Release date: November 18, 2020 | Next release date: November 25, 2020
Financial flows into crude oil futures have declined
Both the notional values and absolute levels of total contracts outstanding (open interest) and of all contracts traded per day (volume) for crude oil futures contracts have declined in 2020 relative to the start of the year. While the decline in notional value has been primarily driven by lower crude oil prices, changes in volume and open interest have also played an important role. Like prices, open interest and volume for Brent and West Texas Intermediate (WTI) have been volatile throughout 2020. Earlier in the year, open interest and daily trading volume of futures contracts neared or set all-time highs in March and April 2020 as a result of multiple factors. These factors include the delayed renewal of the production agreement between members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+), economic responses to COVID-19, and a volatile trading environment that, among other effects, resulted in negative WTI crude oil prices in late April. The volatility these factors produced has resulted in both large increases and decreases in open interest and volume. On net, from the end of 2019 through November 16, 2020, 30-day average trading volume declined by 1%, open interest declined by 5%, and the notional values of each declined by about 31% (Figure 1).
Crude oil and other commodities are traded on futures markets, which are exchanges that market participants use to manage risk associated with price uncertainty in a variety of businesses, including upstream crude oil production, refining, shipping, and portfolio management. Futures markets play a role in crude oil price discovery, and futures markets are essential to the ability of crude oil producers and end users to manage the risk associated with uncertain crude oil prices. Significant changes in trading volume and open interest could affect liquidity, or the ability of market participants to enter and exit trades with low transaction costs. In addition, liquidity can significantly affect the ability of physical producers to find the willing counterparties needed to hedge their physical production or secure financing from investors.
This article primarily looks at Brent and WTI futures markets for crude oil. As a result, the analysis is largely restricted to market participants active in the United States and Europe. China, for instance, launched its own crude oil futures contract in 2018 and has active futures markets for many other commodities. The primary Brent and WTI contracts, however, constitute most of the futures market for crude oil, and EIA estimates that the two contracts collectively accounted for more than 80% of all crude oil traded on futures markets. In addition, Brent and WTI represent transparent and regulated futures markets. The lack of data on over-the-counter forwards, swaps, and other derivatives means that this analysis is limited to only highly transparent futures markets. The analysis also does not include finished or intermediate products such as gasoline, diesel, and low sulfur gas oil.
Another way to analyze a commodity’s level of trading activity is to compare the amount that a given commodity is traded on futures markets with the commodity’s level of production (Figure 2). Analyzing the ratio of a commodity’s futures volume or open interest against its production may not be perfectly representative of a commodity’s degree of financial activity, however, because the futures market involves transactions for production and consumption occurring years into the future, whereas the daily production level represents only one moment in time. For instance, futures market participants can buy and sell crude oil contracts that correspond to transactions to be settled up to 11 years in advance in the case of WTI and 8 years in advance in the case of Brent.
Nonetheless, despite the lower notional financial flows into crude oil futures, the ratios of open interest to production and volume to production reached all-time highs in March through May 2020. These record highs were a result of both increases in trading volume and open interest. For example, on April 20, volume reached an all-time high largely as a result of a large number of market participants wanting to close expiring WTI futures contracts as oil prices fell sharply. In addition, the futures-to-physical ratios were also higher because of significant declines in crude oil production, which were in turn largely the result of voluntary production cuts from members of OPEC+.
The crude oil ratios of open interest to production and volume to production are similar to other consumable commodities with little recycling capability and ability to store for long periods, such as agricultural commodities. Metals, on the other hand, tend to have higher futures-to-physical ratios because easier storage and recycling capability adds additional sources of supply to the tradable market—sources that are not captured by production numbers alone (Figures 3A and 3B). Gold and silver, for example, are commonly held in storage by investors and central banks precisely because the commodities are not consumed and have a functionally infinite shelf life.
Although crude oil futures-to-physical ratios are comparable to those of other commodities, the notional value of daily volume and open interest for crude oil has historically been significantly higher. Crude oil’s higher notional value is likely attributable to several factors, some of which are unique to the crude oil market. Most notably, crude oil plays a substantially larger role in the global economy relative to other commodities. For instance, in 2019, global crude oil production was valued at a nominal value of $1,204 billion compared with $112 billion for gold; $124 billion for corn; a combined $231 billion for cattle and hogs; and a collective $232 billion for aluminum, copper, nickel, and zinc. The economic importance of crude oil in turn has resulted in crude oil maintaining consistently larger volumes and higher open interest than any other commodity. The significantly higher levels of open interest (Figure 4A) and trading volume (Figure 4B) have traditionally led to higher notional values of crude oil, but the crude oil price decline since the second quarter of 2020 has contributed to a lower notional value. For the first time since at least 2000, crude oil’s weekly notional value of trading volume fell lower than another commodity, gold, for a brief period in August and September.
Lower financial flows in crude oil since March 2020 likely reflect decreased prices and reduced physical activity in the crude oil market, where crude oil production and refinery runs have been significantly disrupted following worldwide responses to COVID-19. Other factors may also be contributing to lower financial flows, including changing investor preferences, the relative attractiveness of other asset classes, and concerns over the level and viability of future investment in crude oil projects. The effects of lower financial flows into crude oil futures contracts remain undetermined, and flows could recover if worldwide liquid fuels demand and prices increase.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price increased nearly 2 cents to $2.11 per gallon on November 16, 48 cents lower than the same time last year. The Gulf Coast price increased more than 3 cents to $1.78 per gallon, and the East Coast price increased nearly 3 cents to $2.07 per gallon. The West Coast price was unchanged at $2.77 per gallon. The Midwest price decreased nearly 1 cent to $1.96 per gallon, and the Rocky Mountain price decreased nearly 1 cent, remaining virtually unchanged at $2.20 per gallon.
The U.S. average diesel fuel price increased nearly 6 cents to $2.44 per gallon on November 16, 63 cents lower than a year ago. The Rocky Mountain price increased nearly 12 cents to $2.49 per gallon, the Midwest price increased nearly 8 cents to $2.34 per gallon, the West Coast price increased more than 5 cents to $2.99 per gallon, the Gulf Coast price increased nearly 5 cents to $2.18 per gallon, and the East Coast price increased nearly 4 cents to $2.49 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 2.0 million barrels last week to 92.9 million barrels as of November 13, 2020, 5.3 million barrels (6.1%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast and East Coast inventories decreased by 1.9 million barrels and 0.3 million barrels, respectively. Midwest and Rocky Mountain/West Coast inventories increased by 0.2 million barrels and 0.1 million barrels, respectively.
Residential heating fuel prices increase
As of November 16, 2020, residential heating oil prices averaged $2.18 per gallon, nearly 4 cents per gallon above last week’s price but almost 81 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged nearly $1.31 per gallon, almost 2 cents per gallon above last week’s price but nearly 75 cents per gallon lower than last year.
Residential propane prices averaged almost $1.86 per gallon, nearly 2 cents per gallon above last week’s price but almost 12 cents per gallon below last year’s price. Wholesale propane prices averaged nearly $0.71 per gallon, less than 1 cent per gallon below last week’s price and more than 14 cents per gallon below last year’s price.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.
Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 11/16/20 | Week | Year | |
| Gasoline | 2.111 | 0.015 | -0.481 |
| Diesel | 2.441 | 0.058 | -0.633 |
| Heating Oil | 2.180 | 0.038 | -0.805 |
| Propane | 1.855 | 0.018 | -0.115 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 11/13/20 | Week | Year | |
| Crude oil | 40.13 | 2.99 | -17.59 |
| Gasoline | 1.125 | 0.041 | -0.510 |
| Heating oil | 1.204 | 0.061 | -0.744 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 11/13/20 | Week | Year | |
| Crude oil | 489.5 | 0.8 | 39.1 |
| Gasoline | 228.0 | 2.6 | 7.1 |
| Distillate | 144.1 | -5.2 | 28.4 |
| Propane | 92.887 | -2.002 | 3.728 |