The 40-Year Story of a Crude Oil Benchmark – OpenMarkets


3,000 contracts traded in the first month after the launch of WTI, and a year later, trading volume would top 100,000 contracts a month, according to CME Group data. As WTI proved its worth, volumes ramped up even more, topping two million contracts per month by the end of the 1980s.

The crude futures contract was barely three years old when it faced a big test. Oil prices were in freefall after then Saudi Oil Minister Sheikh Ahmed Yamani revealed the Kingdom’s practice of netback pricing, which guaranteed buyers a certain refining margin.

“It was April 1986 when the netback deals crushed the crude market,” recalled McMahon. “Brent hadn’t launched yet, so we were the only open market. I remember in two days we went from like 34 bucks to nine bucks. I remember the second day it opened like 24 and paid down to nine. I had never seen anything like it, and I had been running in commodity markets for years.”

Amid the chaos, McMahon said the futures contract proved its worth as a risk management tool and achieved a “global buy-in.”

“Literally, it was that simple. When they needed us traders, we proved we could be there. We gave them liquidity where they hadn’t seen it previously.”

“The world needed a crude oil futures contract because in order to scale the market, in order to allocate oil correctly between all the suppliers and consumers, you have to have free market pricing in order for industry to grow and allocate that product properly,” said Keavey.



This article was originally published by a www.cmegroup.com . Read the Original article here. .