In the battle for supremacy between the world’s two largest oil exchanges, one of them is enjoying a turbo charge from the U.S. government.
Traders bought and sold an average of almost 1.1 billion barrels of West Texas Intermediate crude futures each day in 2016, a surge of 35 percent from a year earlier. The scale of the gain was partly because of the U.S. government lifting decades-old export limits last year, pushing barrels all over the world, according to CME Group Inc., whose Nymex exchange handles the contracts. By comparison, ICE Futures Europe’s Brent contract climbed by 13 percent.
WTI and Brent have been the oil industry’s two main futures contracts for decades. In the past, the American grade’s global popularity was restrained by the fact that exports were heavily restricted. Now, record U.S. shipments are heading overseas, meaning WTI’s appeal as a hedging instrument is rising, particularly in Asia, where CME has expanded its footprint.
“You have turbo-charged WTI as a truly waterborne global benchmark,” Derek Sammann global head of commodities and options products at CME Group, said in a phone interview regarding the lifting of the ban. “You’re seeing the global market reach out and use WTI — whether that’s traders in Europe, Asia and the U.S.”
U.S. crude exports averaged a record 523,000 barrels a day through September, according to Bloomberg calculations from the latest U.S. Census Bureau data — more than Libya pumped last month. The lifting of restrictions has lured physical trading houses including Vitol Group and Trafigura Group. As a consequence, that’s increased the number of futures contracts being traded, according to Sammann. Producers’ short positions in WTI futures contracts are near their highest level since 2007, meaning output hedges are climbing, according to Nymex data compiled by Bloomberg.
Expanding Volumes
While Nymex is enjoying the benefits of unfettered U.S. trade for crude, ICE Futures Europe is still experiencing expanding volumes. It is also bigger when measured by open interest, or the amount of contracts traders are keeping open. Brent’s open interest hit a record 2.333 million lots in April. In comparison, WTI’s rose to an all-time high 1.954 million yesterday, according to preliminary CME data, although the number may still be adjusted.
“ICE Brent Crude remains the leading global benchmark for oil,” the exchange said in an e-mailed response to questions. “With up to two-thirds of the world’s oil priced off the Brent complex, the Brent crude futures contract is a key hedging mechanism for oil market participants.”
In December last year, the U.S. lifted 40-year-old export restrictions established during the energy shortages of the 1970s. Companies including ConocoPhillips and Continental Resources Inc. had pushed for freely traded U.S. oil, arguing that federal policies were outdated following a boom in the nation’s production.
U.S. Exports
“The lifting of the export ban certainly did open it up to being more of an international discovery tool, in a sense, so that does see it as an international benchmark,” Warren Patterson, a commodity strategist at ING Bank NV, said of Nymex WTI by phone from Amsterdam.
Before this year, U.S. crude shipments were largely limited to Canada, which had essentially been exempt from the export limits. Absent the restrictions, American oil in recent months has flowed to nations including China, Curacao, France, the Netherlands, Peru and the U.K. The U.S. exported a record 692,000 barrels a day of crude in September, the most recent month available, according to Bloomberg calculations of U.S. Census Bureau data.
Both ICE Futures Europe and Nymex handle U.S. and European crude futures. When combined, volumes on Nymex have jumped by 29 percent this year. On the European exchange, they’ve expanded by 13 percent.
The growth for CME is also not confined to futures contracts alone. Options trading so far this year has seen a sizable increase, with average volumes up 14 percent on last year at 177 million barrels per day. While ICE Brent has seen similar growth of 11 percent, the average number of contracts changing hands daily this year is 61 million barrels.
“There are some market structure changes here that have fundamentally re-positioned the market’s use of WTI as a marker for the global price of oil,” Sammann said.
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