Ultimate magazine theme for WordPress.

United States Oil Fund LP ETF : , LP Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

The following discussion should be read in conjunction with the condensed
financial statements and the notes thereto of the United States Oil Fund, LP
(“USO”) 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 USO’s actual results, performance
or achievements to be materially different from future results, performance or
achievements expressed or implied by any forward-looking statements. USO
believes these factors include, but are not limited to, the following: changes
in inflation in the United States; movements in U.S. and foreign currencies;
market volatility in the crude oil markets and futures markets, in part
attributable to the COVID-19 pandemic, disputes among oil-producing countries
over the potential limits on the production of crude oil, changes in demand for
crude oil and storage for crude oil; uncertainties associated with the impact
from the coronavirus (COVID-19) pandemic, including: its impact on the global
and U.S. capital markets and the global and U.S. economy, the length and
duration of the COVID-19 outbreak in the United States as well as worldwide and
the magnitude of the economic impact of that outbreak, the effect of the
COVID-19 pandemic on USO’s business prospects, including its ability to achieve
its objectives, and the effect of the disruptions caused by the COVID-19
pandemic on our ability to continue to effectively manage our business.
Forward-looking statements, which involve assumptions and describe USO’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 USO cannot assure investors that the
projections included in these forward-looking statements will come to pass.
USO’s actual results could differ materially from those expressed or implied by
the forward-looking statements as a result of various factors.

USO has based the forward-looking statements included in this quarterly report
on Form 10-Q on information available to it on the date of this quarterly report
on Form 10-Q, and USO assumes no obligation to update any such forward-looking
statements. Although USO 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 USO may make directly to them or through reports that USO files in the
future with the 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

USO, a Delaware limited partnership, is a commodity pool that issues shares that
may be purchased and sold on the NYSE Arca. The investment objective of USO is
for the daily changes in percentage terms of its shares’ per share NAV to
reflect the daily changes in percentage terms of the spot price of light, sweet
crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in
the price of the futures contract for light, sweet crude oil traded on the NYMEX
that is the near month contract to expire, except when the near month contract
is within two weeks of expiration, in which case it will be measured by the
futures contract that is the next month contract to expire (the “Benchmark Oil
Futures Contract”), plus interest earned on USO’s collateral holdings, less
USO’s expenses. “Near month contract” means the next contract traded on the
NYMEX due to expire. “Next month contract” means the first contract traded on
the NYMEX due to expire after the near month contract. USO seeks to achieve its
investment objective by investing so that the average daily percentage change in
USO’s NAV for any period of 30 successive valuation days will be within
plus/minus ten percent (10%) of the average daily percentage change in the price
of the Benchmark Oil Futures Contract over the same period. As described below,
USO is currently unable to pursue its investment objective with the same high
degree of success that it has in the past due to its limited ability to invest
in the Benchmark Oil Futures Contract and certain other Oil Futures Contracts,
as defined below, to the same extent it was able to before the market conditions
and regulatory limitations imposed on USO occurred in Spring of 2020, and risk
mitigation measures taken by USO’s FCMs as a result, as described herein, arose.
As a result of such market conditions, the regulatory conditions that were and
could again be imposed, and the risk mitigation measures imposed by its FCMs,
there is still uncertainty as to whether USO will be able to achieve its
investment objective within as narrow a percentage change difference in its NAV
for any period of 30 successive valuation days and the average daily percentage
change in the price of the Benchmark Oil Futures Contract as it typically had
prior to the Spring of 2020 due to the foregoing factors.

18

Table of Contents

USO’s investment objective is not for its NAV or market price of shares to
equal, in dollar terms, the spot price of light, sweet crude oil or any
particular futures contract based on light, sweet crude oil, nor is USO’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 USO,
United States Commodity Funds, LLC (“USCF”), believes that it is not practical
to manage the portfolio to achieve such an investment goal when investing in Oil
Futures Contracts and Other Oil-Related Investments.

USO invests primarily in futures contracts for light, sweet crude oil, other
types of crude oil, heating oil, gasoline, natural gas and other petroleum-based
fuels that are traded on the NYMEX, ICE Futures or other U.S. and foreign
exchanges (collectively, “Oil Futures Contracts”) and to a lesser extent, in
order to comply with regulatory requirements, risk mitigation measures,
liquidity requirements, or in view of market conditions, other oil-related
investments such as cash-settled options on Oil Futures Contracts, forward
contracts for oil, cleared swap contracts and OTC swaps that are based on the
price of oil, other petroleum-based fuels, Oil Futures Contracts and indices
based on the foregoing (collectively, “Other Oil-Related Investments”). For
convenience and unless otherwise specified, Oil Futures Contracts and Other
Oil-Related Investments collectively are referred to as “Oil Interests” in this
quarterly report on Form 10-Q.

USCF believes that market arbitrage opportunities will cause daily changes in
USO’s share price on the NYSE Arca on a percentage basis to closely track daily
changes in USO’s per share NAV on a percentage basis but there can be no
assurance of that. USCF further believes that daily changes in prices of the
Benchmark Oil Futures Contract have historically closely tracked the daily
changes in spot prices of light, sweet crude oil. USCF believes that the net
effect of these relationships will be that the daily changes in the price of
USO’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 USO’s collateral holdings, less USO’s expenses.

As noted above, USO seeks to achieve its investment objective by investing so
that the average daily percentage change in USO’s NAV for any period of 30
successive valuation days will be within plus/minus ten percent (10%) of the
average daily percentage change in the price of the Benchmark Oil Futures
Contract over the same period. Historically, USO has achieved its investment
objective by primarily investing in the Benchmark Futures Contract and Oil
Futures Contracts for light, sweet crude oil traded on NYMEX and ICE Futures
with the same maturity month as the Benchmark Futures Contract Certain
circumstances could cause and have caused, as discussed below, USO to invest in
Oil Futures Contracts other than the Benchmark Oil Futures Contract and may
cause USO to invest in Other Oil-Related Investments. Such circumstances
include: the need to comply with regulatory requirements (including, but not
limited to, exchange accountability levels and position limits imposed by NYMEX
discussed below); market conditions (including but not limited to those allowing
USO to obtain greater liquidity or to execute transactions with more favorable
pricing); and risk mitigation measures taken by USO’s FCM, RBC Capital, and
other FCMs that limit USO and other market participants from investing in
particular crude oil futures contracts.

As a result of market and regulatory conditions, including significant market
volatility, large numbers of USO shares purchased during a short period of time,
and applicable regulatory accountability levels and position limits on oil
futures contracts that were imposed on USO in 2020, including as a result of the
COVID-19 pandemic and the state of crude oil markets, USO has invested in Oil
Futures Contracts (as defined below) in months other than the Benchmark Oil
Futures Contract. The foregoing has impacted the performance of USO and its
ability meet its investment objective within as narrow a percentage difference
between the average daily percentage change in USO’s NAV for any period of 30
successive valuation days and the average daily percentage change in the price
of the Benchmark Oil Futures Contract as it typically has in prior to the Spring
of 2020.

USO’s investment in Oil Futures Contracts in months other than the Benchmark Oil
Futures Contract, other Oil Futures Contracts and Other-Oil Related Interests
(as defined below), is intended to be temporary but may continue indefinitely if
the aforementioned market and regulatory conditions do not abate. Until such
time as USO is able to return to investing in the Benchmark Oil Futures
Contract, its performance and ability to meet its investment objective will

continue to be impacted.

19

Table of Contents

The following chart shows, for the period ending June 30, 2021, the rolling
30-day average difference between USO’s NAV and the Benchmark Oil Futures
Contract. This is measured by subtracting the return of the Benchmark Oil
Futures Contract from the return on USO’s NAV for each of the last thirty
business days, and then averaging those thirty differences. The calculation is
repeated daily.

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

[[Image Removed: Graphic]]

In 2020, significant market volatility occurred in the crude oil markets and the
oil futures markets. Such volatility was attributable to the COVID-19 pandemic,
disputes among oil-producing countries over the potential limits on the
production of crude oil, a corresponding collapse in demand for crude oil and a
lack of on-land storage for crude oil. These conditions together with the
prospect that such conditions could reoccur, severely limited and continue to
significantly limit USO’s ability to have a substantial portion of its assets
invested in the Benchmark Oil Futures Contract and certain other Oil Futures
Contracts of the same month, such as cash-settled, but substantially similar,
oil futures contracts traded on ICE Futures (the “ICE WTI Contract”).
Specifically:

In 2020, NYMEX and ICE Futures imposed accountability levels and position

limits on USO’s investments in the Benchmark Oil Futures Contract and the ICE

WTI Contract, respectively. As described in more detail below, the NYMEX

ordered USCF, USO and the Related Public Funds (as defined herein) 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 excess of 78,000

long futures contracts, for August 2020 in excess of 50,000 long futures

contracts, and for September 2020 in excess of 35,000 long futures contracts.

While these limits no longer apply, NYMEX’s current accountability levels for

? any one month in the Benchmark Oil Futures Contract is 10,000 contracts, and an

accountability level for all months of 20,000 net futures contracts for light

sweet crude oil, do apply. In addition, the ICE WTI Contract was in 2020 and,

currently, is subject to spot month and all-months-combined position limits

established under the European Union’s Market in Financial Instruments

Directive, as implemented by the Financial Conduct Authority in the United

Kingdom. ICE Futures also imposes accountability levels and position limits on

the ICE WTI Contract. Investors should note that the foregoing accountability

levels and position are subject to change and could change the amount and type

of permitted investments in which USO invests. See “Accountability Levels,

Position Limits and Position Limits and Price Fluctuation Limits” below.

20

Table of Contents

In 2020, RBC imposed risk mitigation measures that constrained USO’s ability to

invest in the Benchmark Oil Futures Contract and other Oil Futures Contracts.

RBC, which at the time was USO’s only FCM, expressly informed USO that USO may

not hold positions in the June Benchmark Oil Futures Contract expiring on May

19, 2020. At the time it imposed this restriction, RBC continued to trade and

clear other Oil Futures Contracts for USO, including in connection with rolls

and rebalances of its portfolio. RBC also advised USO at that time, that, going

? forward, it may only purchase additional Benchmark Oil Futures Contracts and

other Oil Futures Contracts through RBC for rolls and rebalances of USO’s

portfolio and not as investments for the proceeds of new Creation Baskets. The

limits on positions imposed by RBC on holdings in USO’s portfolio applied

regardless of whether the Oil Futures Contracts purchased would be within the

accountability levels and position limits permitted by NYMEX and ICE. RBC has

since informed USO that USO may resume repurchasing Oil Futures Contracts for

investment of the proceeds from Creation Baskets.

Subsequent to RBC’s imposition of risk mitigation measures in 2020, USO entered

into an agreements with RCG, MCM and MFUSA to become additional FCMs for USO.

These FCMs have not precluded USO from purchasing, holding, or reinvesting the

proceeds from the purchases of Creation Baskets in Oil Futures Contracts,

including the Benchmark Oil Futures Contract. However, limits could be imposed

by any FCM that, coupled with the risk measures already taken by RBC, would

? continue to limit USO’s ability to have a substantial portion of its assets

invested in the Benchmark Oil Futures Contract. USO cannot predict with any

certainty when and whether RBC will remove its limitations on holding certain

positions in Oil Future Contracts, or whether, or to what extent, any such

limits may be imposed by any other FCM in the future. USO may enter into

agreements with other FCMs and it cannot predict whether or when it will enter

into such agreements.

? A large number of USO shares were purchased during a relatively short period of

time in March and April 2020.

These events significantly limited USO’s current ability to have a substantial
portion of its assets invested in the Benchmark Oil Futures Contract and, during
the Spring of 2020, in other Oil Futures Contracts. Accordingly, and because
such factors have continued to evolve, USO has invested in other permitted Oil
Futures Contracts and had to more frequently rebalance and adjust the types of
holdings in its portfolio than it has in the past. In addition, the limitations
imposed by the exchanges and FCMs, especially during the Spring of 2020 limited
USO’s ability to invest in certain Oil Futures Contracts. As a result, USO was
and will be limited in its ability to invest in Oil Futures Contracts, including
the Benchmark Oil Futures Contract, and may be required to invest in other
permitted investments including Other Oil-Related Interests, and may hold larger
amounts of Treasuries, cash and cash equivalents, which will further impair
USO’s ability to meet its investment objective.

USO has had the ability to invest in Oil Futures Contracts beyond the Benchmark
Oil Futures Contract and in Other Oil-Related Investments but, until recently,
USO’s need to exercise its discretion in making such investments has been
limited. Certain circumstances, including market conditions, applicable
regulatory requirements and risk mitigation measures imposed by FCMs,
counterparties or other market participants, require USO to exercise greater
discretion in investing than in the past. USO has established parameters for the
decision-making regarding the permitted investments USO will hold and the
intended order of priority it will consider in selecting investments to be held
in USO’s portfolio as set forth and discussed in greater detail below. The
application of the below parameters requires USO to exercise its discretion. If,
due to regulatory requirements, risk mitigation measures, market conditions,
liquidity requirements or other factors, USO is not able to invest in accordance
with such parameters and the intended order of priority, such methodology may
change.

Accordingly, for the foreseeable future, to address and comply with the market
conditions, regulatory requirements or other factors that have influenced, and
may continue to influence, its investment decisions, USO intends to buy or sell
the following permitted investments taking into account the order, or waterfall,
set forth below when USO increases or decreases either its portfolio overall or
its holdings of particular investments:

The current or front month (“first month”) Oil Futures Contracts based on the

price of the light, sweet crude oil known as West Texas Intermediate (“WTI”)

1. or, which are priced off of the oil futures contracts based on WTI as traded

on the NYMEX including the Benchmark Oil Futures Contracts and the ICE WTI

Contract (“WTI Oil Futures Contracts”); then

The first month, the next or following month (“second month”, with months

2. thereafter 2. being numerically designated, i.e., the third month, the fourth

month, the fifth month, etc.) and the third month WTI Oil Futures Contracts;

then

The first through the sixth month WTI Oil Futures Contracts, plus the next

3. nearest June WTI Oil Futures Contracts or the next nearest December WTI Oil

Futures Contracts that is not included in the first through sixth months; then

21

Table of Contents

4. The first through the twelfth month WTI Oil Futures Contracts; then

The first through the twelfth month WTI Oil Futures Contracts plus the second

5. through thirteenth month Oil Futures Contracts based on Brent Crude Oil traded

on ICE Futures (“Brent Oil Futures Contracts”); then

The first through the twelfth month WTI Oil Futures Contracts Months plus the

second through thirteenth month Brent Oil Futures Contracts plus the first

6. through the twelfth month Oil Futures Contracts based on Ultra Low Sulfur

Diesel Oil Futures Contract traded on NYMEX (“USDL Oil Futures Contract”);

then

The first through the twelfth month WTI Oil Futures Contracts plus the second

through thirteenth month Brent Oil Futures Contracts plus the first through

7. the twelfth month USDL Oil Futures Contracts plus the first through the

twelfth month RBOB Gasoline Oil Futures Contracts (“Gasoline Futures
Contract”); then

USO may also utilize the Oil Futures Contracts based on WTI, WTI Oil Futures

Contacts or other types of crude oil traded on the Dubai, Singapore, and

8. Houston exchanges, if and when these contracts reach sufficient scale and

liquidity to meaningfully contribute to USO’s investment objective, in

addition to the foregoing investments; then, finally,

9. Other Oil-Related Investments, in addition to the foregoing investments.

If, due to regulatory requirements, risk mitigation measures, market conditions,
liquidity requirements or other factors, USO is not able to invest in a
particular month contract described above, then it will adjust the methodology
incrementally beginning from the nearest month contract available to it that it
is reasonable or feasible to hold in light of such factors.

If USO uses OTC swaps or other instruments, those OTC swaps or instruments would
also provide exposure to one or more of the same above-described permitted
investments in varying months or contracts. USO also anticipates that to the
extent it invests in Oil Futures Contracts other than WTI Oil Futures Contacts)
and Other Oil- Related Investments, it may enter into various
non-exchange-traded derivative contracts to hedge the short-term price movements
of such Oil Futures Contracts and Other Oil-Related Investments against the
current Benchmark Oil Futures Contract.

The progression from one stage of permitted investments described in the above
waterfall to the next stage, including the specific target weights for the
particular portfolio investments to be held by USO, will take into account, to
the extent applicable, the relative levels of open interest, position limits,
and other factors. The specific permitted investments and the identified target
weights for such investments, consistent with progression from one stage of the
above described waterfall to the next stage, will be published on the website
the day before the start of (i) any monthly roll/rebalance period for the end of
such roll/rebalance period, and (ii) any rebalancing to be done outside of the
monthly roll period due to market conditions, regulatory requirements or other
factors described herein. In extreme circumstances, changes may need to be made
intraday. In such circumstances, the changes will be published on the website at
the end of the day. USO will attempt to execute rebalances required over several
days to minimize market impact. However, it may be necessary to execute these
risk measures rapidly and with minimal notice. Published portfolio changes will
be implemented by USO over the course of the roll/rebalance period as indicated
on the website or over the course of another day or period with respect to a
particular change outside of the roll.

USO will progress through the stages of the above describe waterfall of
permitted investments as it approaches regulatory or other limits or as
necessary to address market conditions, or other factors, including additional
investments in USO, requiring consideration of particular levels of the
waterfall. Generally, USO will invest in each stage of the waterfall in the
order described above. However, USO, in its sole discretion, may proceed to
invest in a further stage of the waterfall (i.e., skipping over a particular
stage) if it determines it may exceed position limits in the immediately
following stage of the above waterfall within the next month.

The investment intention announced by USO could change as a result of any or all
of the following: evolving market conditions, a change in regulator
accountability levels and position limits imposed on USO with respect to its
investment in Oil Futures Contracts, additional or different risk mitigation
measures taken by market participants, generally, including USO, with respect to
USO acquiring additional Oil Futures contracts, or USO selling additional shares
USO’s ability to invest in the Benchmark Oil Futures Contract could be limited
by any of these occurrences. In addition, while determining the appropriate
investments for USO’s portfolio in accordance with its current intention, or to
address the foregoing changes in market conditions, regulatory requirements or
risk mitigation measures, USO may need to hold significant portions of its
portfolio in cash beyond what it has historically held in order to satisfy
potential margin requirements.

22

Table of Contents

USCF may not be able to fully invest USO’s assets in Benchmark Oil Futures
Contracts having an aggregate notional amount exactly equal to USO’s NAV. For
example, as standardized contracts, the Benchmark Oil Futures Contracts are for
a specified amount of a particular commodity, and USO’s NAV and the proceeds
from the sale of a Creation Basket are unlikely to be an exact multiple of the
amounts of those contracts. As a result, in such circumstances, USO may be
better able to achieve the exact amount of exposure to changes in price of the
Benchmark Oil Futures Contract through the use of Other Oil-Related Investments,
such as OTC contracts that have better correlation with changes in price of the
Benchmark Oil Futures Contract.

USCF does not anticipate letting USO’s Oil Futures Contracts expire and taking
delivery of the underlying commodity. Instead, USCF will close existing
positions, e.g., when it changes the Benchmark Oil Futures Contracts or Other
Oil-Related Investments or it otherwise determines it would be appropriate to do
so and reinvests the proceeds in new Oil Futures Contracts or Other Oil-Related
Investments. Positions may also be closed out to meet orders for Redemption
Baskets and in such case proceeds for such baskets will not be reinvested.

While it is USO’s expectation that at some point in the future it will be able
to return to primarily investing in the Benchmark Oil Futures Contract, there
can be no guarantee of when, if ever, that will occur. In addition, because of
the limitations imposed on USO, for example, by its regulators and its FCMs, USO
may be limited in investing in other Oil futures Contracts in addition to the
Benchmark Oil Futures Contract. Limitations on USO may negatively impact the
ability of USO (i) to reallocate its investments to more favorably meet its
investment objective or (ii) in connection with the purchase of Creation
Baskets, to invest the proceeds of such purchases in Oil Futures Contracts. As a
result, investors in USO should expect USO’s ability to invest in the Benchmark
Oil Futures Contract and other Oil Futures Contracts will continue to be limited
and USO may be required to invest in Other Oil-Related Interests. As a result,
there may be continued wider deviations between the performance of USO’s
investments and the Benchmark Oil Futures Contract, than prior to the Spring of
2020, and that changes in USO’s share price may not be able to track changes in
the price of the Benchmark Oil Futures Contract within as narrow a percentage
change difference for any period of 30 successive valuation days as it typically
had prior to Spring of 2020. The inability to closely track the Benchmark Oil
Futures Contract and, as described in this quarterly report on Form 10-Q, the
changes in its portfolio of investments and the impact of higher levels of
contango, will impact the performance of USO and the value of its shares.

USO has not leveraged, and does not intend to leverage, its assets through
borrowings or otherwise, and makes its investments accordingly. Consistent with
the foregoing, USO’s announced investment intentions, and any changes thereto,
will take into account the need for USO to make permitted investments that also
allow it to maintain adequate liquidity to meet its margin and collateral
requirements and to avoid, to the extent reasonably possible, USO becoming
leveraged. If market conditions require it, these risk reduction procedures may
occur on short notice if they occur other than during a roll or rebalance
period.

Regulatory Disclosure

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 USO
is not) may hold, own or control. These levels and position limits apply to the
futures contracts that USO 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.

23

Table of Contents

The accountability levels for the Benchmark Oil Futures Contract 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 Contract is 10,000 contracts. In addition, the NYMEX imposes an
accountability level for all months of 20,000 net futures contracts for light,
sweet crude oil. In addition, the ICE Futures maintains the same accountability
levels, position limits and monitoring authority for its light, sweet crude oil
contract as the NYMEX. If USO 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 USO and the Related Public Funds. If deemed necessary by the NYMEX
and/or ICE Futures, USO could be ordered to reduce its Crude Oil Futures CL
contracts to below the 10,000 single month and/or 20,000 all month
accountability level. 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, USO 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 accountability levels and position limits set forth in the April 23
CME Letter superseded the April 16 CME Letter. The April 23 CME Letter ordered
USCF, USO 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. While these limits no longer apply, NYMEX’s current
accountability levels for any one month in the Benchmark Oil Futures Contract is
10,000 contracts, and an accountability level for all months of 20,000 net
futures contracts for light sweet crude oil, do apply. As of June 30, 2021, USO
held 43,145 NYMEX WTI Crude Oil Futures CL contracts and did not hold any ICE
WTI Crude Oil Futures contracts. USO exceeded accountability levels of the NYMEX
during the six months ended June 30, 2021, including when it held a maximum of
73,956 Crude Oil Futures CL contracts, on the NYMEX, exceeding the “any” month
limit.

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. Commencing with
the monthly roll that occurred in May 2020, USO’s positions in Oil Futures
Contracts and Other Oil Related Investments roll over a ten-day period, whereas
previously USO’s positions would roll over a four-day period. As of May 1, 2020,
the type and percentages of investments to be held by USO at the end of the
monthly roll period as well as going forward, including for any rebalances, is
published on its website www.uscfinvestments.com.

For the six months ended June 30, 2021, USO did not exceed any position limits
imposed by the NYMEX and ICE Futures. The April 23 CME Letter, discussed above,
ordered USCF, USO and the Related Public Funds 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 USO with respect to its
investment in Oil Futures Contracts as discussed in the CME Letters, remaining
within relevant accountability levels and position limits, and additional or
different risk mitigation measures taken by USO’s FCM with respect to USO
acquiring additional Oil Futures contracts, USO has invested and intends to
invest in other permitted investments, beyond the Benchmark Oil Futures
Contract.

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”), the CFTC, the NFA, the futures exchanges, clearing organizations and
other regulatory bodies. Pending final resolution of all applicable regulatory
requirements, some examples of how new rules and regulations could impact USO
are discussed in “Item 1. Business” and “Item 1A. Risk Factors” in this
quarterly report on Form 10-Q.

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.

24

Table of Contents

On October 15, 2020, the CFTC approved the Position Limits Rule. The Position
Limits Rule establishes federal position limits for 25 core referenced futures
contracts (comprised of agricultural, energy and metals futures contracts),
futures and options linked to the core referenced futures contracts, and swaps
that are economically equivalent to the core referenced futures contracts. The
Position Limits Rule sets position limits for the spot month and non-spot month;
however, the non-spot month limits only apply in respect of the agricultural
futures contracts that are currently subject to position limits under Part 150
of the CFTC regulations (the “legacy agricultural contracts”). With respect to
regulatory oversight, the Position Limits Rule delegates authority to designated
contract markets and swap execution facilities to oversee certain aspects of the
position limits framework. In addition to setting the federal position limits,
the Position Limits Rule also provides several exemptions from such position
limits, including an expanded list of enumerated bona fide hedge exemptions and
certain spread exemptions. Further, the Position Limits Rule sets forth two
alternative processes for pursuing an exemption for non-enumerated hedge
positions. Other than for the legacy agricultural contracts, compliance with the
limits imposed by the Position Limits Rule will not be required until 2022,
except that economically equivalent swaps need not comply with the Position
Limits Rule until 2023.

The Benchmark Futures Contract will be subject to position limits under the
Position Limits Rule, and USO’s trading does not qualify as an enumerated bona
fide hedge. Accordingly, the Position Limits Rule could negatively impact the
ability of USO to meet its investment objective by inhibiting USCF’s ability to
effectively invest the proceeds from sales of Creation Baskets of USO in
particular amounts and types of its permitted investments.

Until such time as compliance with the Position Limits Rule is required, 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 the nine legacy
agricultural contracts, 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).

Under existing CFTC regulations and the Position Limits Rule, 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 market participant (the “Aggregation
Rules”).

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.

25

Table of Contents

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. USO is not a Covered Swap Entity under the Final Margin
Rules, but it is a financial end-user. Accordingly, USO is currently subject to
the variation margin requirements of the Final Margin Rules. However, USO does
not have material swaps exposure and, accordingly, USO 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. USO does not currently engage in security-based swap transactions
and, therefore, the SEC’s margin rules are not expected to apply to USO.

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 USO enters into an interest
rate or index-based credit default swap that is subject to these requirements,
such swap will be required to be executed on a swap execution facility and
centrally cleared. Mandatory clearing and “made available to trade”
determinations with respect to additional types of swaps may be issued in the
future, and, when finalized, could require USO 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 USO’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, USO may be subject to non-U.S.
derivatives laws and regulations if it engages in futures and/or swap
transactions with non-U.S. persons. For example, USO may be impacted by European
laws and regulations to the extent that it engages in futures transactions on
European exchanges or derivatives transactions with European entities. Other
jurisdictions impose requirements applicable to futures and derivatives that are
similar to those imposed by 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 USO. A portion of USO’s assets that are
not used for margin or collateral in the Futures Contracts currently are
invested in government MMFs. USO does not hold any non-government MMFs and does
not anticipate investing in any non-government MMFs. However, if USO invests in
other types of MMFs besides government MMFs in the future, USO 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).

26

Table of Contents

Although such government MMFs 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 USO
may lose money by investing in a government MMF. An investment in a government
MMF 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 MMF can fall below the $1.00 share price. USO cannot rely on or
expect a government MMF’s adviser or its affiliates to enter into support
agreements or take other actions to maintain the government MMF’s $1.00 share
price. The credit quality of a government MMF’s holdings can change rapidly in
certain markets, and the default of a single holding could have an adverse
impact on the government MMF’s share price. Due to fluctuations in interest
rates, the market value of securities held by a government MMF may vary. A
government MMF’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 six months ended June 30,
2021. The price of the Benchmark Oil Futures Contract started the period at
$48.52 per barrel. The high of the period was on June 25, 2021 when the price
reached $74.05 per barrel. The low of the period was on January 4, 2021 when the
price dropped to $47.62 per barrel. The period ended with the Benchmark Oil
Futures Contract at $73.47 per barrel, an increase of approximately 51.42% over
the period. USO’s per share NAV began the period at $33.07 and ended the period
at $49.87 on June 30, 2021, an increase of approximately 50.80% over the period.
The Benchmark Oil Futures Contract prices listed above began with the February
contracts and ended with the August contracts. The increase of approximately
51.42% on the Benchmark Oil Futures Contract listed above is a hypothetical
return only and could not actually be achieved by an investor holding Oil
Futures Contracts. An investment in Oil Futures Contracts would need to be
rolled forward during the time period described in order to simulate such a
result. Furthermore, the change in the nominal price of these differing Oil
Futures Contracts, measured from the start of the period to the end of the
period, does not represent the actual benchmark results that USO seeks to track,
which are more fully described below in the section titled “Tracking USO’s
Benchmark.”

During the six months ended June 30, 2021, the crude oil futures market
alternated between conditions of contango and backwardation. On days when the
market was in 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. On days when the market is in 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 USO’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. USO’s Administrator uses the settlement price
determined by NYMEX at 2:30 p.m. Eastern time for the Oil Futures Contracts held
on the NYMEX and the settlement price determined by ICE Futures at 2:30 p.m.
Eastern time for the Oil Futures Contracts held on ICE Futures, but calculates
or determines the value of all other USO investments, 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 April 10, 2006, USO listed its shares on the AMEX
under the ticker symbol “USO.” On that day, USO established its initial offering
price at $67.39 per share and issued 200,000 shares to the initial Authorized
Participant, KV Execution Services, LLC, in exchange for $13,479,000 in cash. As
a result of the acquisition of the AMEX by NYSE Euronext, USO’s shares ceased
trading on the AMEX and commenced trading on the NYSE Arca on November 25,

2008.

27

Table of Contents

As of June 30, 2021, USO had issued 4,653,000,000 shares, 61,623,603 of which
were outstanding. As of June 30, 2021, there were 974,000,000 shares registered
but not yet issued. USO has registered 5,627,000,000 shares since inception. On
April 28, 2020, after the close of trading on the NYSE Arca, USO effected a
1-for-8 reverse share split and post-split shares of USO began trading on April
29, 2020. As a result of the reverse share split, every eight pre-split shares
of USO were automatically exchanged for one post-split share. Immediately prior
to the reverse split, there were 1,482,900,000 shares of USO issued and
outstanding, representing a per share NAV of $2.04. Immediately after the effect
of the reverse share split, the number of issued and outstanding shares of USO
decreased to 185,362,500, not accounting for fractional shares, and the per
share NAV increased to $16.35. In connection with the reverse share split, the
CUSIP number for USO’s shares changed to 91232N207. USO’s ticker symbol, “USO,”
remains the same. The accompanying unaudited condensed financial statements have
been adjusted to reflect the effect of the reverse share split on a retroactive
basis.

More shares may have been issued by USO than are outstanding due to the
redemption of shares. Unlike funds that are registered under the 1940 Act,
shares that have been redeemed by USO cannot be resold by USO. As a result, USO
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 June 30, 2021, USO had the following Authorized Participants: ABN Amro,
BNP Paribas Securities Corp., Citadel Securities LLC, Citigroup Global Markets
Inc., Credit Suisse Securities USA LLC, Goldman Sachs & Company, JP Morgan
Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley &
Company Inc., RBC Capital Markets LLC, SG Americas Securities LLC, UBS
Securities LLC and Virtu Financial BD LLC.

For the Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30,
2020

Six months Six months
ended ended
June 30, 2021June 30, 2020

Average daily total net assets $ 3,255,866,404 $

2,811,778,572

Dividend and interest income earned on Treasuries,
cash and/or cash equivalents

$ 714,910 $

8,552,898

Annualized yield based on average daily total net
assets 0.04 % 0.61 %
Management fee $ 7,265,487 $

6,291,930

Total fees and other expenses excluding management
fees $ 5,947,751 $

7,385,149

Fees and expenses related to the registration or
offering of additional shares $ 1,260,041 $

1,478,714

Total commissions accrued to brokers $ 655,585 $

4,679,525

Total commissions as annualized percentage of
average total net assets 0.04 % 0.33 %
Commissions accrued as a result of rebalancing $ 511,882 $

3,863,377

Percentage of commissions accrued as a result of
rebalancing 78.08 % 82.56 %
Commissions accrued as a result of creation and
redemption activity $ 143,703 $

816,148

Percentage of commissions accrued as a result of
creation and redemption activity 21.92 %

17.44 %

Portfolio Expenses. USO’s expenses consist of investment management fees,
brokerage fees and commissions, certain offering costs, licensing fees,
registration fees, the fees and expenses of the independent directors of USCF
and expenses relating to tax accounting and reporting requirements. The
management fee that USO pays to USCF is calculated as a percentage of the total
net assets of USO. The fee is accrued daily and paid monthly.

Average interest rates earned on short-term investments held by USO, including
cash, cash equivalents and Treasuries, were lower during the six months ended
June 30, 2021, compared to the six months ended June 30, 2020. As a result, the
amount of income earned by USO as a percentage of average daily total net assets
was lower during the six months ended June 30, 2021, compared to the six months
ended June 30, 2020. To the degree that the aggregate yield is lower, the net
expense ratio, inclusive of income, will be higher.

The decrease in total fees and other expenses excluding management fees for the
six months ended June 30, 2021, compared to the six months ended June 30, 2020,
was due primarily to a decrease in total commissions accrued to brokers and
directors’ fees and insurance.

28

Table of Contents

The decrease in total commissions accrued to brokers for the six months ended
June 30, 2021, compared to the six months ended June 30, 2020, was due primarily
to a lower number of Oil Futures Contracts being held and traded.

For the Three Months Ended June 30, 2021 Compared to the Three Months Ended June
30, 2020

Three months Three months
ended ended
June 30, 2021June 30, 2020

Average daily total net assets $ 3,076,784,006 $

4,140,398,737

Dividend and interest income earned on Treasuries,
cash and/or cash equivalents

$ 326,103 $

3,152,052

Annualized yield based on average daily total net
assets 0.04 % 0.31 %
Management fee $ 3,451,899 $

4,632,495

Total fees and other expenses excluding management
fees $ 3,316,710 $

5,705,718

Fees and expenses related to the registration or
offering of additional shares $ 315,041 $

1,211,000

Total commissions accrued to brokers $ 350,906 $

3,706,371

Total commissions as annualized percentage of
average total net assets 0.05 % 0.36 %
Commissions accrued as a result of rebalancing $ 301,685 $

3,303,396

Percentage of commissions accrued as a result of
rebalancing 85.97 % 89.13 %
Commissions accrued as a result of creation and
redemption activity $ 49,221 $

402,975

Percentage of commissions accrued as a result of
creation and redemption activity 14.03 %

10.87 %

Portfolio Expenses. USO’s expenses consist of investment management fees,
brokerage fees and commissions, certain offering costs, licensing fees,
registration fees, the fees and expenses of the independent directors of USCF
and expenses relating to tax accounting and reporting requirements. The
management fee that USO pays to USCF is calculated as a percentage of the total
net assets of USO. The fee is accrued daily and paid monthly.

Average interest rates earned on short-term investments held by USO, including
cash, cash equivalents and Treasuries, were lower during the three months ended
June 30, 2021, compared to the three months ended June 30, 2020. As a result,
the amount of income earned by USO as a percentage of average daily total net
assets was lower during the three months ended June 30, 2021, compared to the
three months ended June 30, 2020.

The decrease in total fees and other expenses excluding management fees for the
three months ended June 30, 2021, compared to the three months ended June 30,
2020, was due primarily to a decrease in total commissions accrued to brokers
and expenses related to the decrease in total net assets.

The decrease in total commissions accrued to brokers for the three months ended
June 30, 2021, compared to the three months ended June 30, 2020, was due
primarily to a lower number of Oil Futures Contracts being held and traded.

Tracking USO’s Benchmark

USCF seeks to manage USO’s portfolio such that changes in its average daily per
share NAV, on a percentage basis, closely track the daily changes in the average
price of the Benchmark Oil Futures Contract, also on a percentage basis.
Specifically, USCF seeks to manage the portfolio such that over any rolling
period of 30-valuation days, the average daily change in USO’s per share NAV is
within a range of 90% to 110% (0.9 to 1.1) of the average daily change in the
price of the Benchmark Oil Futures Contract. As an example, if the average daily
movement of the price of the Benchmark Oil Futures Contract for a particular
30-valuation day time period was 0.50% per day, USCF would attempt to manage the
portfolio such that the average daily movement of the per share NAV during that
same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of the
benchmark’s results). USO’s portfolio management goals do not include trying to
make the nominal price of USO’s per share NAV equal to the nominal price of the
current Benchmark Oil Futures Contract or the spot price for light, sweet crude
oil. USCF believes that it is not practical to manage the portfolio to achieve
such an investment goal when investing in Oil Futures Contracts and Other
Oil-Related Investments.

29

Table of Contents

For the 30-valuation days ended June 30, 2021, the average daily change in the
Benchmark Oil Futures Contract was 0.404%, while the average daily change in the
per share NAV of USO over the same time period was 0.363%. The average daily
difference was (0.041)% (or (4.1) basis points, where 1 basis point equals 1/100
of 1%), meaning that over this time period USO’s NAV performed within the plus
or minus 10% range established as its benchmark tracking goal.

Since the commencement of the offering of USO’s shares to the public on April
10, 2006 to June 30, 2021, the average daily change in the Benchmark Oil Futures
Contract was (0.010)%, while the average daily change in the per share NAV of
USO over the same time period was (0.029)%. The average daily difference was
(0.019)% (or (1.9) basis points, where 1 basis point equals 1/100 of 1%),
meaning that over this time period USO’s NAV performed within the plus or minus
10% range established as its benchmark tracking goal.

The following two graphs demonstrate the correlation between the changes in
USO’s NAV and the changes in the Benchmark Oil Futures Contract. The first graph
exhibits the daily changes in the last 30 valuation days ended June 30, 2021.
The second graph measures monthly changes since June 30, 2016 through June 30,
2021.

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

[[Image Removed: Graphic]]

30

Table of Contents

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

[[Image Removed: Graphic]]

An alternative tracking measurement of the return performance of USO versus the
return of its Benchmark Oil Futures Contract can be calculated by comparing the
actual return of USO, measured by changes in its per share NAV, versus the
expected changes in its per share NAV under the assumption that USO’s returns
had been exactly the same as the daily changes in its Benchmark Oil Futures
Contract.

For the six months ended June 30, 2021, the actual total return of USO as
measured by changes in its per share NAV was 50.80%. This is based on an initial
per share NAV of $33.07 as of December 31, 2020 and an ending per share NAV as
of June 30, 2021 of $49.87. During this time period, USO made no distributions
to its shareholders. However, if USO’s daily changes in its per share NAV had
instead exactly tracked the changes in the daily total return of the Benchmark
Oil Futures Contract, USO would have had an estimated per share NAV of $50.36 as
of June 30, 2021, for a total return over the relevant time period of 52.28%.
The difference between the actual per share NAV total return of USO of 50.80%
and the expected total return based on the Benchmark Oil Futures Contract of
52.28% was a tracking difference over the time period of (1.48)%, which is to
say that USO’s actual total return underperformed its benchmark by that
percentage. USO incurs expenses primarily composed of the management fee,
brokerage commissions for the buying and selling of futures contracts, and other
expenses. The impact of these expenses, offset by interest and dividend income,
and net of positive or negative execution, tended to cause daily changes in the
per share NAV of USO to track slightly lower or higher than daily changes in the
price of the Benchmark Oil Futures Contract.

31

Table of Contents

By comparison, for the six months ended June 30, 2020, the actual total return
of USO as measured by changes in its per share NAV was (72.60)%. This is based
on an initial per share NAV of $102.27* as of December 31, 2019 and an ending
per share NAV as of June 30, 2020 of $28.02. During this time period, USO made
no distributions to its shareholders. However, if USO’s daily changes in its per
share NAV had instead exactly tracked the changes in the daily total return of
the Benchmark Oil Futures Contract, USO would have had an estimated per share
NAV of $49.03 as of June 30, 2020, for a total return over the relevant time
period of (52.06)%. The difference between the actual per share NAV total return
of USO of (72.60)% and the expected total return based on the Benchmark Oil
Futures Contract of (52.06)% was a difference over the time period of (20.54)%,
which is to say that USO’s actual total return underperformed its benchmark. USO
incurs expenses primarily composed of the management fee, brokerage commissions
for the buying and selling of futures contracts, and other expenses. The impact
of these expenses, offset by interest and dividend income, and net of positive
or negative execution, tended to cause daily changes in the per share NAV of USO
to track slightly lower higher than daily changes in the price of the Benchmark
Oil Futures Contract.

* Adjusted to give effect to the reverse share split of 1-for-8 executed on
April 28, 2020.

As a result of market conditions and the regulatory response that occurred in
March 2020 and thereafter, large numbers of USO shares that were purchased
during a short period of time, and regulatory accountability levels and position
limits on oil futures contracts that were imposed on USO, and risk mitigation
measures imposed by its FCMs, USO invested in Oil Futures Contracts in months
other than the Benchmark Oil Futures Contracts. The foregoing impacted the
performance of USO and made it difficult for USO to meet its investment
objective, which is for the daily percentage changes in the NAV per share to
reflect the daily percentage changes of the spot price of light, sweet crude
oil, as measured by the daily percentage changes in the price of Benchmark Oil
Futures Contract, plus interest earned on USO’s collateral holdings, less USO’s
expenses, with the same level of success as before in meeting its investment
objective.

While it is USO’s expectation that at some point in the future it will return to
primarily investing in the Benchmark Futures Contract and related ICE Futures
contracts or other similar futures contracts of the same tenor based on light,
sweet crude oil, there can be no guarantee of when, if ever, that will occur.
As a result, investors in USO should expect that there will be continued wider
deviations between the performance of USO’s investments and the Benchmark
Futures Contract than prior to the Spring of 2020, and changes in USO’s share
price may not be able to track changes in the price of Benchmark Futures
Contract within as narrow a percentage change difference for any period of
successive valuation days as it typically has prior to the Spring of 2020. That
said, in the second quarter of 2021 the average daily difference between the
return of USO’s NAV and the Benchmark Futures Contract was (0.015)% (or (1.5)
basis points).

There are three factors that typically have impacted or are most likely to
impact USO’s ability to accurately track Benchmark Oil Futures Contract in
addition to the foregoing.

First, USO may buy or sell its holdings in the then current Benchmark Oil
Futures Contract at a price other than the settlement price of that contract on
the day during which USO executes the trade. In that case, USO may pay a price
that is higher, or lower, than the closing settlement price of the Benchmark Oil
Futures Contract, which could cause the changes in the daily per share NAV of
USO to either be too high or too low relative to the daily changes in the
Benchmark Oil Futures Contract. During the six months ended June 30, 2021, USCF
attempted to minimize the effect of these transactions by seeking to execute its
purchase or sale of Oil Futures Contracts at, or as close as possible to, the
end of the day settlement price. However, it may not always be possible for USO
to obtain the settlement price and there is no assurance that failure to obtain
the closing settlement price in the future will not adversely impact USO’s
attempt to track the Benchmark Oil Futures Contract.

32

Table of Contents

Second, USO incurs expenses primarily composed of the management fee, brokerage
commissions for the buying and selling of futures contracts, and other expenses.
The impact of these expenses tends to cause daily changes in the per share NAV
of USO to track slightly lower than daily changes in the price of the Benchmark
Oil Futures Contract. At the same time, USO earns dividend and interest income
on its cash, cash equivalents and Treasuries. USO is not required to distribute
any portion of its income to its shareholders and did not make any distributions
to shareholders during the six months ended June 30, 2021. Interest payments,
and any other income, were retained within the portfolio and added to USO’s NAV.
When this income exceeds the level of USO’s expenses for its management fee,
brokerage commissions and other expenses (including ongoing registration fees,
licensing fees and the fees and expenses of the independent directors of USCF),
USO will realize a net yield that will tend to cause daily changes in the per
share NAV of USO to track slightly higher than daily changes in the Benchmark
Oil Futures Contract. If short-term interest rates rise above these levels, the
level of deviation created by the yield would increase. Conversely, if
short-term interest rates were to decline, the amount of error created by the
yield would decrease. When short-term yields drop to a level lower than the
combined expenses of the management fee and the brokerage commissions, then the
tracking error becomes a negative number and would tend to cause the daily
returns of the per share NAV to underperform the daily returns of the Benchmark
Oil Futures Contract. USCF anticipates that interest rates may continue to
stagnate over the near future near historical lows. It is anticipated that fees
and expenses paid by USO may continue to be higher than interest earned by USO.
As such, USCF anticipates that USO could possibly underperform its benchmark so
long as interest earned is less than the fees and expenses paid by USO.

Third, USO may hold Other Oil-Related Investments in its portfolio that may fail
to closely track the Benchmark Oil Futures Contract’s total return movements. In
that case, the error in tracking the Benchmark Oil Futures Contract could result
in daily changes in the per share NAV of USO that are either too high, or too
low, relative to the daily changes in the Benchmark Oil Futures Contract. During
the six months ended June 30, 2021, USO did not hold any Other Oil-Related
Investments. If USO increases in size, and due to its obligations to comply with
market conditions, regulatory limits, and risk mitigation measures imposed by
its FCMs, USO may invest in 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 USO’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 USO’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.

33

Table of Contents

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).

34

Table of Contents

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

[[Image Removed: Graphic]]

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.

35

Table of Contents

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

[[Image Removed: Graphic]]

An investment in a portfolio that owned only the near month crude oil futures
contract would likely produce a different result than an investment in a
portfolio that owned an equal number of each of the near 12 months’ of crude oil
futures contracts. Generally speaking, when the crude oil futures market is in
backwardation, a portfolio of only the near month crude oil futures contract may
tend to have a higher total return than a portfolio of 12 months’ of the crude
oil futures contract. Conversely, if the crude oil futures market was in
contango, the portfolio containing only 12 months’ of crude oil futures
contracts may tend to outperform the portfolio holding only the near month

crude
oil futures contract.

36

Table of Contents

Historically, the crude oil futures markets have experienced periods of contango
and backwardation, with backwardation being in place somewhat less often than
contango since oil futures trading started in 1983. Following the global
financial crisis in the fourth quarter of 2008, the crude oil market moved into
contango and remained in contango for a period of several years. During parts of
2009, the level of contango was unusually steep as a combination of 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 during the second half of 2019.

Crude oil flipped back into contango in January 2020 and remained predominantly
in contango throughout 2020.

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 level of
contango was due to significant market volatility that occurred in crude oil
markets as well as oil futures markets. Crude oil prices collapsed in the wake
of the COVID-19 demand shock, which reduced global petroleum consumption, and
the price war launched 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. Eventually, the United States, OPEC, Russia, and other
oil producers around the world agreed to a historic 9.7 million barrel per day
cut to crude supply. The supply cut along with the partial reopening of
economies during the third quarter of 2020 reduced some of the unprecedented
volatility oil markets experienced in the spring of 2020. Likewise, contango
returned to moderate levels in May 2020. During the six months ended June 30,
2021, the crude oil futures market was primarily in a state of backwardation as
measured by the difference between the front month and the second month
contract.

As a result of market and regulatory conditions, including significant market
volatility, large numbers of USO shares purchased during a short period of time,
applicable regulatory accountability levels and position limits on oil futures
contracts, and FCM risk mitigation measures that were imposed on USO, in 2020,
USO invested in Oil Futures Contracts in months other than the Benchmark Oil
Futures Contracts and was limited in its investments in the Benchmark Oil
Futures Contract. In order to continue to meet its investment objective, USO has
chosen from its permitted investments types and amounts of Oil Futures Contracts
allowed by its current regulatory requirements and under the risk mitigation
efforts of its FCMs and other market participants, including those Oil Futures
Contracts with expiration dates for months later than that of the Benchmark
Futures Contract. Continued holdings in these later month contracts may allow
USO to experience lesser effects from contango than would be the case if USO’s
holdings were primarily in Oil Futures Contracts in the first month or second
month. Likewise, continued holdings in these later month contracts also could
cause USO to experience lesser effects from backwardation than would be the case
if USO’s holdings were primarily in Oil Futures Contracts in the first month or
second month. While USO continues to invest in later month contracts, there is
no assurance that this will continue and if USO returns to primarily investing
in the Benchmark Oil Futures Contract it will be subject to greater effects of
contango and backwardation.

Crude Oil Market. During the six months ended June 30, 2021, crude oil prices
traded in a range between $47.62 to $74.05. Crude oil rose 51.42% from the end
of 2020 through June 30, 2021 finishing the quarter at $73.47.

The simultaneous demand and supply shocks from the COVID-19 pandemic and
Saudi-Russia price war precipitated unparalleled risk and volatility in crude
oil markets during the first half of 2020. Global demand for crude oil plummeted
by as much as 30% in the spring of 2020 as workers around the world stopped
driving, airlines cut flight schedules, and companies suspended operations.
Meanwhile, U.S. crude oil supply reached 13 million barrels per day (mbd),
capping a period of almost continuous growth since 2016. To offset the seemingly
unstoppable U.S. production juggernaut, OPEC+ (a loose coalition between OPEC
and non-member nations such as Russia and Mexico) had maintained an uneasy
series of agreements to curtail their crude oil output in order to support crude
oil prices. However, in early March of 2020, Russia refused Saudi Arabia’s
proposal to extend cuts in response to the COVID-19 demand shock. The kingdom
retaliated with a massive production increase, launching an all-out price war in
the middle of a pandemic. Although the members of OPEC+ reached a
record-shattering agreement in mid-April of 2020, the implementation of new
supply cuts came too late to prevent crude oil prices from plummeting to
historic lows, culminating in a drop into negative territory for the May WTI
crude oil futures contract on April 20, 2020.

37

Table of Contents

During the second quarter of 2020, the International Energy Agency (IEA)
reported that crude oil demand fell an average of 16.4 mbd while global crude
oil supply declined by an average of 13.7 mbd. Demand evaporated as a result of
quarantines and massive drops in industrial and manufacturing activity. Supply
declined largely due to the historic agreement in April of 2020 between the
United States, OPEC, Russia, and other oil producers. The bulk of the supply
decline came from voluntary OPEC+ cuts while 2.8 mbd resulted from market driven
cuts in the United States. As of June 30, 2020, U.S. production had dropped over
15%, rapidly falling back to 11 mbd. Oil producing rigs in the United States
fell to 180 from over 670 at the start of the year, a massive decline that will
likely see U.S. supply fall further. Finally, in late June of 2020 storage in
the U.S. spiked to 541 million barrels while global storage reached 3.351
billion barrels.

The unprecedented twin crises described above caused unparalleled effects on oil
futures markets during 2020.

First, front month WTI Oil Futures Contract prices dipped below $20 for the
first time since 2002 and hit an all-time closing low of $(37.63). Multiple
record-breaking returns occurred between March and May of 2020. The price of the
front month WTI Oil Futures Contract averaged $28 during the second quarter of
2020 compared to $46 during the first quarter of 2020 and $57 during calendar
year 2019.

Second, crude oil price volatility went off-the-charts. For example, the 30-day
annualized volatility of front month WTI crude oil futures prices reached 984%
in May 2020 after averaging 35% in 2019 and 25% in the first two months of 2020.
(If May crude oil futures had not gone negative on April 20, 2020, volatility
would “only” have reached 416%.)

Third, futures curves, which can exhibit conditions known as “contango” and
“backwardation” as discussed above, moved into a condition that some market
experts referred to as “super contango.” This was a result of extreme
bearishness at the front of the futures curve due to rapidly filling storage
facilities in the U.S. and around the world. Specifically, the price of the
front month WTI Oil Futures Contract detached from the rest of the futures curve
and fell to an extreme position relative to futures contracts with expiration
dates in later months. On a percentage basis, the difference in price between
the front month WTI Oil Futures Contract and the second month WTI Oil Futures
Contract was more than double the previous record. This divergence caused the
price of WTI Oil Futures Contracts with different expiration dates to move in
different directions. For example, the price of the front month WTI Oil Futures
Contract and second month WTI Oil Futures Contract typically move together
(i.e., increase or decrease) about 99% of the time. However, in late April of
2020, the correlation of the price of the front and second month WTI Oil Futures
Contracts was (24)%, meaning that these contracts were moving in opposite
directions.

Fourth, USO, among other market participants, diversified its portfolio away
from the front of the futures curve in favor of deferred contract months, as
discussed in this Form 10-Q. The move by USO and other market participants to
deferred contract months caused a historic change to relative levels of open
interest among the different futures contracts. For example, open interest in
the front month futures contract fell an average of 40% during April, May, and
June of 2020 compared to the average level of open interest during those same
calendar months during the previous five years.

More recently, as economies reopened and OPEC+ supply cuts were absorbed by the
market, WTI crude oil prices rose from all-time lows in the spring of 2020 to
$48.52 per barrel on December 31, 2020. Prices continued rising during the
first half of 2021 to a high of $74.05 before finishing the second quarter at
$73.47. WTI crude oil inventories in the United States fell from a modern record
of 541 mb in June 2020 to 445 mb by the end of the second quarter of 2021.
Meanwhile, crude oil production in the United States fell below 10 mbd during
the second half of 2020 after peaking at over 13 mbd in March 2020. Production
topped 11.3 mbd by the end of June of 2021. Similarly, OPEC production declined
from over 30 mbd pre-COVID-19 to a pandemic low of 22.5 mbd before gradually
recovering to 26.5 mbd by June 2021. It’s uncertain how quickly OPEC, Russia,
or the U.S. will return to pre-pandemic 2019 production levels. It’s similarly
difficult to forecast when the recovery in demand will occur given the ongoing
threat posed by COVID-19 variants. While some market participants expect the
rise in crude oil prices to continue, several factors could impact the rise in
prices. First, supply from both the U.S. and OPEC has been rebounding. Second,
the majority of the demand recovery from the COVID-19 pandemic is now in the
rearview mirror. Third, any increased supply from Iran would likely surprise
the market as current expectations are for little to no progress in negotiations
between Iran and the U.S. On the other hand, inflation could continue to
increase, which would likely be a catalyst for ongoing crude oil price
increases. The full impact of the world’s response to the COVID-19 pandemic
still has not been determined. At this stage, it is impossible to predict
whether crude oil prices will rise, fall, or remain stable. High risk remains in
the oil markets until demand and supply are fully balanced and the full impact
of past, current, and future COVID-19 pandemic mitigation measures is known.

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

38

Table of Contents

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 June 30, 2011 and June 30, 2021, 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, no
correlation with natural gas, and moderate negative correlation with U.S.
government bonds.

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

Crude Oil – 10 Years
Large US Global
Cap US Gov’t Equities
Equities Bonds (FTSE
(S&P (BEUSG4 World Unleaded Heating Natural Crude
Correlation Matrix 10
Years 500) Index) Index) Gasoline Oil Gas Oil
Large Cap US Equities (S&P
500) 1.000 (0.381) 0.967 0.546 0.366 0.161 0.471
US Gov’t Bonds (BEUSG4
Index) 1.000 (0.368) (0.306) (0.340) (0.082) (0.330)
Global Equities (FTSE
World Index) 1.000 0.574 0.428 0.137 0.509
Unleaded Gasoline 1.000 0.678 0.081 0.740
Heating Oil 1.000 0.018 0.784
Natural Gas 1.000 0.010
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 June 30, 2021, movements of crude
oil displayed strong correlation with unleaded gasoline, diesel- heating oil,
large cap U.S. equities and global equities , limited correlation with the
movements of U.S. Government bonds and limited negative correlation with
movements of natural gas.

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

Crude Oil – 1 Year
Large US Global
Cap US Gov’t Equities
Equities Bonds (FTSE
(S&P (BEUSG4 World Unleaded Heating Natural Crude
Correlation Matrix 1 Year 500) Index) Index) Gasoline Oil Gas Oil
Large Cap US Equities (S&P 500) 1.000 0.137 0.974 0.539 0.449 (0.081) 0.645
US Gov’t Bonds (BEUSG4 Index) 1.000 0.182 (0.124) 0.184 (0.099) 0.156
Global Equities (FTSE World Index) 1.000

0.608 0.578 (0.215) 0.719
Unleaded Gasoline 1.000 0.845 (0.390) 0.881
Heating Oil 1.000 (0.485) 0.881
Natural Gas 1.000 (0.286)
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

39

Table of Contents

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 USO’s assets in Oil Futures
Contracts and Other Oil-Related Investments so that daily changes in percentage
terms in USO’s per share NAV correlate as closely as possible with daily changes
in percentage terms in the price of the Benchmark Oil Futures Contract. If
certain other fuel-based commodity futures contracts do not closely correlate
with the crude-oil futures contract, then their use could lead to greater
tracking error. As noted above, USCF also believes that the changes in
percentage terms in the price of the Benchmark Oil Futures Contract will closely
correlate with changes in percentage terms in the spot price of light, sweet
crude oil.

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. USO’s application of these policies involves
judgments and actual results may differ from the estimates used.

USCF has evaluated the nature and types of estimates that it makes in preparing
USO’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 USO for its Oil Futures Contracts are provided by its commodity broker who
uses market prices when available, while OTC swaps are valued based on the
present value of estimated future cash flows that would be received from or paid
to a third party in settlement of these derivative contracts prior to their
delivery date and valued on a daily basis. In addition, USO estimates interest
and dividend income on a daily basis using prevailing rates earned on its cash
and cash equivalents. These estimates are adjusted to the actual amount received
on a monthly basis and the difference, if any, is not considered material.

Liquidity and Capital Resources

USO has not made, and does not anticipate making, use of borrowings or other
lines of credit to meet its obligations. USO has met, and it is anticipated
that USO will continue to meet, its liquidity needs in the normal course of
business from the proceeds of the sale of its investments, or from the
Treasuries, cash and/or cash equivalents that it intends to hold at all
times. USO’s liquidity needs include: redeeming shares, providing margin
deposits for its existing Oil Futures Contracts or the purchase of
additional Oil Futures Contracts and posting collateral for its OTC swaps, if
applicable, and payment of its expenses, summarized below under “Contractual
Obligations.”

USO currently generates cash primarily from: (i) the sale of baskets consisting
of 100,000 shares (“Creation Baskets”) and (ii) income earned on Treasuries,
cash and/or cash equivalents. USO has allocated substantially all of its net
assets to trading in Oil Interests. USO invests in Oil Interests to the fullest
extent possible without being leveraged or unable to satisfy its current or
potential margin or collateral obligations with respect to its investments in
Oil Futures Contracts and Other Oil-Related Investments. A significant portion
of USO’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 USO’s account at its custodian bank and in investments in money market funds
and Treasuries at the FCMs. Income received from USO’s investments in money
market funds and Treasuries is paid to USO. During the six months ended June 30,
2021, USO’s expenses exceeded the income USO earned and the cash earned from the
sale of Creation Baskets and the redemption of Redemption Baskets. During the
six months ended June 30, 2021, USO used other assets to pay expenses. To the
extent expenses exceed income, USO’s NAV will be negatively impacted.

USCF endeavors to have the value of USO’s Treasuries, cash and cash equivalents,
whether held by USO or posted as margin or other collateral, at all times
approximate the aggregate market value of its obligations for its investments in
Oil Interests. Commodity pools’ trading positions in futures contracts or other
related investments are typically required to be secured by the deposit of
margin funds that represent only a small percentage of a futures contract’s (or
other commodity interest’s) entire market value. While USCF has not and does not
intend to leverage USO’s assets, it is not prohibited from doing so under the LP
Agreement.

Although permitted to do so under its LP Agreement, USO has not and does not
intend to leverage its assets and makes its investments accordingly. Consistent
with the foregoing, USO’s investments will take into account the need for USO to
make permitted investments that also allow it to maintain adequate liquidity to
meet its margin and collateral requirements and to avoid, to the extent
reasonably possible, USO becoming leveraged. If market conditions require it,
these risk reduction procedures may occur on short notice if they occur other
than during a roll or rebalance period.

40

Table of Contents

USO’s investments in Oil Interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons. For
example, most commodity exchanges limit the fluctuations in futures contracts
prices during a single day by regulations referred to as “daily limits.” During
a single day, no trades may be executed at prices beyond the daily limit. Once
the price of a futures contract has increased or decreased by an amount equal to
the daily limit, positions in the contracts can neither be taken nor liquidated
unless the traders are willing to effect trades at or within the specified daily
limit. Such market conditions could prevent USO from promptly liquidating its
positions in Futures Contracts. During the six months ended June 30, 2021, USO
did not purchase or liquidate any of its positions while daily limits were in
effect; however, USO cannot predict whether such an event may occur in the
future.

Since March 23, 2007, USO has been responsible for expenses relating to: (i)
management fees, (ii) brokerage fees and commissions, (iii) licensing fees for
the use of intellectual property, (iv) ongoing registration expenses in
connection with offers and sales of its shares subsequent to the initial
offering, (v) other expenses, including tax reporting costs, (vi) fees and
expenses of the independent directors of USCF and (vii) other extraordinary
expenses not in the ordinary course of business.

USO may terminate at any time, regardless of whether USO has incurred losses,
subject to the terms of the LP Agreement. In particular, unforeseen
circumstances, but not limited to, (i) market conditions, regulatory
requirements, risk mitigation measures taken by USO or third parties or
otherwise that would lead USO to determine that it could no longer foreseeably
meet its investment objective or that USO’s aggregate net assets in relation to
its operating expenses or its margin or collateral requirements make the
continued operation of USO unreasonable or imprudent, or (ii) adjudication of
incompetence, bankruptcy, dissolution, withdrawal or removal of USCF as the
general partner of USO could cause USO to terminate unless a majority interest
of the limited partners within 90 days of the event elects to continue the
partnership and appoints a successor general partner, or the affirmative vote of
a majority in interest of the limited partners subject to certain conditions.
However, no level of losses will require USO to terminate USO. USO’s termination
would cause the liquidation and potential loss of an investor’s investment.
Termination could also negatively affect the overall maturity and timing of an
investor’s investment portfolio.

Market Risk

Trading in Oil Futures Contracts and Other Oil-Related Investments, such as
forwards, involves USO 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 USO’s future cash requirements since USO
intends to close out its open positions prior to settlement. As a result, USO is
generally only subject to the risk of loss arising from the change in value of
the contracts. USO considers the “fair value” of its derivative instruments to
be the unrealized gain or loss on the contracts. The market risk associated
with USO’s commitments to purchase oil is limited to the aggregate market value
of the contracts held. However, should USO 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 USO could be
unlimited.

USO’s exposure to market risk depends on a number of factors, including the
markets for oil, the volatility of interest rates and foreign exchange rates,
the liquidity of the Oil Futures Contracts and Other Oil-Related Investments
markets and the relationships among the contracts held by USO. Drastic market
occurrences could ultimately lead to the loss of all or substantially all of an
investor’s capital.

Credit Risk

When USO enters into Oil Futures Contracts and Other Oil-Related Investments, it
is exposed to the credit risk that the counterparty will not be able to meet its
obligations. The counterparty for the Oil Futures Contracts traded on the NYMEX
and on most other futures exchanges is the clearinghouse associated with the
particular exchange. In general, in addition to margin required to be posted by
the clearinghouse in connection with cleared trades, clearinghouses are backed
by their members who may be required to share in the financial burden resulting
from the nonperformance of one of their members and, therefore, this additional
member support should significantly reduce credit risk. USO is not currently a
member of any clearinghouse. Some foreign exchanges are not backed by their
clearinghouse members but may be backed by a consortium of banks or other
financial institutions. There can be no assurance that any counterparty,
clearinghouse, or their members or their financial backers will satisfy their
obligations to USO in such circumstances.

41

Table of Contents

USCF attempts to manage the credit risk of USO by following various trading
limitations and policies. In particular, USO generally posts margin and/or holds
liquid assets that are approximately equal to the market value of its
obligations to counterparties under the Oil Futures Contracts and Other
Oil-Related Investments it holds. USCF has implemented procedures that include,
but are not limited to, executing and clearing trades only with creditworthy
parties and/or requiring the posting of collateral or margin by such parties for
the benefit of USO to limit its credit exposure. An FCM, when acting on behalf
of USO 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 USO, all assets of USO relating to domestic Oil
Futures Contracts trading. These FCMs are not allowed to commingle USO’s assets
with their other assets. In addition, the CFTC requires FCMs to hold in a secure
account USO’s assets related to foreign Oil Futures Contracts and, in some
cases, to cleared swaps executed through the FCMs. Similarly, under its current
OTC agreements, USO requires that collateral it posts or receives be posted with
its custodian, and under agreements among the custodian, USO and its
counterparties, such collateral is segregated.

In the future, USO 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 June 30, 2021, USO held cash deposits and investments in Treasuries and
money market funds in the amount of $2,762,908,222 with the custodian and FCMs.
Some or all of these amounts held by a custodian or an FCM, as applicable, may
be subject to loss should USO’s custodian or FCMs, as applicable, cease
operations.

Off Balance Sheet Financing

As of June 30, 2021, USO had no loan guarantee, credit support or other
off-balance sheet arrangements of any kind other than agreements entered into in
the normal course of business, which may include indemnification provisions
relating to certain risks that service providers undertake in performing
services which are in the best interests of USO. While USO’s exposure under
these indemnification provisions cannot be estimated, they are not expected to
have a material impact on USO’s financial position.

Redemption Basket Obligation

In order to meet its investment objective and pay its contractual obligations
described below, USO requires liquidity to redeem shares, which redemptions must
be in blocks of 100,000 shares called “Redemption Baskets.” USO has to date
satisfied this obligation by paying from the cash or cash equivalents it holds
or through the sale of its Treasuries in an amount proportionate to the number
of shares being redeemed.

Contractual Obligations

USO’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 USO’s NAV, currently 0.45% of NAV on its average daily total
net assets.

USCF agreed to pay the start-up costs associated with the formation of USO,
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 USO and
its shares with the SEC, FINRA and NYSE Arca (formerly, AMEX), respectively.
However, since USO’s initial offering of shares, offering costs incurred in
connection with registering and listing additional shares of USO have been
directly borne on an ongoing basis by USO, and not by USCF.

USCF pays the fees of the Marketing Agent as well as BNY Mellon’s fees for
performing administrative, custodial, and transfer agency services. BNY Mellon’s
fees for performing administrative services include those in connection with the
preparation of USO’s condensed financial statements and its SEC, NFA and CFTC
reports. USCF and USO have also entered into a licensing agreement with the
NYMEX pursuant to which USO and the Related Public Funds, other than BNO, USCI
and CPER, pay a licensing fee to the NYMEX. USO also pays the fees and expenses
associated with its tax accounting and reporting requirements.

USCF paid BBH&Co.’s fees for performing administrative services, including those
in connection with the preparation of USO’s condensed financial statements and
its SEC, NFA and CFTC reports through May 31, 2020.

42

Table of Contents

In addition to USCF’s management fee, USO pays its brokerage fees (including
fees to FCMs), OTC dealer spreads, any licensing fees for the use of
intellectual property, and, subsequent to the initial offering, registration and
other fees paid to 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 USO’s business, including
expenses relating to the indemnification of any person against liabilities and
obligations to the extent permitted by law and under the LP Agreement, the
bringing or defending of actions in law or in equity or otherwise conducting
litigation and incurring legal expenses and the settlement of claims and
litigation. Commission payments to FCMs are on a contract-by-contract, or round
turn, basis. USO also pays a portion of the fees and expenses of the independent
directors of USCF. See Note 3 to the Notes to 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 USO’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 USO’s existence. Either party may terminate these agreements earlier for
certain reasons described in the agreements.

As of June 30, 2021, USO’s portfolio held 43,145 Oil Futures Contracts traded on
the NYMEX. As of June 30, 2021, USO did not hold any Oil Futures Contracts
traded on the ICE Futures. For a list of USO’s current holdings, please see
USO’s website at www.uscfinvestments.com.

© Edgar Online, source Glimpses

Comments are closed.