Open interest in futures and options markets increase as traders try to anticipate improvement in the economy

After declining to historical lows in 2022, open interest (the total number of futures and options contracts that have not been settled) increased for both crude oil and petroleum products at the start of 2023. Commercial traders, who use financial markets primarily to hedge their business activities, led the increase in open interest for NYMEX West Texas Intermediate (WTI) crude oil futures and options. This suggests sellers could be increasing hedging activity ahead of planned production increases and buyers could be increasing hedging activity ahead of future purchases that anticipate higher crude oil prices. Increases in open interest of RBOB (the petroleum component of gasoline used in many parts of the country) futures and options reflect the seasonal trend of traders preparing for increased gasoline demand during the summer driving season.

Parties who hold futures contracts that exceed a certain threshold must report their holdings weekly to the U.S. Commodity Futures Trading Commission (CFTC), and those holdings are aggregated in the CFTC’s Commitments of Traders (COT) report. A futures contract obligates parties to transact at a predetermined date and price in the future. An option contract gives the buyer the right, without obligation, to buy or sell at a set price in the future. In these markets, a long position means the holder buys crude oil for future delivery, whereas a short position means the holder sells crude oil for future delivery.

Since late January, a cyber-related incident at a service provider that clears financial derivatives has affected some futures and options information submitted to the CFTC. The outage has not affected aggregate measures of trading volume or open interest but does affect futures and options positions by category of trader published in the COT report. The latest report available as of this publication is from January 24, 2023.

Crude oil and petroleum product open interest declined for much of 2022 and reached historic lows before increasing in January 2023. These declines occurred across all trader categories, which suggests that broad-based factors such as higher oil prices, greater oil price volatility, a lower economic outlook, and higher interest rates in 2022 caused market participation to drop. Higher prices can reduce the incentive for some market participants to hedge future production or consumption, and greater volatility can increase the cost of popular hedging strategies that use futures and options. Higher interest rates not only raise concerns about an economic recession that could depress demand for liquid fuels, but also raise the opportunity cost for holding risk assets (such as crude oil) when returns in lower risk assets (such as bonds) increase. From February 22 to December 27 of last year, futures open interest decreased by 31% (645,000 contracts) for WTI and 15% (349,000 contracts) for Brent (Figure 1). RBOB open interest decreased by 36% (142,000 contracts), and ultra-low sulfur diesel (ULSD) open interest decreased by 23% (77,000 contracts) over the same period. This trend reversed at the beginning of 2023. From December 27, 2022, through February 21, 2023, futures open interest increased 24% (342,000 contracts) for WTI, 12% (223,000 contracts) for Brent, 29% (71,000 contracts) for RBOB, and 1% (2,000 contracts) for ULSD.

Data showing the economy’s recent resilience and declining inflation may have contributed to traders’ expectations of stronger liquid fuels production and consumption, which would explain increasing open interest in futures and options. As recently as November, the U.S. real GDP forecast in our Short-Term Energy Outlook (STEO) projected a downturn in economic activity for much of 2023 (Figure 2). Also in November, open interest in WTI and RBOB futures and options were the lowest they have been in at least 10 years. However, recent strong economic data contributed to a rising GDP forecast in each of the last three months; in the February 2023 STEO forecast, year-over-year GDP growth for the first half of 2023 is 1.2 percentage points higher, on average, compared with the November 2022 forecast. Higher economic growth supports more futures and options market activity as a result of more demand for trading commodities and hedging physical production. Despite this improvement, economic uncertainty remains as the Federal Reserve continues to navigate interest rate increases to slow higher-than-expected inflation, the Chinese economy is affected by the COVID-19 pandemic, and Russia’s full-scale invasion of Ukraine continues.

Producers and merchants, who predominately engage in production, processing, or handling crude oil, represented the largest increase in WTI open interest in January. From December 27, 2022, to January 24, 2023, producer and merchant long positions increased by 33% (122,000 contracts), and short positions increased by 29% (108,000 contracts) (Figure 3). The producer and merchant category typically has a net short position in futures and options, which reflects crude oil producers using short contracts to lessen the financial risk of oil prices changing before delivery. In the last week of 2022, producers and merchants showed a net short position for the first time since August 2021. In addition, swap dealers (who use financial markets on behalf of clients whose primary business is producing, processing, or shipping crude oil) increased their short positions by 12% (43,000 contracts) between January 10 and January 24. These changes suggest commercial traders could be increasing their financial hedging compared with last year.

Increasing long positions in RBOB futures and options by both commercial and non-commercial traders (investors that have no business activities related to gasoline) show market participants preparing for increased gasoline demand during the summer driving season. From December 27, 2022, to January 24, 2023, producer and merchant long positions increased by 44% (31,000 contracts), and money manager long positions increased by 35% (19,000 contracts), bringing open interest for both to its highest in seven months (Figure 4). Although increases in RBOB open interest at the start of the year are typical, the increase in RBOB futures open interest through the first eight weeks of this year, at 29% (71,000 contracts), is well above the previous 10-year (2013–22) average increase of 10% (33,000 contracts). This trend could mean traders have renewed confidence in gasoline demand going into 2023. However, our forecast for 2023 expects that limited growth in U.S. demand for gasoline combined with increased gasoline production will contribute to gasoline inventories rising and retail prices being lower than prices in summer 2022.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.