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Who creates futures such as CL.AUG20 (August WTI Crude Oil contract) sold on NYMEX which can be bought via eToro?

I understand that when a company wants to go public, they sell these stocks on an exchange such as NYMEX or other to which brokers connect to and people like me buy those stocks via the broker. The company wants to go public so they 'create' the shares and give them to the exchange who in turn sells to brokers.

But who creates oil futures such as the one I mentioned above? I understand they are backed by oil and that their price comes from a formula which takes into account the spot price of oil, carry and storage costs, and other stuff such as dividends that you would get if you owned say an oil index fund instead (I believe this is called fair value). Is this correct?

I understand how a company that needs oil would enter into a future contract with a company that sells oil to secure its right to buy at a specific date and price. I assume that when companies do this that they are doing it by meeting and signing some form of real paper contract rather than doing it on an exchange. If that is the case then does that means that such actions taken by companies don't have any effect on the oil futures we see on an exchange?

But who creates these oil futures that everyone with a broker account can buy? Do oil companies create those futures and sell them in a similar way a company would sell its stock? Or are they some kind of instrument created by exchanges and not by companies? How does it work?

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The exchange "creates" the futures contracts. I use quotes because unlike stock in a company, you aren't really "buying" anything - you're entering into a contract with a counterparty (also arranged by the exchange). The exchange sets up the contracts and the platform to facilitate the legal documents (and settlement, margin, etc.) between the counterparties. They aren't created by oil companies - oil companies are just counterparties like anyone else.

Also, counterparties can trade similar contracts over-the-counter (they're then called "forwards" instead of "futures") that have no direct price on the futures, but it could create an arbitrage opportunity that should keep the prices roughly in line. Also, you then bring counterparty credit risk and liquidity risk into play.

  • Thanks it makes more sense now. So the exchange sees how much oil is available(from the oil producing companies) and then they create a number of future contracts that people who want to bet on the price of oil or buy oil at a specific date with a set price can use. So if I wanted 2000 barrels of physical oil I could buy 2 contracts and hold on to them until they expire then go pick the barrels up? – Cantaff0rd Jun 24 '20 at 6:26
  • @Cantaff0rd The number of contracts is unlimited - the market determines how many contracts are open. Too many open contracts is why the price went negative in March (too many open contracts and not enough storage to hold the oil). And realistically you would enter into a future to lock in the price you pay for that oil - you could always go buy 2000 barrels at the "spot" price. – D Stanley Jun 24 '20 at 12:32
  • This doesn't make sense to me.... There's not an unlimited amount of oil, how can there be an unlimited amount of oil contracts ? – xyious Jun 25 '20 at 15:31
  • @xyious i promise to sell you oil, you promise to sell me oil, i promise to sell you oil, you promise to sell me oil, ........ – user253751 Nov 24 '20 at 17:42
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Everytime you 'buy' a futures contract, somewhere someone else is 'selling' it, to you, at the agreed price. The exchange just facilitates this. When you 'sell' the contract, you sell it to someone who 'buys' it, and the amount of contracts in existence goes down.

Therefore the total number of open 'buys' always equals the total number of open 'sells'. This value is called the 'open interest' and gives a measure of how much people care about the price.

Theorectically the 'open interest' can be a number from zero to infinity. If the value is large, and the futures contract is physically settled, then problems can and do occur at final settlement. This happened this year with oil, and in the 00's a few times with german government bond futures.

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