Treat, with Board Chairman Marks and the support of the rest of the NYMEX Board, eventually chose West Texas Intermediate (WTI) as the traded product and Cushing, Oklahoma, as the delivery point. Robin Woodhead, who later became the first Chairman of the International Petroleum Exchange (IPE) in London started an active dialogue with Treat about whether they could start a Brent Crude oil contracts. Treat was very supportive and gave Woodhead strong support and a lot of advice. Shortly thereafter, after substantial conversations, The IPE was formally launched and started trading Brent. Indian investors and traders have generally remained focused on trading in equity markets, while world over commodity markets are bigger than equities.
Treat and his research staff then began looking for other oil products to trade. Gasoline was clearly ETF next on the product list but there was a lot of debate about where the delivery point should be.
One reason is the relative ease in relating to commodities as compared to equities. Even an Indian house wife tracks gold prices closely, irrespective of the fact that she will be buying the shinning metal someday. Similarly, a farmer tracks cotton and sugar prices in the market regularly but rarely makes use of it for hedging his produce.
A commodity trader is an individual or business that focuses on investing in physical substances like oil, gold, or agricultural products. The day-to-day buying and selling are often driven by expected economic trends or arbitrage opportunities in the commodities markets. Commodity markets typically trade in the primary economic sector, including industries focused on collecting natural resources for profit. Most commodity trading involves the purchase and sale of futures contracts, though physical trading and derivatives trading are also common.
Exchange-Traded Commodity vs. Exchange-Traded Fund
The Gulf Coast was the easiest, but the Exchange also looked at California markets, but decided they wouldn’t work. Treat then started looking simultaneously at launching crude and later products options contracts. Under Treat’s leadership, NYMEX also began to research the potential for trading natural gas and electricity, but focused first on natural gas. Product quality of natural gas was not an issue in that market, but the delivery point was a more difficult choice.
ETCs have a share price that moves up and down as the price of the underlying commodity(ies) fluctuate in value. Like all commodities, the price of Brent crude is dependent on supply and demand factors. Historically, demand for oil has been correlated with global economic performance. Prices generally rise during boom periods – as more oil is needed to manufacture and transport products – and fall during economic slowdowns.
On the supply side, global supplies of oil – rather than the supply of Brent crude specifically – has the most influence over this commodity’s price. Here the Organisation of the Petroleum Exporting Countries (OPEC), which sets production quotas for member countries, has historically had a great deal of influence. However, this has waned in recent years as the US, which is not an OPEC member, has increased shale production. Commodities exchanges guarantee each trade using clearing members who are responsible for managing the payments between buyer and seller. The risk borne by clearing members lends further support to the strict quality, quantity, and delivery specifications of commodities futures contracts.
Crude oil is an example of a traditional commodity that is frequently traded using futures contracts. Because each kind of crude oil (light sweet crude, for example) meets the same quality specifications, buyers know exactly what they’re getting, regardless of the source of the oil. However, sometimes producers attempt to brand their products in an effort to obtain higher prices.
- The Gulf Coast was the easiest, but the Exchange also looked at California markets, but decided they wouldn’t work.
- Treat and his research staff then began looking for other oil products to trade.
- Gasoline was clearly next on the product list but there was a lot of debate about where the delivery point should be.
- Product quality of natural gas was not an issue in that market, but the delivery point was a more difficult choice.
- Treat then started looking simultaneously at launching crude and later products options contracts.
- Under Treat’s leadership, NYMEX also began to research the potential for trading natural gas and electricity, but focused first on natural gas.
The initial resistance from the OPEC producers was almost impossible to break through, although some finally gave in, among the first being Venezuela. In terms of structural differences between an ETF and an ETC, the ETF invests directly in physical commodities or futures contracts. An ETC is a debt What is ETF? note, backed by an underwriter, which then collateralizes the note with buying the commodity. Investors will often find little difference between the various types of exchange-traded products, but a bit of research before investing may reveal one product does have a slight advantage over another.
Modern commodity markets trade many types of investment vehicles, and are often utilized by various investors from commodity producers to investment speculators. NYMEX’s business threatened some entrenched interests like big oil and government groups like OPEC that had traditionally controlled oil prices. NYMEX provided an “open market” and thus ETF transparent pricing for heating oil, and, eventually, crude oil, gasoline, and natural gas. NYMEX’s oil futures contracts were standardized for the delivery of West Texas Intermediate light, sweet crude oil to Cushing. It took almost a year to get the first US “majors” to start trading, but several “majors” did not start for almost 5 years.
Traders rarely deliver any physical commodities through a commodities exchange. When the potato ban came into effect, NYMEX’s platinum, palladium and heating oil markets were not significantly affected. When Leone left NYMEX in 1981 What is ETF? as a result of a strong disagreement with the NYMEX Board, John Elting Treat was asked to replace him as President. Arnold Safir was one of the members of an advisory committee formed by Treat to help design the new contract.
What Is an Exchange-Traded Commodity (ETC)?
$2 higher or lower equates to a 40% move when compared to the margin necessary to trade the crude oil futures contract. Therefore, the risk of commodity futures is what attracts some and keeps others far away. Commodities exchanges are the central location where commodities are traded. The commodity markets began with the trading of agricultural products such as corn, cattle, wheat, and pigs in the 19th century. Chicago was the main hub for this kind of trading, due to its geographical location near the farm belt and because it was a key east-west transit point with railroad access.
Eventually, the new chairman, Michel Marks – the son of commodities icon Francis Q. Marks – along with economist Arnold Safer, figured out that NYMEX could revamp an old heating oil futures contract. When the government deregulated heating oil, the contract had a chance of becoming a good object of trade on the floor. A new futures contract was carefully drawn up and trading began on a tiny scale in 1978. Some of the first users of NYMEX heating oil deliveries were small scale suppliers of people in the Northern United States.
Several different types of traders are active in the commodities market. Often these traders are dealing in raw materials used at the beginning of the production chain. Some operate independently, trading on major exchanges such as the New York Mercantile Exchange, and others work for international oil companies, mining companies, or other large commodity producers.
An ETC is traded on a stock exchange, like a stock, but tracks the price of a commodity or a commodity index. This What is ETF? allows investors to gain exposure to commodity markets without buying futures contracts or the physical commodity.