Oil trading was once largely the preserve of commodity houses, institutional investors and professional traders who could place bets involving thousands of barrels at a time. That barrier has now been dramatically lowered.

CME Group began offering a new futures contract on Sunday that represents 10 barrels of West Texas Intermediate crude, meaning a trader would pay roughly $860 at current prices. By comparison, CME's Micro WTI contract covers 100 barrels, while its standard contract covers 1,000 barrels. WTI, the U.S. benchmark crude delivered at Cushing, Oklahoma, underpins one of the most heavily traded commodity markets in the world, and its futures prices feed into everything from gasoline costs to airline fuel budgets. The 10-barrel contract is the exchange's smallest WTI product yet, shrinking the smallest ticket size by a further factor of ten.

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. Futures trading also works on margin, meaning traders post only a fraction of a contract's face value to control the full position — which magnifies both gains and losses, a risk that smaller contract sizes do not remove.

"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 the 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

Retail participation has been climbing, especially during periods of market stress. According to Wong, 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. CME likewise noted that its 100-barrel Micro WTI futures averaged 272,000 contracts a day in May, up 317% year-over-year. The growth suggests the exchange sees a deepening pool of small-sized traders to serve, having first launched the Micro contract in 2021 to court exactly that audience.

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 serve as a gateway for traders who have considered futures but were put off by the risks associated with larger positions.

Greater access does carry a potential downside, however. "Speculators can temporarily influence prices through emotional volatility that has little to do with fundamental reality," Garner cautioned. At the same time, she noted, retail participation adds liquidity, helping producers and consumers hedge their exposure more efficiently.

Garner argued that commodity ETFs have already distorted price discovery on occasion. She pointed to the turmoil of April 2020, when pandemic lockdowns caused oil demand to collapse far more quickly than producers could cut supply, just 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; the front-month contract famously settled below zero for the first time in history. Retail investors, meanwhile, were pouring money into oil funds on the assumption that prices would rebound, adding further strain to 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."

Retail's limits in a professional market

Some observers still doubt that retail investors can exert the same influence over crude that they occasionally wield over individual stocks. Retail flows could boost volumes and sometimes 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. Retail traders will therefore 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, according to market watchers.

"We're all oil traders now, at least to some extent, whether we realize it or want to be," Sosnick said.

Source: CNBC