Washington — Open interest in NYMEX WTI contracts for delivery five or more years in the future has collapsed over the past decade, largely due to the growth of US shale oil, according to a US Commodity Futures Trading Commission report released Thursday.
Open interest in these contracts peaked at 46,158 contracts, representing about 46.2 million barrels of oil, in 2008, and fell to 481 open contracts by the end of March 2018, representing just 481,000 barrels of oil, according to the report from the CFTC's Market Intelligence Branch.
The agency did not find a corresponding collapse in daily open interest in ICE Brent contracts that expire five or more years in the future, likely proving that US shale growth may have stymied in these longer-dated futures contracts.
"The physical market for Brent oil is primarily driven by conventional oil field developments using more traditional oil rigs," the CFTC report states. "Tight oil is a unique feature of the US market, which suggests that the growth in tight oil production may have altered the way US oil market participants use the WTI futures market."
NYMEX had listed oil futures contracts for consecutive delivery months for the first five years, and June and December contracts for the sixth year, until 2007 when it expanded the contract, ultimately listing contracts for delivery for up to nine years at a time.
But the growth of US shale oil, where most oil from new wells can be extracted within 18 months to two years, reduced the need of US producers to hedge physical market crude activity beyond three years, according to the report.
"Without sufficient quantities of oil to sell, [US producers] do not need to use futures contracts that far down the curve," the report states.
Shale producers have more operational flexibility than with conventional production, which necessitated hedging output on a longer timeframe, the report said.
In addition, the report found that market participants have grown reluctant to engage in long-term contracts due to speculative trading restrictions put in place after the 2008 financial crisis and due to the oil price collapse of 2014 and 2015.
"While non-financial entities who are willing to take a speculative interest in crude markets remain free to do so, changes in financial regulations have been made to severely limit, if not outright prohibit, proprietary trading by financial institutions, which accounted for some of the liquidity on the back end of the oil futures curve prior to the shale boom," the report states.
