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 here in the US, and it is still the most influential financial energy commodities exchange in the world. In this lesson, we will explore the history of the Exchange, how it functions, who participates, what commodities are traded. Can you define what NYMEX is and does in this paragraph to ease the students into the lesson?

Figure 1: Cushing, OK WTI Crude Oil Spot Price (1985 - 2015)
Source: EIA

I'm not clear on why this image is here? Can you add context about it so students understand the importance of it.  The paragraph below seems out of place. It just jumps right into specificswithout any explanation. I guess I am asking myself, as a student, why this paragraph is here.

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.There are specific nuances in the flow of the orders themselves. As legally-binding agreements, non-performance under a futures contract can have severe financial, and legal, consequences. Therefore, most phone conversations are recorded to ensure the accuracy of the orders placed as well as the results of the execution of those orders. Standardized Order Forms are used on the floor of the NYMEX during order execution. Daily "check-outs" occur between Brokers and their clients for verification of all trades conducted that day. In this lesson, we will follow a natural gas futures contract trade from the beginning to end for a producer and end-user wishing to lock-in a fixed-price for a 12-month period ("strip"). In addition, electronic trading is becoming the main way in which these transactions are executed these days and the traditional "pits" are quickly becoming a thing of the past. In addition, "High Frequency Traders" (HFT) are using super-computers with complicated algorithms to trigger thousands of trades in mere nano-seconds. They have only added to the volatility in the marketplace.

Learning Outcomes

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

  • Understand the history and development of the Exchange
  • Know the commodities traded
  • Identify the components of a standard NYMEX contract
  • Know the difference between “pit” and electronic trading
  • Recognize various exchange “floor” personnel and players
  • List the specific contract provisions for:
    • Natural Gas
    • Crude Oil
    • Heating Oil
    • Unleaded Gasoline
  • Understand the importance of the “price discovery” function provided by the Exchange for energy commodities
  • NYMEX - Order Execution & Electronic Trading
    • Understand the order flow from the physical customer through the Exchange.
    • Recognize that very few contracts ever actually get delivered physically.
    • Understand the concept of the “zero-sum” game in financial contracts.
    • Become familiar with electronic trading for futures contracts.
    • Understand what "high-frequency trading" is.

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.

  • Nymex Prices Activity
  • 2 Quizzes
  • Fundamental Factors

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.