Rising oil prices attract stock-trading “tourists” to the market

“Since we got to $67, it’s gone up pretty steadily and orderly,” said Dilmaghani, a Phoenix-based day trader who tried to capitalize on the market’s short-term direction. “When it’s tidy, it’s great.”

He’s not the only so-called oil “tourist” hitting the market as the risk of war drives futures higher. With Iran’s attack on Israel sending oil prices soaring by more than $6 a barrel in the past week, retail investors are focusing on oil-related products.

Also read: Oil war premium returns after Iranian strike on Israel

Volume of the U.S. Petroleum Fund — the largest exchange-traded product that tracks the price of oil — rose this week to the highest levels since Russia invaded Ukraine in 2022.

Similarly, CME Group Micro WTI futures contracts – which trade on retail investment sites – saw their biggest daily volume since January this week. The company’s weekly options, which traders use to hedge their short-term exposure to prices, saw open interest rise to a record high of nearly 80,000 contracts this week.

While this brings much-needed liquidity to a futures market that has freed up commercial players, it also threatens to fuel more volatility.

Opportunistic traders who rush into the market during major world events have had a significant impact on oil prices in recent years. In 2020, as demand concerns pushed prices lower, a massive foray into the market by retail investors helped push US oil briefly into the negative.

The increase in USO volumes this week “coincided with higher-than-usual volatility in crude oil,” said John Love, chief executive of USCF Investments, which manages USO.

A measure of volatility jumped this week to its highest level in two years.

This creates risks for more traditional traders. Retail investors entering the market amid rising geopolitical tension are helping to drive prices higher than fundamentals warrant. If the conflict in the Middle East does not effectively affect crude oil supplies, the market could shrink, according to Scott Shelton, energy specialist at TC ICAP.

Read: Middle East war risk puts spotlight on Iran’s quiet oil comeback

That doesn’t worry Dilmaghani, for one simple reason: “I don’t keep anything overnight.”