EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Lesson 3 Introduction

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Overview

In 2008, the price of crude oil on the New York Mercantile Exchange (NYMEX) hit an all-time high of $147 per barrel. And, within (6) months, the price had fallen to about $35. Again, in 2014, oil was over $100/Bbl in June only to fall to below $50/Bbl by December. While many factors led to these "peaks and troughs, the nature of futures trading and the Exchange itself made this possible. The New York Mercantile Exchange has been around since the late 1800s. Financial energy commodity contracts, such as futures contracts, are traded on the New York Mercantile Exchange and it is still the most influential financial energy commodities exchange in the world. Futures contracts are financial tools to hedge against the price fluctuations. In this lesson, we will explore the history of the Exchange, how it functions, who participates, what commodities are traded and futures contracts. In this lesson, we will also learn about the NYMEX order flow. Standardized Order Forms are used on the floor of the NYMEX during order execution. All orders placed on the NYMEX to buy or sell contracts are done in a very precise manner where each party involved is fully aware of the details of the transaction.

Learning Outcomes

At the successful completion of this lesson, students should be able to:

  • Explain the history and development of the Exchange
  • Identify the components of a standard NYMEX contract and which commodities are traded.
  • List the specific contract specifications for:
    • Natural Gas
    • Crude Oil
    • Heating Oil
    • Unleaded Gasoline
  • Describe the importance of the “price discovery” function provided by the Exchange for energy commodities
  • Know the difference between “pit” and electronic trading
  • Recognize various exchange “floor” personnel and players
  • NYMEX - Order Execution & Electronic Trading
    • List the order flow from the physical customer through the Exchange.
    • Recognize that very few contracts ever actually get delivered physically.
    • Explain the electronic trading and "high-frequency trading" for futures contracts.
  • Identify information about the futures market including risks, functions, regulators, margins, motions, price, short and long positions.
  • Explain the concept of the “zero-sum” game in financial contracts.
  • Recognize and research the various factors impacting supply and demand for natural gas and crude oil for this week and assess their potential impact on market pricing for each factor.

What is due for Lesson 3?

This lesson will take us one week to complete. The following items will be due Sunday at 11:59 p.m. Eastern Time.

  • Quizz
  • Fundamental Factors
  • Nymex Prices Activity

Questions?

If you have any questions, please post them to our General Course Questions discussion forum (not e-mail), located under Modules in Canvas. The TA and I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.