I know the difference between open interest and trading volume. Open interest is the number of contracts, long or short, outstanding. Trading volume is the number of contracts traded in a day.
However, I am struggling to understand this concept intuitively. When would open interest equal trading volume and when would it differ?
Futures are in "zero net supply", or "for every long there is a short", which means that at any time there are investors who are long a certain number of contracts and other investors who are short an (exactly matching!) number of contracts. This number is called the Open Interest. It starts at zero when the exchange introduces a new contract (like Sep 2019 Gold a few years ago), increases over time, and then goes back to zero by the expiration date (September 2019), after which the contract no longer exists.
When you buy a contract, you can buy an "already existing" contract from an investor who is long (in which case there is one trade and no change in OI), or you might buy it from a "writer" who does not have a contract but creates one by selling short to you. In the second case there is one trade and also an increase in Open Interest by 1 unit. Of course you don't know, when you are buying, who is on the other side and whether they have a position or not, so you can't tell the difference. But the OI can be computed by the exchange based on its information from all the clearing firms (one of whom, of course holds you account).
OI decreases when someone who is long sells to someone who is already short. In this case both parties have terminated their positions. OI also decreases at expiration when someone who is short delivers the underlying to someone who is long, closing out their obligations to each other.
