Asia demand, hedging boosts trading in forward U.S. oil contracts

Trading volumes and open interest in U.S. crude futures soared in 2016, particularly among buyers out of Asia and shale companies locking in output, both of whom have shown an affinity for far-dated contracts, the CME Group Inc (CME.O) said on Thursday.

NYMEX light sweet crude oil futures average daily volume hit an all-time high of 1.303 million contracts in November 2016, according to exchange data.

Demand out of Asia/Pacific was notably stronger, with trading volume rising 93 percent from a year earlier, according to data provided to Reuters by the CME.

Recently, there has been growing interest in the liquidity of near-term contracts but also further along the futures curve, for contracts that are two and three years forward, the CME said.

So far in 2017, WTI open interest and volume continue to exceed historic levels. Several WTI crude oil trading records have already been set in 2017, including the current daily open interest record of 2.24 million contracts on March 14.

“With the lifting of U.S. export ban and greater market efficiencies, WTI has become the leading indicator for price discovery in the global crude oil market,” the exchange said in a report on Thursday.

U.S. shale production has boomed since 2011, fueled by hydraulic fracturing technology, but production waned during the worst price rout in a generation.

Shale has since emerged as a resilient rival to the Organization of the Petroleum Exporting Countries (OPEC) as efficiency improvements have reduced the cost of production.

Trading volumes skyrocketed and hit records after OPEC and other top producers reached their first joint agreement to limit production since 2001.

U.S. crude has increasingly found its way around the world after the four-decade export ban was lifted in late 2015. Exports reached a record 1.1 million barrels per day in February.

The rising liquidity and rebound in oil prices has also narrowed the spread between the bid and ask prices, according to the report.

“What really matters is the difference between the bid and the ask,” said Owain Johnson, managing director of energy research and product development at CME Group.

“The more you can narrow the bid/ask – the cheaper it is for companies to hedge and that makes a huge difference.”

As shale producers increasingly hedged to protect future prices, WTI options activity increased. An average of 182,000 contracts traded per day in 2016, up 16 percent versus 2015.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell