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How WTI Became the Most Important Commodity Contract on the Planet

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This content is from: Innovation


HOW WTI BECAME THE
MOST IMPORTANT COMMODITY
CONTRACT ON THE PLANET

 * Sponsored by CME Group

May 01, 2023

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WTI crude oil futures



OWAIN JOHNSON, CME GROUP





AT A GLANCE

 * Since launching 40 years ago, WTI crude oil futures have gone from a nascent
   contract to setting the agenda for the entire commodity suite
 * U.S. exports have gone from virtually zero in 1983 when WTI launched, to a
   current rate of over 4 million barrels per day

Let me take you back to 1983. Amazingly, that’s 40 years ago now, even though it
doesn’t seem that long ago for some of us.




1983 was the year when Michael Jackson released Thriller, and I also remember
waiting in a huge line to watch Return of the Jedi at the cinema. 1983 was also
a big year for technology: Nintendo released the first games console, Motorola
released the first mass-appeal mobile phones, and a standard Internet Protocol
was adopted for the first time.

1983 was also a very important year for the global oil markets. The Iran-Iraq
war was raging but there was still too much oil on the market, and prices were
hovering just below $30 per barrel.

At that time, the oil price had been relatively stable for some years, but it
was starting to become more volatile as OPEC’s control of the world oil markets
diminished.

It was amid this backdrop, that the New York Mercantile Exchange (NYMEX), now
part of CME Group, launched its Light Sweet Crude Oil futures contract in March
1983. This futures contract has become best known as WTI, which is short for
West Texas Intermediate, a grade of domestic U.S. crude oil.


THE MOST SIGNIFICANT COMMODITY CONTRACT ON THE PLANET

Since that launch, 40 years ago, WTI has established itself as the most
significant commodity contract on the planet. Nowadays, the price of WTI crude
oil sets the agenda for the entire commodity suite.

Changes in the price of WTI can literally move economies. But back in 1983, it
took some time for the new oil contract to establish itself. WTI did not take
off immediately, and just 3,000 contracts changed hands in its first month of
trading.

It took another year for WTI to breach more than 100,000 contracts in a single
month, but after that its growth was explosive. By the end of the 1980s, WTI was
regularly trading more than two million contracts per month and in recent years
we have seen plenty of trading sessions when WTI trades over one million
contracts per day and even more.


40 YEARS OF ECONOMIC BOOMS AND BUSTS

This dramatic surge in trading activity over the past four decades reflects the
awareness that oil prices are unlikely to ever go back to being stable and
predictable.

The last 40 years have seen multiple geopolitical events that have affected the
supply of oil, whether it has been wars in the Middle East or more recently in
Ukraine. On the demand side, key consumer areas have experienced repeated cycles
of economic booms and busts, and more recently consumer demand has been impacted
by pandemic lockdowns and by the growing take up of electric vehicles.

The great uncertainty surrounding oil prices, which are so crucial for so many
companies, made it more and more important for firms to try to manage their
exposure to oil prices by hedging with futures.

This trend towards greater awareness of risk management has been a key theme of
the last four decades – WTI crude oil futures have helped firms take out “price
insurance” to avoid downside risks if they are a producer, or upside risks if
they are a consumer.


HOW DID WE GET HERE?

A 40th birthday is often an opportunity for some self-evaluation: how did we get
to this point and where are we going next? Certainly, much has changed since WTI
was launched at the height of disco fever and the Cold War.

When WTI first launched 40 years ago, the U.S. oil markets looked very
different. U.S. oil was not exported, and it was widely believed that U.S.
production was on a one-way downward spiral.

The shale oil revolution changed all of that by unlocking vast new supplies of
crude oil.

In recent years, U.S. production has surged once more, from 8.7 million barrels
per day in 1983 to its current giant level of 12.4 million barrels per day. At
the same time, U.S. oil exports have soared to record levels – from virtually
zero when WTI launched to a current rate of over 4 million barrels per day.

In recent years, WTI’s importance has also extended way beyond its U.S.
heartland. A major buildout of pipeline and port infrastructure has linked WTI’s
delivery point of Cushing, Oklahoma to the world via the export terminals of the
U.S. Gulf Coast.

The growing role of the U.S. as a major exporter has made WTI ever more relevant
to the global markets, and WTI-linked grades now play a key role in supplying
Europe and Asia.

As it hits middle age, WTI shows no sign of slowing down. Despite growing
environmental awareness, oil demand is expected to continue to grow over the
coming years as countries industrialize. Ensuring the need for a reliable price
benchmark and for risk management has never been greater.

Learn more about CME Group





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