Oil trading was once largely the preserve of commodity houses, institutional investors and professional traders able to make bets involving thousands of barrels at a time. That barrier has gotten much lower.
CME Group began offering a new futures contract Sunday that represents 10 barrels of West Texas Intermediate crude, which means a trader would pay about $860 at current prices.
This compares with 100 barrels for CME’s Micro WTI contract and 1,000 barrels for its standard contract.
The move marks the latest step in what some market watchers describe as the “democratization” of oil trading, following years of growth in online brokerage platforms, exchange-traded funds and smaller futures contracts.
“Trading oil used to be a rich man’s game,” said Zavier Wong, market analyst at eToro Singapore.
“It wasn’t that retail couldn’t access the market, but it was heavily gatekept by the size of the contracts,” he said, adding that online brokers, contracts for difference and ETFs have since transformed dynamics. “You don’t need a berth or a six-figure net worth to hold a view on oil anymore, so the ability to have an opinion and to act on that opinion has become democratized.”
Retail interest is already rising, especially during periods of market stress. The number of oil trades handled by eToro was nearly 16 times greater than a year earlier in the three months following the start of the war on Feb. 28, according to Wong.
CME similarly underscored that its 100-barrel Micro WTI futures averaged 272,000 contracts a day in May, up 317% year-over-year.
A new breed of oil trader
CME’s smaller contract could accelerate that shift.
Carley Garner, a commodity market strategist and broker at DeCarley Trading, said smaller futures and oil ETFs such as the United States Oil Fund (ticker USO) have made speculation possible for traders at almost any level of experience or funding.
“The oil market is absolutely becoming more democratized,” she said, adding that the new contract could act as a gateway for traders who have considered futures but were put off by the risks associated with larger positions.
But greater access brings a potential downside: “Speculators can temporarily influence prices through emotional volatility that has little to do with fundamental reality,” Garner said. Retail participation also adds liquidity, however, helping producers and consumers hedge their exposure more efficiently, she added.
Garner argued that commodity ETFs have already distorted price discovery on occasion. She pointed to the turmoil in April 2020, when pandemic lockdowns caused oil demand to collapse far more quickly than producers could cut supply. The crunch came as the May WTI futures contract approached expiration.
Traders still holding the contract faced the prospect of taking delivery of physical crude with little storage available, prompting a rush to sell.
Retail investors were meanwhile pouring money into oil funds on the assumption that prices would rebound, adding to strains in the futures market.
“In my eyes, this has been a problem for the commodity industry,” she said. “We see money flow push commodity prices outside of fundamental reality.”
However, some still doubt retail investors can exert the same influence over crude that they sometimes wield over individual stocks.
Retail could boost volumes and occasionally magnify headline-driven moves, but professional and commercial flows are still likely to dominate benchmark pricing.
“Commodities are and will always be spot-dependent products. Prices can never go too far away from prevailing fundamentals, so I doubt the tail in this case would be able to wag the dog,” said Ole Hansen, head of commodity strategy at Saxo Bank.
Steve Sosnick, chief strategist at Interactive Brokers, made a similar point. The crude market remains dominated by state producers, major energy companies, commodity merchants and large industrial consumers whose activity dwarfs that of individual traders.
Hence, retail traders will gain a cheaper and more precise way to speculate on crude, but production, consumption, inventories and geopolitics will remain the dominant forces setting prices.
Still, oil’s influence extends far beyond the professional traders and companies that dominate its market. Its price shapes inflation and household spending, making virtually every investor exposed to its swings directly or otherwise, said market watchers.
“We’re all oil traders now, at least to some extent, whether we realize it or want to be,” Sosnick said.
