Oil trading was once largely dominated by commodity companies, institutional investors and professional traders who could bet thousands of barrels at a time. That barrier is becoming much lower.
CME Group announced a futures contract worth 10 barrels of West Texas Intermediate crude oil in June, which means traders will pay about $860 at current prices. It was originally scheduled to go on sale on Sunday, but is still awaiting regulatory approval.
By comparison, CME’s micro WTI contract is for 100 barrels and the standard contract is for 1,000 barrels.
The move is 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 small futures contracts.
“Oil trading used to be a rich man’s game,” said Xavier Wong, market analyst at eToro Singapore.
“It’s not that retailers didn’t have access to the market, but it was tightly controlled by the size of the contracts,” he said, adding that online brokers, contracts for difference and ETFs have since changed the dynamic. “You no longer need a home or a six-figure net worth to have a view on oil, so the ability to have an opinion and act on that opinion has been democratized.”
Retail interest is already heightened, especially during times of market stress. Wong said that in the three months following the start of the war on February 28, eToro handled nearly 16 times the number of oil transactions compared to the same period last year.
CME similarly highlighted that its 100-barrel micro WTI futures averaged 272,000 contracts per day in May, an increase of 317% year over year.
A new breed of oil trader
CME’s small contract could accelerate that change.
Carly Garner, commodity market strategist and broker at DeCarly Trading, says that things like small-cap futures and oil ETFs United States Oil Fund (USO) Speculation is now available to traders of almost any level of experience or financial strength.
“The oil market is becoming fully democratized,” he said, adding that the new contract could be an entry point for traders who had considered futures but were hesitant due to the risks associated with larger positions.
But expanding access comes with potential downsides. “Speculators can temporarily influence prices through emotional swings that have little to do with the underlying reality,” Garner said. However, he added that retailer participation also increases liquidity, allowing producers and consumers to hedge risks more effectively.
Garner argued that commodity ETFs already sometimes distort price discovery. She pointed to the disruption in April 2020, when pandemic lockdowns caused oil demand to collapse much faster than producers could cut supply. The crisis occurred as the May WTI futures contract was about to expire.
Traders still holding contracts, faced with the prospect of receiving physical crude with little storage space available, were rushing to sell.
Meanwhile, retail investors poured money into oil funds in anticipation of a rebound in prices, adding to tensions in the futures market.
“From my perspective, this is a problem for the commodity industry,” she says. “We see that money flows are pushing commodity prices outside of their fundamental reality.”
But some still question whether individual investors can exercise the same influence over oil as they do over individual stocks.
Retail may increase sales volumes and possibly expand headline-driven movements, but professional and commercial flows are likely to still dominate benchmark prices.
“Commodities have always been and always will be spot-dependent products. I don’t think the tail can wag in this case because prices never stray too far from the prevailing fundamentals,” said Ole Hansen, head of commodity strategy at Saxo Bank.
Steve Sosnick, chief strategist at Interactive Brokers, made a similar point. The oil market remains dominated by state producers, large energy companies, commodity merchants, and large industrial consumers, whose activities dwarf those of individual traders.
Retail traders will therefore have a cheaper and more accurate way to speculate on crude oil, but production, consumption, inventories and geopolitics will remain the key factors determining prices.
Still, oil’s influence goes far beyond the professional traders and companies that dominate the market. Its prices drive inflation and household spending, market participants say, and virtually all investors are directly or otherwise exposed to price fluctuations.
“Whether we realize it or want to be, we are now oil traders, at least to some extent,” Sosnick said.
Correction: This article has been updated to reflect that CME Group’s 10-barrel crude oil futures contract is pending regulatory approval. Previous versions did not list regulatory status.
