Open interest is the total number of outstanding futures contracts (i.e. contracts that have been entered into but not yet liquidated by an offsetting transaction or fulfilled by delivery) for a particular market or commodity. It can be used as an indicator of market activity, as an increase in open interest suggests that new positions are being added while a decrease indicates that positions are being closed.
The relationship between open interest and the price of a futures contract can indicate market sentiment and the level of bullishness or bearishness among traders. When the open interest is increasing and the price is also increasing, it can indicate a bullish sentiment among traders, as more traders are entering into long positions and buying contracts at higher prices. When the open interest is decreasing and the price is also decreasing, it can indicate a bearish sentiment among traders, as more traders are closing their positions or entering into short positions and selling contracts at lower prices. When the open interest is increasing but the price is decreasing, it can indicate that new positions are being added but these are mostly short positions. Traders are entering into short positions and selling contracts at lower prices. When the open interest is decreasing but the price is increasing, it can indicate that positions are being closed but these are mostly long positions. Traders are closing long positions and buying contracts at higher prices.
It is important to note that the relationship between open interest and price does not indicate the direction of the market, but the sentiment of the market participants. A more accurate analysis of the market conditions would require considering other factors such as economic data and global events.