The United States Oil Fund, Tracking Nymex WTI Futures

With the attention of the world on crude oil prices, the United States Oil Fund (USOF) could not be much closer to all the price action for this important commodity.

Managed by United States Commodity Funds, LLC (formerly Victoria Bay Asset Management, LLC), the USOF is an oil ETF (exchange traded fund) which offers investors exposure to the price of crude oil.

United States Commodity Funds, LLC is registered with the Commodities Futures Trading Commission as a commodity pool operator and had $1.9 billion assets under management in June 2008.

Let’s review what this fund does and how you might consider using it as a means of gaining exposure to the crude oil markets.

What does the fund consist of?

USOF is a US commodity based exchange traded security which effectively tracks the price movements of Nymex WTI (West Texas Intermediate) light, sweet crude oil futures, the main US crude oil benchmark.This reflects the price of a barrel of crude oil delivered to Cushing, Oklahoma.

Nymex WTI futures contracts are among the most actively traded futures worldwide.

Within two weeks of expiry of the near month contract, the crude oil benchmark then becomes the futures contract for the next month.

The USOF is made up of a spread of crude oil futures as well as other oil related forward and swap contracts.

The fund is managed in such a way that the average daily changes in NAV over any 30 day rolling period is within (+/-)10% of the average daily price change in the above benchmark.

So effectively a percentage change in the spot price of Nymex WTI light crude oil will be reflected in a percentage change in the USOF net asset value, less the fund’s expenses.

Units in USOF can be bought and sold on the American Stock Exchange.

What are the benefits of investing in the USO exchange traded fund?

• As an oil ETF it is a convenient way of gaining exposure to this huge market
• An investor or trader can hedge against movements in crude oil prices or use the fund with a view to make a capital gain over a period of time
• The fund offers certain flexibility such as stop limits, stops and good until cancelled orders
• Availability of daily values for market price, net asset value (NAV)

What should you consider as a potential tracker investor, trader, hedger in the United States Oil Fund, LP ?

Essential requirements:

• Consult your professional financial adviser before committing any funds to these investment vehicles, so that your overall financial aims can be achieved.
• You should consult your tax adviser with regard to the effect of US Federal income tax on an investment in USOF.
• You are strongly advised to get a copy of the Prospectus and study the contents carefully, and ultimately only decide to invest based on the information in this document.
• Please note this investment vehicle is only available to US investors.

What are the risk factors involved investing in these exchange traded funds?

• Past performance is no guide to future results
• This fund is not designed to distribute income or dividends
• USOF aims for its NAV to track closely the WTI light, sweet crude oil price. It does not set out to use leveraged positions (with significantly higher risks) to achieve greater gains
• Sometimes USOF may use oil and oil related futures contracts on commodity exchanges outside the United States, where compliance and regulations may not be as strict as in the US
• United States Oil Fund is not a registered investment company so as an US investor you would not be protected by the Investment Company Act 1940
• As a general observation, by their very nature commodities and futures contracts are volatile, so as an investor or trader you could lose substantial amounts of your capital.

So if your professional adviser thinks an oil ETF is a good vehicle for your investment goals and you have understood the prospectus and tax issues, then the United States Oil Fund seems like an appropriate way of tracking the WTI light, sweet crude spot price on Nymex.

The broad consensus is that oil prices will remain strong because of the tight balance between crude oil production and the demand in global markets.

Concern over the amount of remaining crude oil reserves globally and the fact that most of the Middle Eastern supply is heavy, sour crude oil, are further factors favouring an exposure to the light, sweet crude oil that this fund achieves.

So it seems the United States Oil Fund and other oil ETF's both in the US, UK and elsewhere are set to play an increasingly influential role in the commodities markets going forward.

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