What are WTI Futures?
A West Texas Intermediate Future is a standardized contract, traded on an exchange between a buyer and a seller. The buyer of the contract agrees to take delivery from the seller of a specified quantity of WTI Oil at a previously agreed upon price, with the delivery and payment both at a specified date in the future.
WTI futures are heavily traded in the U.S. and around the world and give WTI producers and consumers a way to protect themselves against the risk of price fluctuations in the WTI market.
What is WTI?
WTI, also known as Texas Light Sweet, is a high-quality, light, sweet crude oil that is a blend of several U.S. domestic streams of light sweet crude oils. WTI has a sulfur content of 0.24 percent by weight, which makes it sweeter than its North Sea counterpart—Brent Oil. However, it is sourer than other sweet crude oils that have less than 0.10% sulfur—this justifies the “Intermediate” in its name. With an API gravity of 39.6 degrees, it is a light oil that is excellent for refining gasoline.
WTI is found in the United States, which is also the largest gasoline consuming country in the world. Little wonder then that WTI has high demand, and high trading volumes.
Brief History of WTI
Back in 1970s, geopolitical issues like the Iranian Revolution and the Yom Kippur War created extreme uncertainty, high prices and price swings in the crude oil market. To combat these fluctuations, the New York Mercantile Exchange (NYMEX) introduced WTI futures as a tool to provide the oil industry a hedge against price volatility. WTI futures came in handy again in 1990, when Iraq invaded Kuwait and there were threats to one quarter of the world’s oil supply.
Today, WTI futures continue to provide protection against dramatic price swings in the price of oil, which can occur during times of financial crises in the U.S.(as in 2008) or unrest in the Middle East (as in 2011). In times of uncertainty, market participants rely on WTI to manage risk.
WTI has experienced continuous increase in contract volumes over time. Today, nearly 850,000 contracts of WTI (almost 1 billion barrels of oil) are traded on the options market around the world every day.
Where is WTI produced?
The Oil is native to the United States, and is produced by a number of independent producers and large petroleum companies. They sell around 400 barrels of crude oil on a daily basis.
In the U.S., WTI oil is transported from the drill sites through pipelines to an oil-trading hub Cushing in Oklahoma. Cushing boasts of several storage facilities and provides direct and easy access to refineries and suppliers. From Cushing, oil is pumped north to be processed by refineries. Most WTI crude refineries are located in the Midwest in the U.S., with some refineries in the Gulf Coast as well.
Part of WTI’s popularity as a light, sweet crude lies in the fact that it has low levels of impurities and can be processed in any type of refinery without the need for high-tech equipment. It is also easier to transport than heavy sour oil which has a higher density.
According to the U.S. Energy Information Administration, U.S. oil production has grown 18 percent to a 25-year high in the past 12 months due to fracking. Growing oil output has spurred record exports of fuel from U.S. refineries.
Crude Oil production was 2,718,155 thousand barrels in 2013, out of which 43,778 thousand barrels were exported. Texas and North Dakota were the highest producers, along with off-shore sources.
Domestic output is expected to grow annually by about 800,000 barrels a day to 9.5 million in 2016, nearing the record level of 1970, according to the U.S. Energy Information Administration’s Annual Energy Outlook for 2014.
How is WTI Used?
The United States is the top consumer of oil in the world.
Thanks to its lower sulfur content, WTI is often used to make gasoline. While unprocessed Crude Oil has very limited uses, once it is processed into gasoline, it is used to fuel homes and vehicles. It also has many other uses in business and industry. Most of this gasoline is processed on the East Coast in the U.S. and is transported by pipes across the country.
WTI Crude Oil is also important in the financial markets, where it is used as a benchmark to represent the price of a crude oil barrel in the United States. Most of the oil imported into U.S. from Mexico and Saudi Arabia is hedged using WTI prices.
Historically, WTI futures have traded closely to Brent and the OPEC basket, but currently it is trading at a discount to Brent crude oil.
Who Invests in and Trades WTI Futures?
A WTI futures contract is the most liquid contract in the oil industry and is traded worldwide, which is what makes it so popular in the financial markets.
WTI traders can be broken down into two main categories: hedgers and speculators.
In order to curb price fluctuations that are beyond the control of producers, WTI futures were introduced. WTI futures offer these market participants a way to shift the exposure to price risk, and gain control over their WTI investments. WTI hedgers usually have a vested interest in the underlying asset and its delivery.
Producers, refiners and marketers of oil can hedge against falling oil prices by selling futures, and can hedge against rising prices by buying futures. Consumers of oil can do the opposite to reduce their exposure.
WTI futures are also traded by speculators. Professional energy traders and investors who have no direct stake in the delivery of oil trade in WTI futures, in order to make money by buying risk. They trade in and out of WTI futures only based on speculations about the price fluctuations of WTI over the trading period. WTI Speculators buy WTI futures if they believe that the price of WTI will go up, and sell WTI futures if they believe that the price of WTI will go down.
WTI Futures Trading in the U.S.
WTI futures are the most actively traded energy product in the world.
WTI futures trade on the NYMEX, and are considered very liquid (especially if contracts are for several months). The contracts trade under the symbol CL and are of 1,000 barrels of oil. The delivery is made at any pipeline or storage unit in Cushing, Oklahoma. WTI contracts are listed nine years forward are quoted in U.S. dollars and cents. They trade both via an open outcry method and electronically.
International WTI Futures Trading
WTI futures also trade on the Intercontinental Exchange (ICE) under the symbol T. ICE is an electronic marketplace, which also offers futures trading of Brent Oil and Middle East Sour Crude. The minimum contract size for WTI on the ICE is 1,000 barrels and the price is quoted in US dollars and cents. The minimum price fluctuation is $0.01 per barrel. The contract is for up to 86 consecutive months and is cash settled against the prevailing market price for US light sweet crude oil.
WTI futures are also available on the Multi Commodity Exchange (MCX) in India.
How to Trade WTI Futures: Costs and Different Brokers
You can trade futures by opening a trading account with a trusted broker who handles futures trading. CME Globex, CME Clear Port and Etrade are some well known online platforms for trading futures.
Most brokerages will charge the National Futures Association fees, which is roughly around $0.02 per side, along with a commission (which can range from $0.025 to $3 and more, per contract per side). You will also have to pay an exchange fee, which will vary depending on the exchange and the specific contract you are trading. Commodity futures will also have a high margin deposit. Be sure to look at the fine print and add up all the fees into your cost before placing trades.
WTI has high intraday volatility and requires active monitoring. WTI futures are directly correlated with the physical market, so any disruption in the physical market worldwide gets reflected immediately in the financial positions. WTI has proven that it is vulnerable to political and economic events around the world. If there is unrest in the Middle East or if demand drops suddenly in Asia, WTI futures usually get affected as well.
Currently more than 300 million barrels per day are traded, which is 750 times the WTI production. This implies that WTI traders are not just producers or refiners, who have a vested interest in WTI delivery—there are also a lot of speculators in the market, looking to make the most profits. As a primary trading instrument, WTI can thus be heavily impacted by the behavior of other traders and by market trends.
Despite these risks, WTI still remains a heavily traded future, with several opportunities to make profits if trades are made with careful selection and timing.