Technical & Fundamental Oil Reports Specialists

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King of the oil futures

Published Friday, July 8th, 2016

In the long-running battle for oil futures supremacy, the US crude oil benchmark extended its lead over its European counterpart in the first half of this year and cemented its position as the world’s most liquid oil futures contract. NYMEX WTI registered a record first-half performance in which average daily volumes (ADV) topped 1 million lots and compares to a still impressive 862,525 contracts on ICE Brent. In spite of this strong showing, it should be noted that this is still part of an ongoing recovery in WTI ADV following a blip in which 30 years of uninterrupted dominance in oil futures trading came to an abrupt end in 2012.

This fall from grace in which ICE Brent ADV surpassed those of NYMEX WTI coincided with the surge in US crude oil production. Though the US shale oil revolution can trace its roots back to the 2000s, its impact was only really felt in 2012 as US crude oil output went on to register an average yearly increase of 947,500 bpd on its way to an annual peak of 9.4 mbpd in 2015. This explosion in landlocked US crude output forced a rapid uptick in the pace of stockpiling as growth in domestic oil demand failed to match soaring production. Total US commercial crude oil inventories rose from 330 million bbls at the start of 2012 to 385 million bbls by the end of 2014. More importantly, stocks at Cushing, the delivery point for the NYMEX WTI contract, spent much of the period close to what was then a record high of 51 million bbls. This build in US oil stockpiles weighed on domestic crude grades and none more so than WTI. Its discount to Brent averaged $11.54/bbl during 2012-2014 and at one point hit the dizzying heights of -$25.66/bbl which in turn undermined WTI futures trading volumes.

Despite heading into 2015 with US oil stocks at close to historically high levels, NYMEX WTI reclaimed the ADV top spot from ICE Brent as additional inventory builds were more than countered by signs of declining US oil production. Having peaked at 9.7 mbpd in April 2015, domestic oil output began its downward trajectory in the second half of the year as producers adjusted to the new low price environment. The change in fortunes of the US oil industry and ensuing slump in crude output helped WTI strengthen against its European cousin with the WTI/Brent arb narrowing to $4.67/bbl last year.

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Posted by Stephen Brennock

Stephen Brennock joined PVM in 2013 after having worked as a project manager for a business development firm. He graduated with a degree in Business Management in 2007.