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The creation of the WTI Crude Oil futures contract 40 years ago was a leap of faith. Not everyone believed it would succeed, let alone become the key global benchmark that it is today. Industry veteran Thomas McMahon, who was there from day one, saw it “struggle” for acceptance before getting “global buy-in.”

Starting as a page at the age of 13 on the New York Cotton Exchange, McMahon launched his professional career trading soft commodities. He moved to NYMEX, now CME Group, in 1981, where he remained until 2003. McMahon, with over 30 years of market experience in leadership positions, is now the Co-CEO of Aircarbon Exchange, a Singapore-based firm he co-founded.

This interview has been edited and condensed for clarity.

You were there at the creation of the WTI futures contract. Explain the trials and tribulations you faced.

Let’s face it: there were no oil markets, technically. The idea of crude oil futures was really one where ‘hey, the world needed it.’ Fundamentally, that was the thought process. But it was really ‘how do we do it?’  It wasn't the first futures contract. The first one was actually on the New York Cotton Exchange in 1975 — the Rotterdam contract. But it was too big. They set it at 100,000 barrels instead of 1,000. So it just didn't fit into the commodities book.

And it was interesting that the model that was used for the WTI contract was based on the shipper delivery mechanism. And, I mean, we did everything on the floors. It was really (late American energy pioneer) T. Boone Pickens from the Texas side who had a very close relationship with Jerry Rafferty, one of the first WTI traders. They built a relationship, and it really brought the concept together. 

After WTI launched, it went through a series of birth pangs. How did you and your colleagues cope?

It was radical. Nobody in the industry wanted it — least of all the majors. Exxon, those guys were kicking and screaming. NYMEX was struggling. It had just come out of the potato failures and didn’t really know what it was going to be when it grew up — or if it was even going to survive.

In 1980-81, you had the big bull markets in gold and sugar, and juice had had a big run. Everybody was making money, but the oil market was struggling. In the crude pit in New York, it was really a group of guys that put it all together. And from 1983 to 86, it was a struggle. Then Wall Street firms put guys into the crude pit because they had hedging. There was a need for it. But the broader industry buy-in? The banks were still very resistant to it because that was their backyard.  

The year 1986 was a crucial turning point after then Saudi Oil Minister Sheikh Ahmed Yamani introduced netback pricing. Was this a kind of baptism by fire for the nascent oil futures contract?

It was April 1986 when the netback deals crushed the crude market. Brent hadn't launched yet, so we were the only open market. I remember in two days we went from like 34 bucks to nine bucks. I remember the second day it opened at about 24 and paid down to nine. I had never seen anything like it, and I had been running in commodity markets for years.

The chaos turned out to be a blessing. Nobody was stepping in front of that train to protect the Saudis. It was the aha moment that somebody had exposed what Yamani had been doing, and the industry wasn't saying anything, because they were making so much money on the refined stuff. And it was interesting. I remember, I had never seen a crowd that big in a crude pit prior to that day.  

But that was the global buy-in for WTI futures. It was, ‘Oh, it works.’ Literally, it was that simple. And all the pooh-poohing that they hated the floor traders — we were the bad guys. But when they needed us, we proved we could be there. We gave them liquidity where they hadn’t seen it previously. So that was good.

It wasn’t exactly smooth sailing after that. What were other volatile events that proved WTI’s value in those early years through to the 1990s?

There were a series of challenges, and it depended whether it was global or domestic. Strangely, the market had a bizarre reaction on the day the (space shuttle) Challenger blew up. We had TVs on the floor broadcasting the Challenger launch. And when it blew up, the world was shocked. And the market dropped by $2. Why did it fall? Nobody knew why.

We had a series of those kinds of events. In 1995-96 there was the savings and loans disaster in the United States. It was an unrelated domestic event in the southwestern United States, yet it affected crude oil and then rolled back through the oil industry.

And then you had Enron. But what was the biggest risk coming out of Enron? Counterparty risk — that traditional counterparty risk that WTI futures satisfied with the clearing model. And again, the success of the WTI contract came out of market stress. Counterparties that were exposed to Enron, literally, they had always wanted to have somebody in the middle, and now it was a reality.

Of course, 2008 was a big year with the Great Recession where oil had a historic run up all before crashing to less than $40 a barrel. You were in the far east by then. What was it like to watch from afar?

WTI went to $33 as it has done multiple times since. But again, the market did what it was supposed to do. When markets get to extreme stress, the markets figure out very quickly how to mitigate the stress.

Do you think today, after the success of the contract, that people understand the role the WTI benchmark plays in everyday life?

I think today we take it for granted. Average people wake up and say, ‘So, what did the Dow Jones do? What did the S&P 500 do? Oh yeah, what's the price of crude oil?’ Literally, it measures everything we do today.

Because the downstream relationship – the power, energy, and transportation – is in everybody's lives whether you're a small business operator or you've got to drive your kids to school every morning. The cost of energy became embedded in our lives. WTI represents that. It is price discovery and it became ingrained in our lives.

Could you imagine an economy without oil futures?

WTI built new businesses. I'm in the carbon sustainability space and I've seen new businesses, new industries, scale rapidly in the last four years around sustainability. WTI did the same thing. Equally, it pushed energy efficiencies. The fracking industry is an outgrowth of WTI.  The Canadian oil sands would have never come into existence if you didn’t have WTI as a benchmark.

So the financialization of crude, the benchmark formation, is just absolutely intrinsically embedded. It's not just about trading oil. It has priced multiple industries.



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