Petroleum & Other Liquids

This Week in Petroleum

Release date: November 15, 2017  |  Next release date: November 22, 2017

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Exchange-traded funds play an increasing role in oil futures markets

Although exchange-traded funds (ETF) are relatively new, their increased positions of oil futures contracts in recent years may have, at times, affected market liquidity and price volatility. ETFs allow smaller capitalized investors indirect access to the oil futures market. Their growth has likely contributed to the increased volume in crude oil futures trading and the number of outstanding contracts (open interest), but the effects on price direction are unclear.

ETFs function similarly to a mutual fund or commodity pool in which investors purchase shares of a fund that holds assets such as equities, bonds, commodities, or futures contracts. Many energy ETFs buy and sell oil futures to serve as underlying assets that support the value of the ETF shares. The fund manager issues blocks of ETF shares to Authorized Participants—typically institutions that facilitate trading liquidity—that then sell individual ETF shares to investors. Because shares of ETFs trade the same way that shares of stock trade on exchanges, such as the New York Stock Exchange, commodities such as crude oil that trade on futures exchanges become indirectly available to investors through ETFs.

The U.S. Commodity Futures Trading Commission (CFTC) requires all holders of futures contracts that exceed a certain threshold to report their holdings weekly, which are aggregated in the CFTC’s Commitments of Traders (COT) report. The COT report for November 7, 2017 identifies the classes of traders for all outstanding West Texas Intermediate (WTI) crude oil futures contracts as of that date (Figure 1). The fund manager of a commodity ETF is classified in the COT report under the Money Manager category because they are registered commodity pool operators engaged in managing and conducting organized futures trading on behalf of clients.

In a futures market, a long position means the holder bought futures contracts, whereas a short position means the holder sold futures contracts. Total long contracts must equal total short contracts because every buyer must have a seller. Most market participants do not settle their contracts with physical delivery of crude oil, rather they buy or sell futures before the contract expires to offset their initial positions.

Figure 1. Brent and West Texas Intermediate crude oil prices

The largest crude oil ETF by total assets is the United States Oil Fund (USOF). USOF’s objective is to track the daily percent changes in front-month WTI futures contracts before fees and expenses. As public interest in USOF has increased in recent years, it created more ETF shares for Authorized Participants to offer to the public for trading. USOF has approximately 200 million outstanding shares, 15 million of which trade daily (as of November 14, Figure 2). Because the value of the shares is backed by crude oil futures contracts, increases and decreases in the number of shares outstanding have a direct effect on the number of contracts the fund holds.

Figure 2. Commercial crude oil inventories versus five-year average

In recent years, as the fund has created more shares, USOF purchased more WTI futures contracts and has held as much as 20% to 25% of the open interest in front-month futures. When the fund has redeemed shares, it reduced its holdings of front-month crude oil futures to as few as 1% to 3% of the open interest (Figure 3). The ETF also makes regular purchases of second-month WTI crude oil futures and sells front-month futures a few weeks before expiration. These regular sales and purchases occur over a four-day period, which changed from a one-day set of transactions in 2009 to address concern that large trades on a single day were affecting price volatility.

Figure 3. Commercial crude oil inventories versus five-year average

The growth in open interest and trading volume in WTI contracts has not been exclusive to first-month and second-month crude oil futures, suggesting that other types of traders have also increased futures trading (Figure 4). However, growth in ETF investing has contributed to the increase in open interest and trading volume in WTI futures contracts and will likely continue to influence crude oil futures markets as investor interest in energy commodities changes.

Figure 4. Commercial crude oil inventories versus five-year average

U.S. average regular gasoline and diesel prices increase

The U.S. average regular gasoline retail price increased 3 cents from the previous week to $2.59 per gallon on November 13, up 41 cents from the same time last year. The East Coast price increased seven cents to $2.55 per gallon, the Gulf Coast price increased five cents to $2.30 per gallon, the West Coast price increased nearly four cents to $3.08 per gallon, and the Rocky Mountain price increased less than one cent, remaining at $2.54 per gallon. The Midwest price fell two cents to $2.53 per gallon.

The U.S. average diesel fuel price increased over 3 cents to $2.92 per gallon on November 13, 47 cents higher than a year ago. The West Coast price increased nearly six cents to $3.39 per gallon, the East Coast price increased nearly four cents to $2.88 per gallon, the Gulf Coast price increased three cents to $2.70 per gallon, the Rocky Mountain price increased nearly three cents to $2.99 per gallon, and the Midwest price increased two cents to $2.88 per gallon.

Propane inventories decline

U.S. propane stocks decreased by 2.5 million barrels last week to 74.7 million barrels as of November 10, 2017, 9.0 million barrels (10.8%) lower than the five-year average inventory level for this same time of year. Gulf Coast and Midwest inventories decreased by 1.8 million barrels and 1.1 million barrels, respectively, while East Coast inventories increased by 0.4 million barrels and Rocky Mountain/West Coast inventories rose slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 3.5% of total propane inventories.

Residential heating oil and propane prices continue to increase

As of November 13, 2017, residential heating oil prices averaged just over $2.80 per gallon, 6 cents per gallon more than last week and 42 cents per gallon higher than last year’s price at this time. The average wholesale heating oil price for this week is $2.03 per gallon, just under 4 cents per gallon more than last week and 55 cents per gallon higher than a year ago.

Residential propane prices averaged $2.38 per gallon, just under 3 cents per gallon more than last week and nearly 34 cents per gallon higher than a year ago. Wholesale propane prices averaged $1.09 per gallon, nearly 2 cents per gallon higher than last week and almost 46 cents per gallon higher than last year's price.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

Tags: crude oil , financial markets , futures , prices , weekly , WTI (West Texas Intermediate)

Retail prices (dollars per gallon)

Retail price graphs
  Retail prices Change from last
  11/13/17 Week Year
Gasoline 2.592 0.031 0.408
Diesel 2.915 0.033 0.472
Heating Oil 2.802 0.063 0.424
Propane 2.382 0.029 0.337

Futures prices (dollars per gallon*)

Futures price graphs
  Futures prices Change from last
  11/09/17 Week Year
Crude oil 57.17 1.53 NA
Gasoline 1.820 0.027 NA
Heating oil 1.947 0.060 NA
*Note: Crude oil price in dollars per barrel.
Data not available for 11/10/2017.

Stocks (million barrels)

Stock price graphs
  Stocks Change from last
  11/10/17 Week Year
Crude oil 459.0 1.9 -31.3
Gasoline 210.4 0.9 -11.3
Distillate 124.8 -0.8 -24.1
Propane 74.680 -2.520 -26.147