Publications: Notes at the Margin

Oil and Gas Futures Markets: Still Needed? (January 6, 2025)

 

The US crude oil futures market has existed for more than forty years, and the natural gas futures market for more than thirty. As 2025 begins, it seems appropriate to ask whether they continue to serve any use.

 

The US natural gas futures market remains essential because the fuel supply is competitive and unencumbered by governmental or nongovernmental control. This means gas futures provide a mechanism to promote investment and even foster new producer entry.

 

The need for oil futures is questionable. This market has been experiencing a long, slow decline. OPEC+’s success in controlling global crude output and the impact of the cooperation (alleged) of several independent US producers has minimized the need for oil futures. Consequently, trading in this market has devolved into a battle among gamblers.

 

The open interest data for the two markets reveal their divergence. Open interest in natural gas futures is near a twelve-year high, and WTI open interest is near a twelve-year low.

 

The diminishment of the oil futures market has important industry implications. Futures markets promote competition and new firm entry. Such markets can benefit consumers, too, through lower prices and refiners and marketers through better margins. The market’s failure does the opposite, promoting increased concentration and the growth of larger firms, and may even lead to monopolies.

 

Natural gas today looks to have a robust competitive future, meaning prices will likely remain low. Crude oil may not enjoy such an outcome until declining consumption prompts OPEC+ to end its concession of market share to aggressive outsiders.

 

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