The Exchange-Traded Markets Domestic Crude Oil

The NYMEX is the only exchange in North America on which crude oil futures trade. It is the world's largest physical commodity futures exchange, accounting for 80% of the world's exchange-based energy trading.¹⁷ (Crude oil trading on other exchanges is discussed in Appendix A.) Futures on light, sweet (low sulfur) crude oil began trad­ing on the NYMEX in March of 1983, and options were introduced in November of 1986. Each futures contract represents 1,000 barrels of crude oil and a point in price is worth $1,000. In other words, one contract purchased at a price of $17.75 would control $17,750 of crude oil. Since the time of its introduction, the contract has seen steady increases in volume and now trades roughly 100,000 contracts (or 100 million barrels) per day. This is significant given that it exceeds total daily world wide oil output and demand which is currently about 70 million barrels per day.

In the US, WTI crude serves as the benchmark crude — the reference for most crude oil transactions. WTI is an acronym for West Texas Intermediate, a grade of crude deliverable against the NYMEX crude oil futures contract. Though ten grades of crude are deliverable against the contract (six domestic and four foreign) the futures contract is commonly referred to as WTI crude oil. The US market for crude oil is the largest in the world. Though the US is also one of the top three oil producing countries, imports still account for slightly more than half of domestic consumption.¹⁸ Transportation of crude oil in the United States is based on a pipeline system which makes it unique in terms of world crude which is largely transported by water. Pipeline disruptions are thus a major factor contributing to volatility of the WTI contract.

For purposes of hedging long-dated (more than one year) crude oil, the OTC market is superior in terms of liquidity. In addition, though the NYMEX has obtained the approval of the Commodity Futures Trading Commission (CFTC) to list crude futures out as far as seven years, the longest-dated futures contract available as of this writing is four years out, and open interest (hence, liquidity) tapers off dramatically after six months and is non-existent in certain longer-dated contracts. In the OTC market, however, it is not uncommon for a deal to be struck for 10 and even 15 years in the future.

NYMEX crude futures are listed for thirty consecutive months, plus certain long-dated futures contracts out to four years as mentioned above. Options on crude are listed for twelve consecutive months with certain long-dated options out to three years. The contract is based on delivery at the pipeline in Cushing, Oklahoma, though most contracts are closed before expiration and less than 1% actually result in delivery.

In June of 1993, the NYMEX launched NYMEX ACCESS^SM, an electronic trading system which allows active trading in crude oil for more than 20 hours per day. Regular pit (open outcry) trading takes place from 9:45 am to 3:10 pm EST Monday through Friday and electronic trading is available from 4:00 pm to 8:00 am the following day Monday through Thursday and from 7:00 pm (Sunday) to 8:00 am on Monday.