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AAA ENERGY OPPORTUNITIES FUND LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 15, 2014

Liquidity and Capital Resources

The Fund does not engage in sales of goods or services. Its only assets are its investment in the Master Fund, cash and receivables from the Master Fund. The Master Fund does not engage in the sale of goods or services. The Master Fund's only assets are its equity in its trading accounts, consisting of cash, future options purchased at fair value, net unrealized appreciation on open futures contracts and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Fund, through its investment in the Master Fund. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the first quarter of 2014.

For the three months ended March 31, 2014 and 2013, the Master Fund's average margin to equity ratio was 2.61% and 2.10%, respectively.

The Fund's capital consists of the capital contributions of the Members as increased or decreased by income/(loss) from its investment in the Master Fund and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the three months ended March 31, 2014, the Fund's capital decreased 11.2% from $155,211,763 to $137,751,349. This decrease was attributable to a net loss from operations of $2,619,310, coupled with the redemptions of Redeemable Units resulting in an outflow of $15,508,104, which was partially offset by subscriptions for Redeemable Units totaling $667,000. Future redemptions from the Fund could impact the amount of funds available for investment in the Master Fund in subsequent periods.

The Master Fund's capital consists of the capital contributions of the investors of the Master Fund as increased or decreased by realized and/or unrealized gains or losses on trading and by expenses, interest income, withdrawals of interest from the Master Fund and distributions of profits, if any.

For the three months ended March 31, 2014, the Master Fund's capital decreased 11.2% from $155,211,763 to $137,751,349. This decrease was attributable to a net loss from operations of $1,787,073, coupled with the withdrawal of interest in the Master Fund resulting in an outflow of $16,340,341, which was partially offset by subscriptions for interest in the Master Fund totaling $667,000. Future withdrawals from the Master Fund can impact the amount of funds available for investments in commodity contract positions in subsequent periods.

Critical Accounting Policies



The preparation of financial statements in conformity with U.S. GAAP requires Sydling to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Sydling believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Fund's significant accounting policies are described in detail in Note 6. "Significant Accounting Polices."

The Fund records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains/(losses) and change in net unrealized gains/(losses) in the Statements of Operations and Changes in Members' Capital.

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Table of Contents Results of Operations



During the Fund's first quarter of 2014, the net asset value per Redeemable Unit decreased 1.8% from $824.97 to $810.45. The Fund, for its own account, through its investment in the Master Fund, experienced a net trading loss before brokerage fees and related fees in the first quarter of 2014 of $424,761. Losses were primarily attributable to the Master Fund's trading of commodity futures in NYMEX Heating Oil, IPE Brent Crude Oil and RBOB/gasoline and were partially offset by gains in WTI Crude Oil and NYMEX Natural Gas.

The Fund's performance declined in the first quarter of 2014 despite modest gains from natural gas trading. The Fund entered January with a short natural gas structure following strong year over year production growth and a meaningful run up in prices during November and December. However, record cold across much of the U.S. and subsequent surge in demand overwhelmed storage levels leading to a severe price spike. The Fund closed out all of its short exposure by mid -January and established a long structure for the remainder of the first quarter. Natural gas prices moved violently in February leading to large gains for the Fund. Prices retracted slightly towards the end of March, costing the Fund slightly. Overall, the Fund generated positive returns from its long natural gas exposure benefiting from abnormally cold weather and increased volatility not seen in many years.

Within the petroleum book, WTI Crude trading produced modest gains while Brent, Heating Oil and RBOB Gasoline trading detracted. The Fund established a long Heating Oil position in February that lead to strong gains as a result of decreasing supply from persistently cold weather. However, the Fund gave back some of its gains as Heating Oil fundamentals weakened in March as implied demand and draws on storage were reportedly weaker than forecasts suggested. Following the losses, the Fund migrated some of its long Heating Oil exposure into RBOB Gasoline. Positions in Brent, Gasoil and RBOB Gasoline were generally flat for the quarter.

During the Fund's first quarter of 2013, the net asset value per Redeemable Unit decreased 8.35% from $960.28 to $880.06. The Fund, for its own account, through its investment in the Master Fund, experienced a net trading loss before brokerage fees and related fees in the first quarter of 2013 of $18,254,026. Losses were primarily attributable to the Master Fund's trading of commodity futures in RBOB/gasoline, NYMEX Crude Oil and NYMEX Gasoil and were partially offset by gains in NYMEX Heating Oil, IPE Brent Crude Oil and NYMEX Natural Gas.

During the first quarter of 2013, the Fund declined primarily from positions related to WTI/crude, NYMEX Gasoil and RBOB/gasoline. Modest gains were generated from NYMEX Heating Oil, IPE Brent Crude Oil and NYMEX Natural Gas. Short WTI crude spread exposure hurt the portfolio in both January and March as the fixed price and spread markets rallied. Prices moved higher despite negative fundamentals relating to extremely high stocks in Cushing, expectations of run cuts and that the Seaway Pipeline flows out of Cushing would be lower and less consistent in the subsequent months. Additionally, long crude option volatility cost the portfolio as the back of the volatility curve declined. Heating oil versus gasoil arbitrage was another big detractor last quarter. The Fund remains bearish on the distillate complex relative to crude oil and believe Euro distillate is set to weaken relative to the US market. Natural gas contributed very modest gains as the Fund becomes more constructive on the opportunity set. While natural gas volatility remains depressed, fundamentals are have a greater impact on price movements.

Commodity futures markets are highly volatile. Broad and rapid price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility for profit or loss. The profitability of the Fund (and the Master Fund) depends on the Advisor's ability to forecast price changes in energy and energy-related commodities. Such price changes are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that the Advisor correctly makes such forecasts, the Fund (and the Master Fund) expects to increase capital through operations.

Brokerage fees are calculated as a percentage of the Fund's capital account balance at the Master Fund as of the end of each month and are affected by trading performance and redemptions. Brokerage, clearing and transaction fees of the Master Fund for the three months ended March 31, 2014 and 2013 were $1,355,070 and $2,419,349, respectively. The decrease in brokerage, clearing and transaction fees for the three months ended March 31, 2014 is due to lower average net assets as compared to the corresponding period in 2013.

Advisory fees are calculated as a percentage of the Fund's net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions.

Advisory fees of the Fund for the three months ended March 31, 2014 and 2013 were $559,021 and $923,189, respectively. The calculation of advisory fees for the three months ended March 31, 2014 and 2013 was based on a monthly average net asset value of $149,072,370 and $245,826,879, respectively. The decrease in advisory fees for the three months ended March 31, 2014 as compared to the corresponding period in 2013 is due to a decrease in the average net assets.

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Administrative fees are paid to Sydling for administering the business and affairs of the Fund. These fees are calculated as a percentage of the Fund's net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions.

Administrative fees of the Fund for the three months ended March 31, 2014 and 2013 were $186,340 and $307,730, respectively. The calculation of administrative fees for the three months ended March 31, 2014 and 2013 was based on a monthly average net asset value of $149,072,370 and $245,826,879, respectively. The decrease in administrative fees for the three months ended March 31, 2014 as compared to the corresponding period in 2013 is due to a decrease in the average net assets.

Incentive allocations to the Advisor (as the Special Member) are based on the new trading profits generated by the Advisor, allocable at the end of each quarter, as defined in the Trading Advisory Agreement between the Fund, Sydling and the Advisor. There was no incentive allocation made for the three ended March 31, 2014 or 2013.

In allocating substantially all of the assets of the Fund to the Master Fund, Sydling considers the Advisor's past performance, trading style, volatility of markets traded and fee requirements. Sydling may modify or terminate the allocation of assets to the Advisor at any time.

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Source: Edgar Glimpses


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