A heating oil futures contract introduced on the New York Mercantile Exchange (NYMEX) in 1978 was the first widely traded oil financial contract to be marketed on an organized, regulated exchange.
When were oil futures first introduced?
The New York Mercantile Exchange (NYMEX) began trading crude oil futures contracts in 1983, and the London-based International Petroleum Exchange (IPE), which was bought by Intercontinental Exchange (ICE) in 2005, began trading crude oil futures contracts in June 1988. During the 1990 Persian Gulf crisis and conflict, the price of oil reached a high of over US$65.
When are oil futures available to trade?
Sunday through Friday, electronic trading of crude oil futures is performed on the CME Globex trading platform from 6:00 p.m. U.S. to 5:00 p.m. U.S. ET. Contracts for crude oil futures are traded every calendar month, from January to December.
Early Nineteenth Century Grain Production and Marketing
The vast majority of American grains wheat, corn, barley, rye, and oats were grown throughout the United States’ hinterlands by subsistence farmers agricultural producers whose primary goal was to feed themselves and their families until the early nineteenth century. Despite the fact that many of these farmers sold their surplus agricultural commodities on the market, they lacked access to large markets, as well as the incentive, affordable labor supply, and a plethora of technologies required to practice commercial agriculture the large-scale production and marketing of surplus agricultural commodities.
The main trading route to the Atlantic seaboard at the period was by river through New Orleans4; nevertheless, the South was also home to terminal markets final destination markets for grain, supplies, and flour. Along the tributaries of the Ohio and Mississippi Rivers, as well as east-west overland routes, smaller local grain markets occurred. The latter were largely employed to convey manufactured (nonperishable and high-valued) commodities west.
The majority of farmers, notably those in the East North Central States – today’s Illinois, Indiana, Michigan, Ohio, and Wisconsin couldn’t afford to send bulk grains to market (Clark 1966, 4, 15).
Instead, most transformed wheat into comparatively high-value flour, animals, supplies, and whiskies or malt liquors, which they transported south or drove east in the case of livestock (14).
6 Oats were only exchanged locally, if at all; their low value-to-weight ratios made bulk or other shipping impractical (15n).
The Great Lakes provided a natural water route east to Buffalo, but farmers in the interior East North Central region needed local ports to accept their grain in order to move grain this way. Although the Erie Canal was completed in 1825 and connected Lake Erie to the port of New York, water routes connecting small interior ports in northern Ohio to the Canal did not exist until the mid-1830s. Indeed, the Erie aided the growth of the Old Northwest at first, not because it enabled eastward grain imports, but because it provided easy access to the West for immigrants and manufactured goods (Clark 1966, 53).
By 1835, the mouths of rivers and streams across the East North Central States had evolved into hubs, or port cities, from which farmers could carry grain east via the Erie. Shippers could alternatively go south on the Ohio River and then upriver to Pittsburgh and eventually Philadelphia, or north on the Ohio Canal to Cleveland, Buffalo, and eventually Lake Ontario and Montreal through the Welland Canal (19).
By 1836, grain was being shipped north on the Great Lakes and through Buffalo, rather than south on the Mississippi through New Orleans (Odle 1964, 441). Even as late as 1840, Ohio was the sole state/region that participated in the Great Lakes trade in a considerable way. Illinois, Indiana, Michigan, and the present-day Wisconsin region either produced for local markets or relied on Southern demand. Only 4,107 people lived in the “village” of Chicago in 1837, the year it became an official city (Hieronymus 1977, 72). 7
Antebellum Grain Trade Finance in the Old Northwest
To finance the U.S. grain trade until the mid-1860s, a network of banks, grain dealers, merchants, millers, and commission houses purchasing and selling agents based in the central commodity markets used an acceptance system (see Clark 1966, 119; Odle 1964, 442). A miller in need of grain, for example, would instruct an agent in New York to create a line of credit with a merchant on the miller’s account. This line of credit was granted by the merchant in the form of sight drafts, which the merchant made receivable in sixty or ninety days, up to the line of credit’s value.
With this credit line in place, commission brokers in the hinterland could work out a contract with grain dealers to get the grain they needed. The commission agent would receive warehouse receipts from dealers, attach them to drafts drawn on the merchant’s line of credit, and discount these drafts at his local bank in exchange for banknotes, which the local bank would then transfer to the New York merchant’s bank for redemption. Grain traders would be advanced lent around three-quarters of the current market value of the grain by the commission agents. When the grain was finally sold in the East, the commission agency would pay the dealers the balance (less finance and commission fees). Consignment contracts were made between commission agents and grain dealers.
Unfortunately, because of the intertwining of banks, grain dealers, merchants, millers, and commission agents, the “entire system was accompanied by great risk and speculation, which was carried by both the consignee and consignor” (Clark 1966, 120). If grain prices remained stable between the time the miller obtained credit and the time the grain (bulk or converted) was sold in the East, the method was adequate, but this was rarely the case. The basic flaw in this financial structure was that commission agents were effectively asking banks to lend them money in order to purchase unsold grain. This shortcoming was particularly obvious during financial panics, when many banks refused to discount these drafts (Odle 1964, 447).
Grain Trade Finance in Transition: Forward Contracts and Commodity Exchanges
The Illinois-Michigan Canal was built in 1848 to connect the Illinois River to Lake Michigan. Farmers in the Illinois River’s hinterlands could ship their produce to merchants along the river thanks to the canal. Grain was accumulated, stored, and then shipped to Chicago, Milwaukee, and Racine by these merchants. Initially, shippers marked deliveries by producer and region, and buyers evaluated and selected these tagged bundles upon arrival. Throughout the 1850s, commercial activity at the three grain ports increased. Later that decade, Chicago became a major grain (mainly corn) hub (Pierce 1957, 66). 8
A confluence of technologies revolutionized the grain trade and its manner of financing during this period of increased Lake Michigan commerce. Grain elevators and railroads, respectively, facilitated high-volume grain storage and shipment by the 1840s. As a result, country merchants and their Chicago counterparts needed more capital to store and export this increased supply of grain. 9 Furthermore, high-volume grain storage and shipment necessitated that inventoried grains be fungible that is, one part or amount could be substituted by another equivalent part or quantity to meet an obligation. Because the price of a bushel of No. 2 Spring Wheat was fungible, it didn’t matter if it came from Farmer A, Farmer B, Grain Elevator C, or Train Car D.
If merchants could obtain firm price and quantity commitments from their buyers, they would be able to secure these larger loans more quickly and at cheaper rates. As a result, merchants began to trade forward (rather than futures) contracts. The first of them, according to Hieronymus (1977), was “On March 13, 1851, a “time contract” was recorded. It stated that 3,000 bushels of maize will be delivered to Chicago in June at a price one cent lower than the cash market price on March 13th (74). 10
Meanwhile, commodities exchanges met the demand for fungible grain in the trade. These exchanges arose as associations in the 1840s and 1850s to cope with local difficulties such harbor infrastructure and commercial arbitration (for example, Detroit in 1847, Buffalo, Cleveland, and Chicago in 1848, and Milwaukee in 1849). (see Odle 1964). They developed a system of staple grades, standards, and inspections by the 1850s, making inventory grain fungible (Baer and Saxon 1949, 10; Chandler 1977, 211). They weighed, inspected, and categorised commodities shipments that went from west to east as gathering points for grain, cotton, and provisions. They also made it easier to trade in spot and forward markets in a more coordinated manner (Chandler 1977, 211; Odle 1964, 439). 11
The Board of Trade of the City of Chicago, a grain and provisions exchange created in 1848 by a State of Illinois corporate charter (Boyle 1920, 38; Lurie 1979, 27), was the largest and most prominent of these exchanges (Boyle 1920, 38; Lurie 1979, 27). (CBT). The CBT served as a gathering place for merchants to resolve contract disputes and discuss economic topics of mutual concern for at least its first decade. At best, participation was part-time. The initial directorate of the Board consisted of 25 people “A druggist, a bookseller, a tanner, a grocer, a coal dealer, a hardware merchant, and a banker” were among those who attended, and complimentary lunches were frequently provided (Lurie 1979, 25).
However, in 1859, the CBT was chartered as a private association by the state of Illinois. As a result, the exchange requested and received approval from the Illinois legislature to establish rules “for the management of their business and the mode in which it shall be transacted, as they may think proper;” to arbitrate and settle disputes with the authority “as if it were a judgment rendered in the Circuit Court;” and to inspect, weigh, and certify grain and grain trades, with these certifications binding on all CBT members (Lurie 1979, 27).
Nineteenth Century Futures Trading
By the 1850s, dealers were selling and reselling advance contracts before they were delivered (Hieronymus 1977, 75). A trader could not offset a forward contact in the sense of the futures market. Nonetheless, the emergence of a secondary market in forward contracts a market for existing securities rather than newly issued securities suggests that speculators were engaged in these early time contracts, if nothing else.
The Chicago Board of Trade issued its initial rules and procedures for trading forwards on the market on March 27, 1863. (Hieronymus 1977, 76). The regulations addressed contract settlement, which was (and still is) the most difficult aspect of a forward contract: finding a willing trader to take a position in a forward contract was relatively straightforward; finding that trader at the time of contract settlement was not.
In May of 1865, the CBT began converting actively traded and reasonably homogeneous forward contracts into futures contracts. The CBT at the time limited time contract trade to exchange members, standardized contract specifications, forced traders to deposit margins, and explicitly established contract settlement, including payments and deliveries, as well as grievance procedures (Hieronymus 1977, 76).
It’s difficult to pinpoint when structured futures trading began. This is partly owing to semantic difficulties for example, was a “to arrive” contract a forward, a futures, or neither? Most grain trade historians agree, however, that storage (grain elevators), shipment (railroad), and communication (telegraph) technologies, a system of staple grades and standards, and the impetus to speculation provided by the Crimean and American Civil Wars enabled futures trading to mature by around 1874, when the CBT was the United States’ premier organized commodities (grain and provisions) futures exchange (Baer and Saxon 1949, 87; Chandler 1977, 212; CBT 1936, 18; Clark 1966, 120; Dies 1925, 15; Hoffman 1932, 29; Irwin 1954, 77, 82; Rothstein 1966, 67).
In the mid-1870s, however, futures exchanges lacked modern clearinghouses, which most exchanges only began to experiment with in the mid-1880s. For example, the CBT’s clearinghouse was established in 1884, and by 1925, the CBT had implemented a thorough and mandated clearing system (Hoffman 1932, 199; Williams 1982, 306). The Minneapolis Grain Exchange created the first formal clearing and offset processes in 1891. (Peck 1985, 6).
Nonetheless, by the 1870s, the rudiments of a clearing system one that prevented traders from engaging directly with one another were in place (Hoffman 1920, 189). That is, brokers took the opposite side of every deal, much like clearinghouse members did decades later. Brokers settled offsets between themselves, albeit these settlements were difficult to achieve in the absence of a formal clearing system.
Direct settlements were straightforward. In this case, two brokers would only settle their offsetting positions in cash with one another. Direct settlements were uncommon, however, because offsetting purchases and sales between brokers rarely matched in terms of volume. B1 might, for example, buy a 5,000 bushel corn future from B2, who might subsequently buy a 6,000 bushel corn future from B1; in this case, 1,000 bushels of corn are still unresolved between B1 and B2. Of fact, if B2 sold a 1,000 bushel corn future to B1, the two brokers might offset the remaining 1,000 bushel contract. What if B2 had already sold a 1,000 bushel corn future to B3, and B3 had already sold a 1,000 bushel corn future to B1? The net futures market positions of each broker are offset in this situation, but all three must meet to settle their respective positions. A ring settlement was the term used by brokers to describe such a meeting. Finally, if B1 and B3 did not have positions with each other in this scenario, B2 might resolve her position by transferring her commitment (with B1) to B3. This procedure was referred to as a transfer settlement by brokers. Brokers had to find other brokers who had and wanted to settle open counter-positions in either ring or transfer settlements. Runners were frequently utilized by brokers to search the offices and passageways for the required counter-parties (see Hoffman 1932, 185-200).
Finally, the transition from forward to futures trading in Chicago grain markets happened practically concurrently in New York cotton markets. By the 1850s, cotton forward contracts were being exchanged in New York (and Liverpool, England). And, like Chicago, regulated cotton futures trading began in 1870 on the New York Cotton Exchange, with rules and procedures establishing the trade in 1872. The New Orleans Cotton Exchange began selling futures in 1882. (Hieronymus 1977, 77).
The New York Produce Exchange, the Milwaukee Chamber of Commerce, the Merchant’s Exchange of St. Louis, the Chicago Open Board of Trade, the Duluth Board of Trade, and the Kansas City Board of Trade were all successful nineteenth-century futures markets (Hoffman 1920, 33; see Peck 1985, 9).
Is there a futures market for oil?
Oil futures are a popular way to purchase and sell oil since they allow you to trade increasing and decreasing prices. Companies utilize futures to lock in a favorable price for oil and to hedge against price fluctuations.
What is the history of futures trading?
The CBOT emerged as a result of railroads and the telegraph connecting Chicago’s agricultural marketplace hub with New York and other eastern U.S. cities. Corn futures contracts were the first to be traded in the United States. Wheat and soybeans were added later, and these three fundamental agricultural commodities currently account for the majority of CBOT trading activity.
What year did option trading begin?
You could think that these futures contracts or options markets are just another complex financial product devised by Wall Street experts for their own nefarious goals, but you’d be wrong. Options and futures contracts, in reality, did not originate on Wall Street. These instruments have a long history, dating back hundreds of years before they were first traded in 1973.
What is the duration of an oil futures contract?
You’re not going to the store and buying a couple thousand 55-gallon barrels of crude oil to store in your backyard, are you? That’s just not feasible.
Crude oil futures contracts were created to allow oil corporations and companies that consume a lot of oil to plan delivery of the commodity at a set price and date. Today, these contracts are also traded between speculators who expect to profit from the commodity’s volatility.
On the futures market, these derivatives are a hot commodity, with the potential to yield large gains in a short period of time. Unfortunately, when bad decisions are made, the consequences can be just as severe.
The majority of oil futures contracts include the purchase and sale of 1,000 barrels of crude oil. When a contract is purchased, it stipulates that these barrels of oil will be delivered at a certain date (up to nine years away) and for a predetermined price at a predetermined date (or expiration date).
Let’s imagine you bought an oil futures contract today with a three-month expiration date; you’d be owed 1,000 barrels of oil three months from now, but you’d pay today’s price let’s say $50 per barrel as an example.
You notice that the price of oil has climbed to $51 per barrel in 30 days, indicating that your futures contract is now worth $1,000 more than you paid. If the price of oil fell to $49 per barrel, on the other hand, you would have lost $1,000.
In either case, you’ll want to sell as soon as possible when the contract expires. Individual investors and price speculators who aren’t large-scale crude oil users typically close off futures contracts well before they expire.
- You’re probably not going to be able to store 1,000 barrels of oil. You probably don’t have enough room to store 55,000 gallons of oil. If you own the contract when it expires, you’ll have to decide where to store the oil and what to do with it. Your entire investment is gone if you opt not to take ownership.
- Futures contracts lose value as they get closer to expiration. The futures market operates at a breakneck speed, with the thrill being in forecasting what will happen in a week rather than when the contract will expire. The premium paid for future value growth decreases as the contract approaches its expiration date. As a result, holding these contracts for too long will limit your prospective gains.
Pro tip: If you want to invest in oil futures, you should open an account with a broker who specializes in future contracts. When you open an account with TradeStation, you can get a $5,000 registration bonus.
To trade oil futures, how much money do you need?
The amount of money you’ll need in your account to day trade a crude oil futures contract varies depending on your futures broker, but you’ll need at least $1,000. Keep in mind that you’ll need enough funds in your account to cover any possible losses. If you don’t want to risk more than 1% of your cash on every single trade, you can limit yourself to $10 per trade.
What’s the deal with oil futures?
In theory, oil futures contracts are straightforward. They keep the time-honored practice of certain market participants selling risk to others who willingly buy it in the expectation of profiting. To put it another way, buyers and sellers agree on a price for oil (or soybeans, or gold) that will be traded at some point in the future, rather than today. While no one knows what price oil will trade at in nine months, futures market participants believe they can.