United States 12 Month Oil Fund, LP (USL)

United States 12 Month Oil Fund, LP is a passive investment vehicle that tracks the price of crude oil by holding a rolling basket of futures contracts. It is designed to give investors exposure to oil-price movements without the complexity of managing futures directly, but the mechanism itself carries unusual risks that most shareholders may not fully recognize.

What it holds and why that matters

USL does not own physical barrels of oil. Instead, it holds futures contracts on crude that mature roughly twelve months forward on the NYMEX. Each month, as the front contract nears expiry, the fund rolls the position forward — selling the near-dated contract and buying the next one out. This rolling mechanism is core to how the fund works, but it is also its greatest vulnerability.

The price of oil depends heavily on the shape of the futures curve. When near-term contracts trade at a discount to future ones, the curve is said to be in contango. When you are constantly selling cheaper, nearby contracts and buying more expensive distant ones, every roll costs money. Over years of contango, these frictions can drag performance below the spot price by a meaningful margin. Conversely, when the curve inverts (backwardation), rolling accesses cheaper future prices, which can enhance performance.

Because USL moves once a month rather than continuously, market participants who understand the roll schedule can sometimes front-run it, pushing prices around the roll dates. The fund’s liquidity is also a constraint — large positions cannot enter or exit without moving the market, a cost borne by all shareholders.

How the fund generates returns and loses them

Returns on USL track the daily changes in the 12-month oil futures contract, less the drag from rolling, fund expenses, and any bid-ask spreads when the fund itself is bought and sold. In a volatile oil environment, the fund can deliver sharp daily swings, both up and down. But the longer-term performance depends almost entirely on whether the oil market is in contango or backwardation during the holding period.

Expense ratios are modest, typically in the low single digits percentage-wise, but the real cost comes from the roll. During the 2020 oil collapse, when contango was severe, USL experienced dramatic losses that reflected not just the fall in oil prices but the persistent cost of rolling forward. Conversely, in periods of tight supply and near-term scarcity, backwardation has been the fund’s friend.

The fund is also subject to all the risks of a leverage-free commodity play: if oil prices fall 20%, USL will fall roughly 20% (before roll effects). There is no equity cushion, no diversification, no way to reduce losses if you are wrong about the direction of prices.

Structural vulnerabilities

The central risk to USL shareholders is the one that is least understood and least regulated: roll slippage. Because the futures curve is usually in contango, the fund is usually losing money on its monthly rebalancing even when oil prices are stable. This drag accumulates. For investors who hold the fund for years, they may find themselves down 20 or 30 percent on the notional price of oil, purely from the cost of rolling.

The second vulnerability is structural liquidity. USL itself trades on an exchange, but the underlying futures contracts it holds are concentrated on NYMEX. Any severe stress in oil markets — a supply shock, a financial crisis, a geopolitical event that freezes trading — could make it difficult for USL to manage its portfolio quickly. The fund could then widen its own bid-ask spread to investors, or fail to execute rolls at expected prices.

A third, less obvious risk is the tax treatment of futures gains and losses, which differs from stocks and bonds. Futures positions are marked to market daily, and gains and losses can trigger capital-gains taxes each year even if the investor has not sold. This tax drag is separate from the roll drag and can reduce after-tax returns substantially.

Who this fund is for, and who it is not

USL is appropriate for investors with a short time horizon who want directional exposure to oil prices without the friction of managing futures contracts themselves. It is also used by commodity traders as a proxy during periods when futures markets are illiquid or too expensive to access directly.

It is not appropriate as a long-term core holding, especially not in a contango market. The roll drag will almost certainly underperform a buy-and-hold of physical oil or a longer-dated futures position. It is not a hedge for a portfolio, because oil prices are weakly correlated with stocks, and during deflationary shocks oil can fall hard just when equities do. And it is not a store of value — the fund’s returns depend on the entire futures curve, not on your thesis about where oil is headed.

Researching USL as an investment

Understanding USL requires reading its prospectus carefully, especially the sections on fees and roll mechanics. The fund publishes monthly factsheets that detail the current futures positions and the roll schedule. The NYMEX publishes the oil futures curve daily, which you can track to see whether contango or backwardation is widening or tightening. For longer-term analysis, watch the trend in the fund’s net asset value relative to the spot price of oil — sustained divergence signals that roll drag is real.

Most investors who buy USL do so on the assumption that they are simply gaining oil-price exposure, unaware that they are also paying an invisible fee every month in the form of roll slippage. That education alone — reading the prospectus and watching a few roll cycles — is the first step toward using the fund wisely or deciding it does not fit your needs.