Financial oil trading is booming, hitting records this year, with volumes in U.S. contracts outpacing growth elsewhere on the back of the U.S. shale oil boom.
Trading data in Thomson Reuters Eikon shows 2017 volumes for U.S. benchmark West Texas Intermediate (WTI) front-month futures, the most exchanged contracts, will hit a record of nearly 150 million.
This is more than double the 71 million trades for spot Brent futures, the international benchmark, further widening a gap that has yawned open as U.S. crude output <C-OUT-T-EIA> has surged nearly 70 percent over the past five years.
The trend is also showing in market open interest, the number of daily open contracts across all months, where WTI started edging ahead of Brent in September.
Oil producers use derivative markets to lock in profits while buyers aim to protect themselves against rising prices, with liquidity further boosted by a raft of sophisticated trading strategies and speculation by investors.
“U.S. shale oil epitomises the modern way of dealing with things,” said Matt Stanley, a fuel broker with brokerage Freight Investor Services (FIS) in Dubai.
“Producers in the USA have a plethora of modern tools available, allowing them to hedge forward production (and) make use of traditional (oil) reserve base lending arrangements, of which many … will have caveats in them that forward production is to be hedged prior to release of funds for investment.”
U.S. crude output is fast approaching 10 million barrels per day, with only top exporter Saudi Arabia and top producer Russia churning out more.
As new producers trade U.S. crude futures and more hedge funds offer their services to producers, WTI volumes have run away, leaving Brent behind.
Outside the United States, Middle East producers – which mostly price their crude off Brent – barely hedge output.
Enjoying low production costs, their largely government-owned oil firms sell most of their crude in long-term supply deals under fixed Official Selling Prices (OSP).
Asia’s big buyers from China to Japan – the biggest customers for Middle East oil – also use futures markets very little, resulting in far lower derivative market activity during Asian trading hours.
But things might change. In Iraq, OPEC’s second biggest producer, state-owned oil company SOMO may start hedging some of its output as a way to protect government revenue against the risk of falling oil prices.
“All eyes will be on the first Middle East producers to really start hedging their production next year,” FIS’s Stanley said. “Then the market share battle is well and truly on.”