The U.S. Energy Information Administration studies that modifications within the oil funding and manufacturing cycle could also be affecting buying and selling dynamics for West Texas Intermediate (WTI) and Brent crude oil futures contracts. Many U.S. producers which will have historically hedged manufacturing years upfront could now solely have to hedge utilizing short-dated parts of the futures curve. Many home producers have shifted their manufacturing portfolios towards tight oil manufacturing, which has a brief funding and manufacturing cycle, and might be decreasing their participation in long-dated WTI futures. For instance, the ratio of open curiosity for WTI contract months 13 and longer to present U.S. month-to-month manufacturing has declined since 2013. In distinction, as of October 2019, an analogous ratio for Brent crude oil to manufacturing outdoors the Organization of the Petroleum Exporting Countries (OPEC) and the United States elevated to its third-highest degree, suggesting elevated liquidity in long-dated Brent futures (Figure 1). Brent is the related crude oil benchmark used amongst non-OPEC, non-U.S. oil producers. Similar analysis from the U.S. Commodity Futures Trading Commission (CFTC) revealed final yr suggests the decrease open curiosity amongst long-dated WTI futures contracts is a results of the altering funding and manufacturing cycle for U.S. oil manufacturing. In distinction, new upstream initiatives outdoors the United States are primarily deepwater initiatives, which have an extended funding and manufacturing horizon. These qualities might be contributing to elevated participation within the long-dated portion of the Brent future curve.
Trading quantity for long-dated Brent crude oil futures contracts is greater than WTI (Figure 2). Market contributors’ elevated use of those long-dated Brent futures contracts may replicate a few of the manufacturing development in non-OPEC international locations, significantly in international locations apart from the United States, comparable to Brazil and Norway. EIA forecasts that subsequent yr, crude oil and different liquids manufacturing in non-OPEC international locations apart from the United States will develop on the quickest price since 2014, growing by zero.6 million barrels per day (b/d) from 45.9 million b/d, the estimated 2019 manufacturing degree. Deepwater offshore initiatives are the principle kind of upstream venture anticipated to return on-line and contribute to manufacturing development subsequent yr. These initiatives usually take years to develop but in addition have comparatively shallow decline charges as soon as in manufacturing. For market contributors, such qualities may make utilizing long-dated futures contracts engaging for managing monetary danger.
Most of the full buying and selling quantity for each Brent and WTI is for crude oil contracts 1 by means of 12—which symbolize roughly the following calendar yr of supply—and about 5% of the quantity is for contract months 13 and longer. Although whole buying and selling quantity for contracts 1 by means of 12 is greater for WTI than for Brent, the long-dated contracts of Brent usually have extra buying and selling quantity than these of WTI, significantly since 2014. Volume for long-dated Brent futures contracts was 11 million contracts in 2019 by means of October, and WTI quantity was 10 million contracts for a similar interval. September 2019 buying and selling quantity for long-dated Brent futures contracts was the third highest ever at 1.6 million contracts for the month.
Open curiosity—the inventory of futures contracts excellent—has additionally shifted extra to Brent. Long-dated Brent open curiosity elevated to a better degree than WTI long-dated open curiosity starting in about 2015 and remained greater for many months since then (Figure three). As of October 2019, WTI long-dated open curiosity stays decrease than its all-time excessive of zero.69 million contracts in September 2013, averaging zero.54 million contracts in October 2019. Long-dated Brent open curiosity averaged zero.61 million contracts in October 2019, barely decrease than the all-time excessive of zero.62 million contracts in October 2017.
These modifications in buying and selling quantity and open curiosity may replicate the completely different funding horizons…