CFTC Division of Market Oversight ("DMO") staff "conducted research on activity in the New York Mercantile Exchange ("NYMEX") Light Sweet Crude Oil futures contract ("WTI") to determine what effect, if any, the growth of [shale] oil in the United States had on usage of the contract." The DMO staff reported that open interest in WTI for delivery five or more years into the future declined.

DMO staff found that the decline is due to "structural changes in physical crude oil caused by the growth of U.S. [shale] oil production." Researchers also found that (i) volume and open interest in the WTI contract remains "robust" and (ii) "the price level for oil and developments in financial regulation may have had a secondary effect on open interest for NYMEX WTI contracts with delivery five or more years into the future."

Commentary / Bob Zwirb

The report illustrates once again the conventional economic wisdom as to the role of market fundamentals in establishing: i) the demand for energy derivatives, and ii) the price of oil; notwithstanding the conventional political wisdom that price surges are due to speculation. Relevant excerpts from the report reinforce this lesson:

"According to the U.S. Energy Information Agency, U.S. tight oil [i.e., shale oil] production was estimated at about 5.5 million barrels per day in March of 2018, which accounts for about 53 percent of total U.S. oil production (10.4 million barrels per day). This is up from about nine percent in 2008, which is when the "shale boom" is generally considered to have started in the U.S. . . ."

"The recurring theme from all participants was that the growth of tight oil fields in the producers' portfolio of production assets had dramatically altered their business models, which reduced their need to hedge physical market crude activity beyond three years into the future. . ."

"The increasing amount of crude production from tight oil in the portfolios of oil-producing firms has left them with less oil to sell five or more years forward, reducing their need for long-dated futures contracts."

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