration and listing of USL and its shares with the SEC, FINRA and NYSE Arca (formerly, AMEX), respectively.
However, since USL’s initial offering of shares, offering costs incurred in connection with registering and listing additional
shares of USL have been directly borne on an ongoing basis by USL, and not by USCF.
USCF pays the fees of the Marketing Agent
and certain of the fees of BBH&Co. through March 31, 2020, as well as BBH&Co.’s fees for performing administrative
services, including those in connection with the preparation of USL's condensed financial statements and its SEC, NFA and CFTC
reports through May 31, 2020. Commencing April 1, 2020, USCF also pays BNY Mellon for fees for custody and transfer agency services
as well as BNY Mellon’s fees for performing administrative services, including those in connection with the preparation of
USL's condensed financial statements and its SEC, NFA and CFTC reports. USCF and USL have also entered into a licensing agreement
with the NYMEX pursuant to which USL and the Related Public Funds, other than BNO, USCI and CPER, pay a licensing fee to the NYMEX.
USL also pays the fees and expenses associated with its tax accounting and reporting requirements.
In addition to USCF’s management fee, USL pays its brokerage fees (including fees to an FCM), OTC dealer spreads, any licensing
fees for the use of intellectual property, and, subsequent to the initial offering, registration and other fees paid to the SEC,
FINRA, or other regulatory agencies in connection with the offer and sale of shares, as well as legal, printing, accounting and
other expenses associated therewith, and extraordinary expenses. The latter are expenses not incurred in the ordinary course of
USL’s business, including expenses relating to the indemnification of any person against liabilities and obligations to the
extent permitted by law and under the LP Agreement, the bringing or defending of actions in law or in equity or otherwise conducting
litigation and incurring legal expenses and the settlement of claims and litigation. Commission payments to an FCM are on a contract-by-contract,
or round turn, basis. USL also pays a portion of the fees and expenses of the independent directors of USCF. See Note 3 to
the Notes to Condensed Financial Statements (Unaudited) in Item 1 of this quarterly report on Form 10-Q.
The parties cannot anticipate the amount
of payments that will be required under these arrangements for future periods, as USL's per share NAVs and trading levels
to meet its investment objective will not be known until a future date. These agreements are effective for a specific term agreed
upon by the parties with an option to renew, or, in some cases, are in effect for the duration of USL's existence. Either
party may terminate these agreements earlier for certain reasons described in the agreements.
As of March 31, 2020, USL's portfolio
consisted of 1,728 Crude Oil Futures CL Contracts traded on the NYMEX. As of March 31, 2020, USL did not hold any Oil Futures Contracts
traded on the ICE Futures. For a list of USL's current holdings, please see USL's website at www.uscfinvestments.com.