What’s Driving 24-hour Trading of WTI Options?

At a Glance

  • Trading during non-U.S. hours by traders outside the U.S. has been the fastest growing component of the WTI options market.
  • Record U.S. oil production, better infrastructure, and growth of U.S. crude oil exports bound for countries around the world has transformed the global oil market.

You may already know CME Group’s NYMEX WTI options on futures are among the most actively traded commodity options in the world.  You may also know that traders from global macro hedge funds to physical oil producers all use WTI options each day to hedge risk or express market opinions.  What you may not know is that trading during non-U.S. hours by traders outside the U.S. has been the fastest growing component of the WTI options market. Volume growth outside U.S. hours has outpaced U.S. trading hours volume by over 20% year-to-date in 2018.

The WTI options market is more transparent and accessible than ever before as more than 80% of all volume is transacted on CME Globex, CME Group’s electronic trading venue – up from only 45% five years ago.  That means information about volumes, volatility, and options pricing is readily available to professional and non-professional energy traders alike.  This added transparency and around-the-clock liquidity has enabled trading firms from across the globe to enter the WTI options market for the first time.

In addition to 24-hour liquidity, shifting fundamentals in the global oil market are moving WTI to the forefront as the preferred contract for price discovery.  Oil traders who historically hedged with other grades of crude oil, have now turned to WTI for their hedging and risk management.

How Have U.S. Oil Fundamentals Changed Recently?

The U.S. is currently at record crude oil production levels and is estimated to average close to 11 million barrels/day of production in 2018.  Discovery of new oil fields and improvements in drilling technology have contributed to the record oil production.

This new oil isn’t simply sitting in storage tanks waiting to be purchased by an oil refinery.  The development of new infrastructure is allowing oil to more easily flow to export terminals in Texas and the U.S. Gulf Coast region.  The ban on U.S. oil exports was only lifted at the end of 2015, and since then, U.S. crude oil exports have continuously grown, averaging about 2 million barrels per day in 2018.

Record U.S. oil production, better infrastructure, and growth of U.S. crude oil exports bound for countries around the world has transformed the global oil market.  Countries in Asia, Europe, and South America are importing U.S. crude oil for the first time, allowing the U.S. to become the marginal supplier of oil to the world.  WTI is solidly linked to global oil pricing and the fundamentals confirm WTI’s viability as a global benchmark.

What Does This Mean for the WTI Options Market?

At a time when WTI has reemerged as the global oil benchmark, traders outside the U.S. are now able to access a deeper and more liquid WTI options market to execute hedging strategies in their own time zones.  This is the result of increased outreach to customers and market users outside the U.S., as well as other efforts by CME Group to build 24-hour liquidity in WTI options. Traders in the marketplace have responded to this and shifting oil fundamentals by increasing trading activity during Asian and European market hours.

Dampened at-the-money implied volatility in 2018 hasn’t stopped the volume growth of WTI options outside of U.S. hours.  During European trading, volume is up 10%. Even more impressive, volume during Asian trading up 25%.  Unmatched on-screen liquidity means traders can easily access the WTI options markets from any location at any time of day.

With record oil production and increasing exports from the U.S., WTI options are poised to remain the preferred option for traders around the globe to hedge oil market risk.

Jeff White is Executive Director of Energy Products at CME Group.

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