UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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Quarterly
report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
quarterly period ended September 30, 2007.
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¨
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Transition
report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from
to .
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Commission
file number: 001-33859
United
States 12 Month Oil Fund,
LP
(Exact
name of registrant as
specified in its charter)
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Delaware
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20-0431897
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(State
or other jurisdiction
of
incorporation
or
organization)
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(I.R.S.
Employer
Identification
No.)
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1320
Harbor Bay Parkway, Suite
145
Alameda,
California
94502
(Address
of principal executive
offices)
(510)
522-3336
(Registrant’s
telephone number,
including area code)
N/A
(Former
name, former address and
former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x
Yes ¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one.)
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x
Smaller
reporting
company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.):
¨
Yes x
No
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FINANCIAL
INFORMATION
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Financial
Statements
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United
States 12 Month Oil Fund, LP
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Statement
of Financial
Condition
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September
30, 2007
(Unaudited)
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September
30,
2007
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Assets
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Cash
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$
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1,000
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Partners'
Capital
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General
Partner
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$
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20
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Limited
Partner
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980
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Total
Partners'
Capital
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$
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1,000
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See
accompanying notes
to statement of financial condition.
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1
United
States
12 Month Oil Fund, LP
Notes
to Statement of Financial
Condition
For
the period ended September 30,
2007 (Unaudited)
The following
Notes to the Statement of Financial Condition and numbers used therein
reflect
the condition of United States 12 Month Oil Fund, LP ("US12OF") as of December
31, 2007.
NOTE
1 - ORGANIZATION AND
BUSINESS
US12OF
was organized as a limited partnership under the laws of the state of
Delaware
on June 27, 2007. US12OF is a commodity pool that issues limited
partnership interests ("units") that may be purchased and sold on the
American
Stock Exchange (the "AMEX"). US12OF will continue in perpetuity, unless
terminated sooner upon the occurrence of one or more events as described
in
its Amended and Restated Agreement of Limited Partnership (the "Limited
Partnership Agreement"). The investment objective of US12OF is for the
changes
in percentage terms of its units' net asset value to reflect the changes
in
percentage terms of the price of light, sweet crude oil delivered to
Cushing, Oklahoma, as measured by the changes in the average of the prices
of
the 12 futures contracts on crude oil traded on the New York
Mercantile Exchange (the "NYMEX"), consisting of the near month contract to
expire and the contracts for the following 11 months for a total of 12
consecutive months' contracts, except when the near month contract is
within two
weeks of expiration, in which case it will be measured by the futures
contracts
that are the next month contract to expire and the contracts for the
following
11 consecutive months, less US12OF's expenses.
US12OF
will accomplish its objective
through investments 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 and other U.S. and foreign
exchanges
(collectively, “Futures Contracts”) and other oil related investments such as
cash-settled options on Futures Contracts, forward contracts for oil
and
over-the counter transactions that are based on the price of crude
oil, heating
oil, gasoline, natural gas and other petroleum-based fuels, Futures
Contracts
and indices based on the foregoing (collectively, “Other Crude Oil Related
Investments”).
US12OF
commenced investment operations on December 6,
2007 and has a fiscal year ending December 31. Victoria Bay Asset Management,
LLC is the general partner of US12OF (the "General
Partner") and is also responsible for the management of US12OF. The
General Partner is a member of the National Futures Association (the
"NFA") and
became a commodity pool operator with the Commodity Futures Trading
Commission (the "CFTC") effective December 1, 2005. The General Partner
is also
the general partner of United States Oil Fund, LP ("USOF") and United
States Natural Gas Fund, LP ("USNG") which listed their units on the
AMEX under
the ticker symbols "USO" on April 10, 2006 and "UNG" on April 18,
2007, respectively.
The
accompanying unaudited financial statements
have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated
by the U.S. Securities and Exchange Commission (the "SEC") and, therefore,
do not include all information and footnote disclosure required under
accounting
principles generally accepted in the United States of America. The
financial information included herein is unaudited, however, such
information reflects all adjustments which are, in the opinion of management,
necessary for the fair presentation of the financial statements for the
interim period.
US12OF issues
units to authorized purchasers by offering creation baskets consisting
of
100,000 units ("Creation Baskets") through ALPS Distributors, Inc. (the
"Marketing Agent"). The purchase price for a Creation Basket is based
upon the
net asset value of a unit determined as of 4:00 p.m. New York time on the
day the order to create the basket is properly received. In addition,
authorized
purchasers pay US12OF a $1,000 fee for each order to create one
or more Creation Baskets. Units can be purchased or sold on a nationally
recognized securities exchange in smaller increments than a Creation
Basket.
Units purchased or sold on a nationally recognized securities exchange
are not
made at the net asset value of US12OF but rather at market prices quoted
on such
exchange.
At
September 30, 2007, US12OF had not generated any revenues. Now that US12OF
has
commenced operations, the General Partner expects that US12OF will generate
sufficient revenue to meet its operational expenses.
On
December 6, 2007, US12OF listed its units on the AMEX under the ticker
symbol
“USL.” On that day, US12OF established its initial net asset value by setting
the price at $50.00 per unit and issued 300,000 units to the initial
authorized purchaser, Merrill
Lynch Professional
Clearing Corp., in exchange for $15,000,000 in cash. US12OF also
commenced investment operations on that day by purchasing crude oil
Futures
Contracts traded on the NYMEX. The total market value of the crude
oil Futures
Contracts purchased was $14,990,260 at the time of purchase. US12OF
established cash deposits equal to $15,000,000 at the time of the initial
sale of the units. The majority of those cash assets were held at
US12OF’s
custodian bank while less than 20% of the cash balance was held as
margin
deposits with the Futures Commission Merchant (as defined in Note
4) relating to
the crude oil Futures Contracts purchased.
As
of
December 31, 2007, US12OF had 400,000 outstanding units. At that time,
US12OF owned 232 crude oil Futures Contracts, which had a market
value as of the
close of trading on that day of $21,641,160. US12OF maintained cash
deposits at
its custodian bank and margin with the Futures Commission Merchant
in an
aggregate amount of $20,173,383.
NOTE
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Revenue
Recognition
Commodity
futures contracts, forward contracts, physical commodities and related
options
will be recorded on the trade date. All such transactions will be recorded
on
the identified cost basis and marked to market daily. Unrealized gains
or losses
on open contracts will be reflected in the statement of financial condition
and in 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 financial statements. Changes in the
unrealized gains or losses between periods will be reflected in
the statement of operations. US12OF will earn interest on assets
denominated in U.S. dollars on deposit with the Futures Commission
Merchant at the 90-day Treasury bill rate. In addition, US12OF will earn
interest on funds held at the custodian bank at prevailing market
rates earned on such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts will be accrued on
a
full-turn basis.
Income
Taxes
US12OF
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.
Additions
and
Redemptions
Authorized
purchasers may purchase Creation Baskets consisting of 100,000 units
from US12OF
as of the beginning of each business day based upon the prior day's
net asset
value. Authorized purchasers may redeem units from US12OF only in
blocks of
100,000 units called “Redemption Baskets”. The amount of the redemption proceeds
for a Redemption Basket will be equal to the net asset value of the
units in the
Redemption Basket determined as of 4:00 p.m. New York time on the
day the order
to redeem the basket is properly received.
US12OF
receives or pays the proceeds from units sold
or redeemed one business day after the trade-date of the purchase
or redemption.
The amounts due from authorized purchasers will be reflected in
US12OF's statement of financial condition as receivable for units sold, and
amounts payable to authorized purchasers upon redemption will be
reflected as
payable for units redeemed.
2
Partnership
Capital and Allocation of
Partnership Income and Losses
Profit
or
loss shall be allocated among the partners of US12OF in proportion to
the number
of units each partner holds as of the close of each month. The General
Partner
may revise, alter or otherwise modify this method of allocation as described
in
the Limited Partnership Agreement.
Calculation
of Net Asset
Value
US12OF calculates
net asset value on each trading day by taking the current market value
of its
total assets, subtracting any liabilities and dividing the amount by
the total
number of units issued and outstanding. US12OF will use the closing price
for
the contracts on the relevant exchange on that day to determine the value
of
contracts held on such exchange.
Offering
Costs
Offering
costs incurred in connection with the registration of additional units
after the
initial registration of units will be borne by US12OF. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated therewith. These costs will
be 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
and
cash equivalents include money market portfolios and overnight time deposits
with original maturity dates of three months or less.
Use
of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
US12OF’s
management to make estimates and assumptions that affect the reported
amount of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements, and the reported amounts of the
revenue and expenses during the reporting period. Actual results could
differ
from those estimates and assumptions.
NOTE 3
- FEES PAID BY US12OF AND
RELATED PARTY TRANSACTIONS
General
Partner Management
Fee
Under
the Limited Partnership Agreement, the General Partner is responsible for
investing the assets of US12OF in accordance with the objectives and
policies of
US12OF. In addition, the General Partner has arranged for one or more
third
parties to provide administrative, custody, accounting, transfer agency
and
other necessary services to US12OF. For these services, US12OF will
be
contractually obligated to pay the General Partner a fee, which will
be paid
monthly and based on average daily net assets, that is equal to 0.60%
per annum
on average net assets.
Ongoing
Registration Fees and Other
Offering Expenses
US12OF
will pay all costs and expenses associated with the
ongoing registration of units subsequent to the initial offering.
These costs and expenses will include registration or other fees
paid to
regulatory agencies in connection with the offer and sale of
units, and all
legal, accounting, printing and other expenses associated with such offer
and sale.
For
the three months ended September 30, 2007, all of
US12OF's offering and organizational expenses were funded by
the General
Partner. US12OF does not have any obligation or intention to
reimburse such
payments. For the three months ended September 30, 2007 and the
six months ended
December 31, 2007, US12OF incurred offering and organizational
costs in the
amount of $246,677 and $350,639, respectively.
Directors'
Fees
US12OF
is
responsible for paying the fees and expenses, including directors'
and officers'
liability insurance, of the independent directors of the General
Partner who are
also audit committee members. US12OF shares these fees with USOF and
USNG based on the relative assets of each fund, computed on a daily
basis. These
fees for calendar year 2007 amounted to a total of $286,000 for all of the
funds.
Investor
Tax Reporting
Cost
The
fees
and expenses associated with US12OF's tax accounting and reporting
requirements,
with the exception of certain initial implementation service
fees and base
service fees which were borne by the General Partner, are paid
by
US12OF.
Other
Expenses and
Fees
In
addition to the fees described above,
US12OF pays all brokerage fees, taxes and other expenses in connection
with
the operation of US12OF, excluding costs and expenses to be paid by the
General Partner as outlined in Note 4.
3
NOTE
4 - CONTRACTS AND
AGREEMENTS
US12OF
is
party to a marketing agent agreement, dated as of November 13, 2007,
with the Marketing Agent, whereby the Marketing Agent provides certain
marketing services for US12OF as outlined in the agreement. The fees
of the
Marketing Agent, which will be borne by the General Partner, will be
equal to
0.06% on US12OF's assets up to $3 billion; and 0.04% on assets in excess
of $3
billion.
The
above
fees do not include the following expenses, which will also be borne by the
General Partner: the cost of placing advertisements in various periodicals;
web
construction and development; or the printing and production of various
marketing materials.
US12OF
is
also party to a custodian agreement, dated October
5, 2007,
with Brown Brothers Harriman & Co. ("BBH&Co."), whereby BBH&Co.
holds investments on behalf of US12OF. The General Partner pays the fees of
the custodian, which shall be determined by the parties from time to
time. In
addition, US12OF is party to an administrative agency agreement, dated
October
5, 2007,
with the General Partner and BBH&Co., whereby BBH&Co. acts as the
administrative agent, transfer agent and registrar for US12OF. The General
Partner also pays the fees of BBH&Co. for its services under this
agreement and such fees will be determined by the parties from time to
time.
The
General Partner pays BBH&Co. for its services, in the foregoing
capacities, the greater of a minimum of $125,000 annually or an asset-based
charge of (a) 0.06% for the first $500 million of US12OF's, USOF's and
USNG's combined net assets, (b) 0.0465% for US12OF's, USOF's and USNG's
combined
net assets greater than $500 million but less than $1 billion, and (c)
0.035%
for US12OF's, USOF's, and USNG's combined net assets in excess of $1
billion.
The General Partner will also pay a $25,000 annual fee for transfer agency
services and transaction fees ranging from $7.00 to $15.00 per
transaction.
US12OF
will invest primarily in Futures Contracts traded on the
NYMEX.
US12OF
expressly disclaims any association with the NYMEX or endorsement of
US12OF by
the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
US12OF
has entered into a brokerage agreement with UBS Securities LLC (the "Futures
Commission Merchant") pursuant to which the Futures Commission Merchant
will
provide services to US12OF in connection with the purchase and sale
of Futures Contracts and Other Crude Oil Related Investments that may be
purchased and sold by or through the Futures Commission Merchant for
US12OF's
account. The agreement provides that the Futures Commission Merchant
charge
US12OF commissions of approximately $7
per round-turn trade, plus applicable exchange and NFA fees
for Futures Contracts and options on Futures Contracts.
NOTE
5 - FINANCIAL INSTRUMENTS,
OFF-BALANCE SHEET RISKS AND CONTINGENCIES
US12OF engages
in the speculative trading of Futures Contracts and options on Futures
Contracts (collectively, "derivatives"). US12OF 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.
All
of
the contracts traded by US12OF are exchange-traded. The risks associated
with exchange-traded contracts are generally perceived to be less than
those
associated with over-the-counter transactions since, in over-the-counter
transactions, US12OF must rely solely on the credit of its respective
individual
counterparties. However, in the future, if US12OF 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. US12OF also has credit risk since the sole counterparty to all domestic
and
foreign Futures Contracts is the exchange clearing corporation. In
addition, US12OF bears the risk of financial failure by the clearing
broker.
4
The
purchase and sale of futures and options on Futures Contracts require
margin
deposits with a futures commission merchant. Additional deposits may
be
necessary for any loss on contract value. The Commodity Exchange Act
requires a
futures commission merchant to segregate all customer transactions and
assets
from the futures commission merchant’s proprietary activities.
US12OF’s
cash and other property, such as U.S. Treasury Bills, deposited with
a futures
commission merchant are considered commingled with all other customer
funds
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’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 amount of cash and other
property
deposited.
US12OF invests
its cash in money market funds that seek to maintain a stable net asset
value.
US12OF is exposed to any risk of loss associated with an investment in
these
money market funds.
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, US12OF is exposed to a 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, US12OF pays or receives a
premium at the outset and then bear the risk of unfavorable changes in
the price
of the contract underlying the option.
US12OF’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, US12OF has a
policy requiring review of the credit standing of each broker or
counterparty with which it conducts business.
The
financial instruments held by US12OF will be reported in its statement
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.
Goldman,
Sachs & Co. (“Goldman Sachs”) sent USOF a letter on March 17, 2006,
providing USOF and the General Partner notice under 35 U.S.C. Section
154(d) of
two pending United States patent applications, Publication Nos. 2004/0225593A1
and 2006/0036533A1. Both patent applications are generally directed
to a method
and system for creating and administering a publicly traded interest
in a
commodity pool. In particular, the Abstract of each patent application
defines a
means for creating and administering a publicly traded interest in
a commodity
pool that includes the steps of forming a commodity pool having a
first position
in a futures contract and a corresponding second position in a margin
investment, and issuing equity interests of the commodity pool to
third party
investors. Subsequently, two U.S. Patents were issued; the first,
patent number
US7,283,978B2, was issued on October 16, 2007, and the second, patent
number
US7,319,984B2, was issued on January 15, 2008.
Preliminarily,
USOF's management is of the view that the structure and operations of USOF
and its affiliated commodity pools do not infringe these patents.
USOF is also
in the process of reviewing prior art (prior structures and operations
of
similar investment vehicles) that may invalidate one or more of the
claims in
these patents. In addition, USOF has retained patent counsel to advise
it on
these matters and is in the process of obtaining their opinions regarding
the
non-infringement of each of these patents by USOF and/or the patents'
invalidity
based on prior art. If the patents were alleged to apply to USOF's
structure
and/or operations, and are found by a court to be valid and infringed,
Goldman
Sachs may be awarded significant monetary damages and/or injunctive
relief.
NOTE 6
- SUBSEQUENT
EVENTS
Goldman
Sachs &
Co.
Goldman
Sachs sent USOF a letter on March 17, 2006, providing USOF and the
General
Partner notice under 35 U.S.C. Section 154(d) of two pending United
States
patent applications, Publication Nos. 2004/0225593A1 and
2006/0036533A1. Both patent applications are generally directed to a
method and system for creating and administering a publicly traded
interest in a
commodity pool. In particular, the Abstract of each patent
application defines a means for creating and administering a publicly
traded
interest in a commodity pool that includes the steps of forming a
commodity pool
having a first position in a futures contract and a corresponding
second
position in a margin investment, and issuing equity interests of
the commodity
pool to third party investors. Subsequently, two U.S. Patents were
issued, the first, patent number US7,283,978B2, was issued on October
16, 2007,
and the second, patent number US7,319,984B2, was issued on January
15,
2008.
Preliminarily,
USOF's management is of the view that the structure and operations of USOF
and its affiliated commodity pools do not infringe these
patents. USOF is also in the process of reviewing prior art (prior
structures and operations of similar investment vehicles ) that may
invalidate
one or more of the claims in these patents. In addition, USOF has
retained patent counsel to advise it on these matters and is in the
process of
obtaining their opinions regarding the non-infringement of each of
these patents
by USOF and/or the patents’ invalidity based on prior art. If the
patents were alleged to apply to USOF’s structure and/or operations, and are
found by a court to be valid and infringed, Goldman Sachs may be
awarded
significant monetary damages and/or injunctive
relief.
Licensing
Fees
US12OF
entered into a licensing agreement with the NYMEX on January 16, 2008. The
agreement has an effective date of December 4, 2007. Pursuant to the
agreement,
US12OF and the affiliated funds managed by the General Partner will
pay a
licensing fee that is equal to 0.04% for the first $1,000,000,000 of
combined assets of the funds and 0.02% for combined assets above $1,000,000,000.
Since inception, US12OF has incurred $540 under this
arrangement.
5
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Management's
Discussion and
Analysis of Financial Condition and Results of
Operations
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The
following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto of United States 12 Month
Oil Fund,
LP ("US12OF") 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 US12OF'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 US12OF'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
US12OF cannot assure investors that the projections included in these
forward-looking statements will come to pass. US12OF's actual results could
differ materially from those expressed or implied by the forward-looking
statements as a result of various factors.
US12OF
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 US12OF assumes no obligation to update any such
forward-looking statements. Although US12OF 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 US12OF may make directly to them or through
reports that US12OF in the future files 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
US12OF,
a
Delaware limited partnership, is a commodity pool that issues limited
partnership interests that may be purchased and sold on the American Stock
Exchange (the "AMEX"). The
net
assets of US12OF consist primarily of investments 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 New
York Mercantile
Exchange (the "NYMEX"), ICE Futures or other U.S. and foreign exchanges
(collectively, “Futures Contracts”). This may include contracts that are of the
standard industry size as measured in physical amounts of crude
oil, as well as
similar contracts that are financially settled but are based on
a percentage of
the standard size contracts. US12OF may also invest in other crude
oil-related
investments such as cash-settled options on Futures Contracts,
forward contracts
for crude oil, and over-the-counter transactions that are based
on the price of
crude oil, heating oil, gasoline, natural gas, and other petroleum-based
fuels,
Futures Contracts and indices based on the foregoing (collectively,
“Other Crude
Oil-Related Investments”). For convenience and unless otherwise specified,
Futures Contracts and Other Crude Oil-Related Investments collectively
are
referred to as “Crude Oil Interests” in this quarterly report on Form
10-Q.
US12OF invests
in Crude 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 Futures Contracts and Other Crude
Oil-Related
Investments. The primary focus of Victoria Bay Asset Management,
LLC (the
"General Partner") with respect to US12OF is the investment in Futures
Contracts and the management of investments in short-term obligations of
the United States of two years or less (“Treasuries”), cash and/or cash
equivalents for margining purposes and as collateral.
The
investment objective of US12OF is to have the changes in percentage
terms of its
units’ net asset value ("NAV") reflect the changes in percentage terms
of the
price of light, sweet crude oil delivered to Cushing, Oklahoma,
as measured by
the changes in the average of the prices of 12 Futures Contracts
on crude oil
traded on the NYMEX (the “Benchmark Futures Contracts”), consisting of the near
month contract to expire and the contracts for the following
11 months, for a
total of 12 consecutive months’ contracts, except when the near month contract
is within two weeks of expiration, in which case it will be measured
by the
futures contracts that are the next month contract to expire
and the contracts
for the following 11 consecutive months, less US12OF’s expenses. When
calculating the daily movement of the average price of the 12
contracts, each
contract month will be equally weighted.
The General
Partner, which is registered as a commodity pool operator with the
Commodity Futures Trading Commission (the "CFTC"), is authorized
by
the Amended and Restated Agreement of Limited Partnership (the "LP
Agreement") to manage US12OF. The General Partner is authorized
by US12OF in its
sole judgment to employ, establish the terms of employment for
and terminate
commodity trading advisors or futures commission merchants.
The
Notes to the Statement of Financial Condition and
the numbers provided in this quarterly report on Form 10-Q are
as of December
31, 2007.
In
December of 2007, US12OF initially registered 11,000,000 units
on Form S-1 with
the SEC. On December 6, 2007, US12OF listed its units on the AMEX
under the ticker symbol “USL”. On that day, US12OF established its initial NAV
by setting a price per unit at $50.00 and issued 300,000 units
to the initial
authorized purchaser, Merrill Lynch Professional Clearing Corp.,
in exchange for
$15,000,000 in cash. The
initial offering price
of the initial Creation Basket was set at $50.00. As od December 31,
2007, US12OF has registered a total of 11,000,000
units. US12OF also commenced investment operations on December 6,
2007 by purchasing Benchmark Futures Contracts.
6
Valuation
of Futures Contracts
and the Computation of the NAV
The
NAV
of US12OF units is calculated once each trading day as of the earlier
of the
close of the New York Stock Exchange (the "NYSE") or 4:00 p.m.
New York time. The NAV for a particular trading day is released after
4:15 p.m. New York time. Trading
on the AMEX typically closes at 4:15 p.m. New York time. US12OF uses the
NYMEX closing price (determined at the earlier of the close of
that exchange or
2:30 p.m. New York time) for the contracts held on the NYMEX, but
calculates or determines the value of all other US12OF investments,
including
ICE Futures or other Futures Contracts, as of the earlier of the close
of the NYSE or 4:00 p.m. New York time.
Management’s
Discussion of Results of
Operations and the Crude Oil Market
Results
of
Operations. During
the three month period ended
September 30, 2007, US12OF had not yet commenced investment activities
nor
issued units. In addition, US12OF did not purchase or own any Futures
Contracts
or Other Crude Oil Related Investments during this reporting period,
nor were
there any receipts or disbursements of cash from US12OF during
this reporting
period. Also, US12OF did not receive any revenue or capital gains
(losses), or
incur any expenses during this reporting period.
Expenses
incurred during the third quarter of 2007 in
connection with organizing US12OF and the initial offering costs
of the units
were borne by the General Partner, and are not subject to reimbursement
by
US12OF.
Portfolio
Expenses.
US12OF’s expenses consist of management fees, brokerage fees and
commissions, certain offering costs, licensing fees and the fees
and expenses of
the independent directors of the General Partner. US12OF pays the
General Partner a management fee of 0.60% of the NAV on all of
its
assets.
US12OF pays
for all brokerage fees, taxes and other expenses, including licensing
fees for
the use of intellectual property, ongoing registration or other
fees paid to the
SEC, the Financial Industry Regulatory Authority ("FINRA") and any
other regulatory agency in connection with subsequent offers
and sales of its
units and all legal, accounting, printing and other expenses
associated
therewith. US12OF is responsible for paying the fees and expenses,
including directors' and officers' liability insurance, of the
independent
directors of the General Partner who are also audit committee
members. US12OF shares these fees with its affiliates, the United
States Oil Fund, LP ("USOF") and the United States Natural Gas
Fund, LP
("USNG"), based on the relative assets of each fund, computed
on a daily basis.
These fees for calendar year 2007 amounted to a total of $286,000
for all three
funds. Investors in US12OF who wish to receive additional information
concerning the United States Oil Fund, LP, may do so by calling
1-800-920-0259,
or going on-line to www.unitedstatesoilfund.com. Investors who wish to
receive additional information concerning the United States Natural
Gas Fund,
LP, may do so by calling 1-800-920-0259, or going on-line to
www.unitedstatesnaturalgasfund.com.
US12OF
will also incur commissions to brokers for the purchase and sale
of Futures
Contracts, Other Crude Oil Related Investments or Treasuries.
Interest
Income.
Unlike
some alternative investment funds, US12OF does not borrow money
in order to
obtain leverage, so US12OF does not incur any interest
expense. Rather, US12OF’s margin deposits are maintained in
Treasuries and interest is earned on 100% of US12OF’s available assets, which
include unrealized profits credited to US12OF’s accounts
Tracking
US12OF’s
Benchmark.
US12OF
seeks to manage its portfolio such that changes in its average
daily NAV, on a
percentage basis, closely track changes in the average of the
daily prices of
the Benchmark Futures Contracts, also on a percentage basis. Specifically,
US12OF seeks to manage the portfolio such that over any rolling
period of 30
valuation days, the average daily change in the NAV is within
a range of 90% to
110% (0.9 to 1.1) of the average daily change of the Benchmark Futures
Contracts. As an example, if the average daily movement of
the average of the
prices of the Benchmark Futures Contracts for a particular
30-day time period
was 0.5% per day, US12OF management would attempt to manage
the portfolio such
that the average daily movement of the 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). US12OF’s portfolio management
goals do not include trying to make the nominal price of its
NAV equal to the
average of the nominal prices of the current Benchmark Futures Contracts or
the spot price for crude oil. Management believes that it is
not practical to
manage the portfolio to achieve such an investment goal when
investing in listed
crude oil futures contracts.
An
alternative tracking measurement of the return performance
of US12OF versus the
return of its Benchmark Futures Contracts can be calculated by comparing
the actual return of US12OF, measured by changes in its NAV, versus the
expected
changes
in its NAV under the assumption that US12OF’s returns had been exactly the same
as the daily changes in its Benchmark Futures Contracts.
There
are
currently three factors that are most likely to have an impact
on US12OF’s ability to accurately track the changes to the average
of the
prices of its Benchmark Futures Contracts.
First,
US12OF may buy or sell its holdings in the then current
Benchmark Futures
Contracts at a price other than the closing settlement
price of that contract on
the day in which US12OF executes the trade. In that case,
US12OF may get a price
that is higher, or lower, than that of the Benchmark Futures Contracts,
which, could cause the changes in the daily NAV of US12OF to either
be too
high or too low relative to the changes in the daily benchmark.
Management will
attempt to minimize the effect of these transactions by
seeking to execute its
purchase or sales of the Benchmark Futures Contracts at, or as close as
possible to, the end of the day settlement price. However,
it may not always be
possible for US12OF 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 US12OF’s attempt to track its benchmark over
time.
Second,
US12OF earns interest on its cash and Treasury holdings. US12OF is not
required to distribute any portion of its income to its
unitholders. Interest
payments, and any other income, are retained within the
portfolio and added to
US12OF’s NAV. When this income exceeds the level of US12OF’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 the General Partner), US12OF realizes a net yield
that will tend to cause daily changes in the NAV of US12OF
to track slightly
higher than daily changes in the average of the prices
of the
Benchmark Futures Contracts.
Third,
US12OF may hold Other Crude Oil Related Investments in its
portfolio that
may fail to closely track the Benchmark Futures Contracts' total return
movements. In that case, the error in tracking the
benchmark could result in
daily changes in the NAV of US12OF that are either
too high, or too low,
relative to the daily changes in the benchmark.
7
Term
Structure of Crude Oil Futures
Prices and the Impact on Total Returns. Several factors determine the
total return from investing in a futures contract position.
One factor that
impacts the total return that will result from investing in near month
crude oil futures contracts and “rolling” those contracts forward each month is
the price relationship between the current near month contract
and the later
month contracts. For example, if the price of the near month
contract is higher
than the next month contract (a situation referred to as “backwardation” in the
futures market), then absent any other change there is a tendency
for the price
of a next month contract to rise in value as it becomes the
near month contract
and approaches expiration. Conversely, if the price of a near
month contract is
lower than the next month contract (a situation referred to
as “contango” in the
futures market), then absent any other change there is a tendency
for the price
of a next month contract to decline in value as it becomes
the near month
contract and approaches expiration.
As
an
example, assume that the price of crude oil for immediate
delivery (the “spot”
price), was $50 per barrel, and the value of a position in
the near month
futures contract was also $50. Over time, the price of the
barrel of crude oil
will fluctuate based on a number of market factors, including demand for
oil relative to its supply. The value of the near month contract
will likewise
fluctuate in reaction to a number of market factors. If investors seek
to
maintain their holding in a near month contract position
and not take delivery
of the oil, every month they must sell their current near
month contract as it
approaches expiration and invest in the next month contract.
If
the
futures market is in backwardation, e.g., when the expected
price of oil in the
future would be less, the investor would be buying a next
month contract for a
lower price than the current near month contract. Hypothetically,
and assuming
no other changes to either prevailing crude oil prices or
the price relationship
between the spot price, the near month contract and the next
month contract (and
ignoring the impact of commission costs and the interest
earned on Treasuries,
cash and/or cash equivalents), the value of the next month
contract would rise
as it approaches expiration and becomes the new near month
contract. In this
example, the value of the $50 investment would tend to rise
faster than the spot
price of crude oil, or fall slower. As a result, it would
be possible in this
hypothetical example for the price of spot crude oil to have
risen to $60 after
some period of time, while the value of the investment in
the futures contract
would have risen to $65, assuming backwardation is large
enough or enough time
has elapsed. Similarly, the spot price of crude oil could
have fallen to $40
while the value of an investment in the futures contract
could have fallen to
only $45. Over time, if backwardation remained constant,
the difference would
continue to increase.
If
the
futures market is in contango, the investor would be buying
a next month
contract for a higher price than the current near month
contract.
Hypothetically, and assuming no other changes to either
prevailing crude oil
prices or the price relationship between the spot price,
the near month contract
and the next month contract (and ignoring the impact of
commission costs and the
interest earned on cash), the value of the next month contract
would fall as it
approaches expiration and becomes the new near month contract.
In this example,
it would mean that the value of the $50 investment would
tend to rise slower
than the spot price of crude oil, or fall faster. As a
result, it would be
possible in this hypothetical example for the spot price
of crude oil to
have risen to $60 after some period of time, while the
value of the investment
in the futures contract will have risen to only $55, assuming
contango is large
enough or enough time has elapsed. Similarly, the spot
price of crude oil could
have fallen to $45 while the value of an investment in
the futures contract
could have fallen to $40. Over time, if contango remained
constant, the
difference would continue to increase.
Historically,
the oil futures markets have experienced periods of contango
and
backwardation, with backwardation being in place more often
than contango.
During the past two years, including 2006 and the first
half of 2007, these
markets have experienced contango. However, starting early
in the third quarter
of 2007, the crude oil futures market moved into backwardation
and remained in
that condition for the rest of the year. The chart below
compares the price of
the front month contract to the average price of the first
12 months over the
last 10 years (1998-2007). When the price of the front
month contract is higher
than the average price of the front 12 month contracts,
the market would be
described as being in backwardation. When the price of
the front month contract
is lower than the average price of the front 12 month contracts,
the market
would be described as being in contango. Although the prices
of the front month
contract and the average price of the front 12 month contracts
do tend to move
up or down together, it can be seen that at times the front
month prices are
clearly higher than the average price of the 12 month contracts
(backwardation),
and other times they are below the average price of the
front 12 month contracts
(contango).
8
An
alternative way to view the same data is to subtract the average
dollar price of
the front 12 month contracts from the dollar price of the front month
contract. If the resulting number is a positive number, than
the front month
price is higher than the average price of the front 12 months
and the market
could be described as being in backwardation. If the resulting
number is a
negative number, than the front month price is lower than the
average price of
the front 12 months and the market could be described as being
in contango. The
chart below shows the results from subtracting the front month
price from the
average price of the front 12 month contracts for the 10 year
period between
1998 and 2007.
A
hypothetical investment in a portfolio that involved owning only
the front month
contract would produce a different result than a hypothetical
investment in a
portfolio that owned an equal number of each of the front 12
month’s worth of
contracts. Generally speaking, when the crude oil futures market
is in
backwardation the front month only portfolio would tend to have
a higher total
return than the 12 month portfolio. Conversely, if the crude
oil futures market
was in contango, the portfolio containing 12 months worth of
contracts would
tend to outperform the front month only portfolio. The chart
below shows the
hypothetical results of owning a portfolio consisting of the
front month
contract versus a portfolio containing the front 12 month’s worth of contracts.
In this example, each month the front month only portfolio would
sell the front
month contract at expiration and buy the next month out contract.
The portfolio
holding an equal number of the front 12 month’s worth of contracts would sell
the front month contract at expiration and replace it with the
contract that
becomes the new twelfth month contract.
As
seen
in the chart, there have been periods of both positive and
negative annual total
returns for both hypothetical portfolios over the last 10 years.
In addition,
there have been periods during which the front month only approach
had higher
returns, and periods where the 12 month approach had higher
total
returns.
9
The
General Partner 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,
the General Partner 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. The General Partner 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.
Periods
of backwardation and contango do not meaningfully impact US12OF’s investment
objective of having percentage changes in its per unit NAV track
percentage
changes in the average of the prices of the Benchmark Futures Contracts
since the impact of backwardation and contango tended to equally
impact the
percentage changes in price of both US12OF’s units and the
Benchmark Futures Contracts. 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.
Crude
oil market. During the
third quarter of 2007, crude oil prices were impacted by several factors.
On the consumption side, demand remained strong as continued
global economic
growth, especially in emerging economies such as China and
India, remained
brisk. On the supply side, production remained steady despite
concerns
about violence impacting production in Iraq and Nigeria. At the same
time, a concern remained about the ability of major oil producing countries
to continue to raise their production to accommodate increasing
demand.
During
the year ended December 31, 2007, crude oil
prices were impacted by several factors. On the consumption side,
demand
remained strong as continued global economic growth, especially
in emerging
economies such as China and India, remained brisk. Additionally,
a falling U.S.
dollar, the currency in which crude oil is traded globally, continued
to be
weak, effectively making crude oil cheaper for most non-U.S. dollar
economies.
On the supply side, production remained steady despite concerns
about violence impacting production in Iraq and Nigeria. At the same
time, a concern remains about the ability of major oil producing countries
to continue to raise their production to accommodate increasing
demand.
Additionally, a concern about the strength of the U.S. economy,
and the risk of
recession which might lead to the U.S. decreasing its oil consumption
in 2008,
began to be a factor in the crude oil markets very late in
2007.
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. US12OF's application of these policies
involves
judgments and actual results may differ from the estimates used.
The
General Partner has evaluated the nature and types of estimates
that
it makes in preparing US12OF'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 over-the-counter contracts) involves
a critical
accounting policy. To the extent US12OF makes such investments,
the values used
by US12OF for its forward contracts will be provided by its commodity
broker who
values over-the-counter contracts 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, US12OF estimates interest income
on a daily basis
using prevailing interest 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
US12OF
has not made, and does not anticipate making, use of borrowings
or other lines
of credit to meet its obligations. US12OF has met, and it is anticipated
that
US12OF 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.
US12OF’s liquidity needs include: redeeming units, providing margin deposits
for
its existing oil futures contracts or the purchase of additional
crude oil
futures contracts and posting collateral for its over-the-counter
contracts and
payment of its expenses, summarized below under “Contractual
Obligations.”
US12OF generates
cash primarily from (i) the sale of Creation Baskets and (ii) interest
earned on
cash, cash equivalents and its investments in Treasuries. US12OF allocates
substantially all of its net assets to trading in Crude Oil Interests.
A
significant portion of its NAV is held in cash, cash equivalents
and its
investments in Treasuries that is used as margin for US12OF's trading in
Crude Oil Interests. The percentage that Treasuries bears to the total
net assets varies from period to period as the market values of
the Crude Oil
Interests change. The balance of the net assets is held in US12OF's Futures
Contracts and Other Crude Oil Related Investments trading account.
Interest
earned on US12OF's interest bearing-funds is paid to US12OF.
10
US12OF's
investment in Crude 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 an Futures Contract has increased or
decreased by an amount equal to the daily limit, positions in the
contracts can
neither be taken or liquidated unless the traders are willing to
effect trades
at or within the specified daily limit. Such market conditions
could prevent
US12OF from promptly liquidating its positions in Futures
Contracts.
To
date,
all of US12OF's expenses, including its organization and offering
expenses
relating to the initial offering of its units, have been paid by
the General
Partner. Fees and expenses associated with the registration of
units with the
SEC subsequent to the initial offering will be borne by US12OF.
In addition,
fees and expenses (including directors' and officers' liability
insurance) of the independent directors of the General Partner,
the management
fee paid to the General Partner, brokerage fees and licensing fees are paid
directly by US12OF. If the General Partner and US12OF are unsuccessful
in
raising sufficient funds to cover US12OF's expenses or in locating
any other
source of funding, US12OF will terminate and investors may lose
all or part of
their investment.
Market
Risk
Trading
in Futures Contracts and Other Crude Oil Related Investments, such
as
forwards, involves US12OF entering into contractual commitments to purchase
or sell oil at a specified date in the future. The gross or face
amount of
the contracts will significantly exceed US12OF's future cash requirements
since US12OF intends to close out its open positions prior to settlement.
As a
result, US12OF is generally only subject to the risk of loss
arising from the change in value of the contracts. US12OF considers
the "fair
value'' of its derivative instruments to be the unrealized gain
or loss on the
contracts. The market risk associated with US12OF's commitments
to purchase oil
is limited to the gross face amount of the contacts held. However,
should US12OF
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 US12OF could be unlimited.
US12OF'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 Futures Contracts and Other Crude Oil Related
Investments markets and the relationships among the contracts held
by US12OF.
The limited experience that US12OF has in utilizing its model to trade in
Crude Oil Interests in a manner intended to track the spot price
of crude oil,
as well as drastic market occurrences, could ultimately lead to
the loss of all
or substantially all of an investor’s capital.
Credit
Risk
When
US12OF enters into Futures Contracts and Other Crude 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 Futures Contracts
traded on the NYMEX and on most other foreign futures
exchanges is the clearinghouse associated with the particular exchange.
In
general, 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. 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 US12OF in such
circumstances.
The
General Partner attempts to manage the credit risk of US12OF by following
various trading limitations and policies. In particular, US12OF
posts margin
and/or holds liquid assets that are approximately equal to the
face amount of
its obligations to counterparties under the Futures Contracts and Other
Crude Oil Related Investments it holds. The General Partner 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 US12OF to limit its credit
exposure.
US12OF's
commodity broker, or any other broker that may be retained by US12OF
in the
future, when acting as US12OF's futures commission merchant in
accepting orders
to purchase or sell Futures Contracts on United States exchanges,
is required by CFTC regulations to separately account for and
segregate as belonging to US12OF, all assets of US12OF relating
to domestic
Futures Contracts trading. A futures commission merchant is not
allowed to
commingle US12OF's assets with its other assets. In addition, the
CFTC requires
commodity brokers to hold in a secure account the US12OF assets
related to
foreign Futures Contracts trading.
Off
Balance Sheet
Financing
As
of
December 31, 2007, US12OF has 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 US12OF. While US12OF's
exposure
under these indemnification provisions cannot be estimated, they
are not
expected to have a material impact on US12OF's financial position.
11
Redemption
Basket
Obligation
In
order
to meet its investment objective and pay its contractual obligations
described
below, US12OF requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called Redemption Baskets. US12OF has
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 units
being redeemed.
Contractual
Obligations
US12OF's
primary contractual obligations are with the General Partner. In
return for its
services, the General Partner is entitled to a management fee calculated
as a
fixed percentage of US12OF's NAV, currently 0.60% of NAV for its
average net
assets.
The
General Partner agreed to pay the start-up costs associated with the
formation of US12OF, primarily its legal, accounting and other
costs in
connection with its contracts with service providers and its
registration with
the SEC and other regulatory filings in connection with the initial
public
offering of its units, and the registration fees paid to the
SEC, FINRA and the
AMEX in connection with such offering. The General Partner agreed to pay
the fees of the custodian and transfer agent, BBH&Co., as well as
BBH&Co.’s fees for performing administrative services, including in
connection with US12OF’s preparation of its financial statements and its SEC and
CFTC reports.
In
addition to the General Partner’s management fee, US12OF pays its brokerage fees
(including fees to the futures commission merchant), over-the-counter
dealer
spreads, any licensing fees for the use of intellectual property,
registration
and, subsequent to the initial offering, the fees paid to the
SEC, FINRA, or
other regulatory agencies in connection with the offer and sale
of the units,
tax accounting and reporting fees, as well as the legal, printing,
accounting,
and other expenses associated therewith, and extraordinary expenses.
In
addition, other expenses not in the ordinary course of US12OF's
business include
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 the futures commission merchant are on a contract-by-contract,
or round turn,
basis. In addition, US12OF pays a portion of the fees and expenses of
the independent directors of the General Partner. See Note 3 to the
Notes to Statement of Financial Condition.
The
parties cannot anticipate the amount of payments that will be
required under
these arrangements for future periods as US12OF’s NAV and trading levels to meet
its investment objectives 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 US12OF’s
existence. Either party may terminate these agreements earlier
for certain
reasons listed in the agreements.
12
|
Quantitative
and Qualitative
Disclosures About Market Risk
|
Over-the-Counter
Derivatives
(Including Spreads and
Straddles)
In
the
future, US12OF may purchase over-the-counter contracts. Unlike
most of the
exchange-traded oil futures contracts or exchange-traded options
on such
futures, each party to over-the-counter contracts bears the credit
risk that the
other party may not be able to perform its obligations under
its
contract.
Some
oil-based derivatives transactions contain fairly generic terms
and conditions
and are available from a wide range of participants. Other oil-based
derivatives
have highly customized terms and conditions and are not as widely
available.
Many of these over-the-counter contracts are cash-settled forwards
for the
future delivery of oil- or petroleum-based fuels that have terms
similar to the
Futures Contracts. Others take the form of “swaps” in which the two parties
exchange cash flows based on pre-determined formulas tied to
the spot price of
the crude oil, forward crude oil prices or crude oil futures prices. For
example, US12OF may enter into over-the-counter derivative contracts
whose value
will be tied to changes in the difference between the spot price of light,
sweet crude oil, the price of Futures Contracts traded on the NYMEX and the
prices of other Futures Contracts that may be invested in by
US12OF.
To
protect itself from the credit risk that arises in connection
with such
contracts, US12OF may enter into agreements with each counterparty
that provide
for the netting of its overall exposure to its counterparty,
such as the
agreements published by the International Swaps and Derivatives
Association,
Inc. US12OF also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address US12OF’s exposure to the
counterparty. In addition, it is also possible for US12OF and
its counterparty
to agree to clear their agreement through an established futures
clearing house
such as those connected to the NYMEX or the ICE Futures. In that
event, US12OF
would no longer have credit risk of its original counterparty,
as the clearing
house would now be US12OF's counterparty. US12OF would still
retain any price
risk associated with its transaction.
US12OF
may employ spreads or straddles in its trading to mitigate the
differences in
its investment portfolio and its goal of tracking the price of
the
Benchmark Futures Contract. US12OF would use a spread when it chooses to
take simultaneous long and short positions in futures written
on the same
underlying asset, but with different delivery months. The effect
of holding such
combined positions is to adjust the sensitivity of US12OF to
changes in the
price relationship between futures contracts which will expire
sooner and those
that will expire later. US12OF would use such a spread if the General
Partner
felt that taking such long and short positions, when combined
with the rest of
its holdings, would more closely track the investment goals of
US12OF, or the
General Partner felt if it would lead to an overall lower cost
of trading to
achieve a given level of economic exposure to movements in oil
prices. US12OF
would enter into a straddle when it chooses to take an option
position
consisting of a long (or short) position in both a call option
and put option.
The economic effect of holding certain combinations of put options
and call
options can be very similar to that of owning the underlying
futures contracts.
US12OF would make use of such a straddle approach if, in the
opinion of the
General Partner, the resulting combination would more closely
track the
investment goals of US12OF or if it would lead to an overall
lower cost of
trading to achieve a given level of economic exposure to movements
in oil
prices.
During
the three months ended September 30, 2007 and the six months
ended December 31,
2007, US12OF did not employ any hedging methods since all of
its investments
were made over an exchange. Therefore, US12OF was not exposed
to counterparty
risk.
13
|
Controls
and
Procedures
|
Disclosure
Controls and
Procedures.
US12OF
maintains disclosure controls and procedures that are designed to
ensure that
material information required to be disclosed in US12OF’s periodic reports
filed or submitted under the Securities Exchange Act of 1934, as
amended (the
"Exchange Act"), is recorded, processed, summarized and reported
within the time
period specified in the SEC’s rules and forms.
The
duly
appointed officers of the General Partner, including its chief executive
officer and chief financial officer, who perform functions equivalent
to those of a principal executive officer and principal financial
officer of
US12OF if US12OF had any officers, have evaluated the effectiveness
of US12OF’s
disclosure controls and procedures and have concluded that the disclosure
controls and procedures of US12OF have been effective as of the end
of the
period covered by this quarterly report on Form
10-Q.
Change
in Internal Control Over
Financial Reporting.
There
were no changes in US12OF’s internal control over financial reporting during
US12OF’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, US12OF’s internal control over financial
reporting.
14
|
Part
II.
|
OTHER
INFORMATION
|
|
Risk
Factors
|
There
has
not been a material change from the risk factors previously
disclosed in
US12OF's Registration Statement on Form S-1, which was declared
effective by the
SEC on December 4, 2007.
|
Other
Information
|
Monthly
Account
Statements
Pursuant
to the requirement under part 4.22 of the Commodity Exchange
Act, each month
US12OF publishes an account statement for its unitholders,
which includes a
Statement of Income (Loss) and a Statement of Changes in
NAV. The account
statement is filed with the SEC on a current report on Form
8-K pursuant to
Section 13 or 15(d) of the Exchange Act and posted each month
on US12OF's
website at www.unitedstates12monthoilfund.com.
|
Exhibits
|
Listed
below are the exhibits which are filed or furnished as part
of this quarterly
report on Form 10-Q (according to the number assigned to them in Item 601
of Regulation S-K):
| Exhibit Number | Description
of
Document
|
|
|
|
||
|
|
|
|
|
|
||
|
|
|
|
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*
Filed herewith
**
Furnished herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934,
the registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto
duly authorized.
|
United
States 12 Month Oil Fund, LP (Registrant)
By:
Victoria Bay Asset Management, LLC, its general partner
|
|
By:
/s/ Nicholas D.
Gerber
|
|
Nicholas
D.
Gerber
|
|
Chief
Executive
Officer
|
|
DateDate: March
5, 2008
|
|
By:
/s/ Howard
Mah
|
|
Howard
Mah
|
|
Chief
Financial
Officer
|
|
DateDate:
March 5, 2008
|
15