Trading equities is Reza Dilmaghani‘s bread and butter, but the past week has seen him diving into the oil market. The reason? He’s been drawn in by the biggest weekly surge in crude oil prices in nearly two years.
“As soon as we hit $67, the upward trend has been steady and predictable,” says Dilmaghani, a day trader based in Phoenix who’s been taking advantage of the market’s short-term fluctuations. “When it’s predictable, it’s fantastic.”
Dilmaghani is not the only trader venturing into oil as geopolitical issues escalate and cause futures to soar. With Iran’s recent attack on Israel boosting oil prices by over $6 a barrel in just one week, retail investors are flocking to oil-linked products in droves.
The Rush For Oil
Notably, the United States Oil Fund, the largest exchange-traded product tracking the price of oil, experienced a flood of activity this week. The volumes were at their highest since Russia’s invasion of Ukraine in 2022.
On the other hand, the Micro WTI futures of CME Group, which are traded on retail investment sites, posted their highest daily volume since January. The company’s weekly options, used by traders to hedge short-term risk in prices, saw open interest leap to a record of almost 80,000 contracts this week.
While this influx brings much-needed liquidity into a futures market that has seen commercial players take a backseat, it also threatens to fuel further volatility.
Potential Risks
Quick-profit seeking traders who pop in and out of the market during major world events have had a significant influence on oil prices in recent years. For instance, in 2020, a massive influx of retail investors into the market led to US oil prices briefly turning negative as demand worries sent prices spiralling lower.
“The increase in USO volumes this week coincides with higher-than-usual crude oil volatility,” says John Love, CEO of USCF Investments, the company that manages USO.
One measure of this volatility soared this week to its highest level in two years, creating potential risks for more traditional traders. Retail investors rushing into the market due to escalating geopolitical tensions are helping to drive prices higher than fundamentals justify. If the conflict in the Middle East doesn’t actually impact crude supplies, the market could nosedive, warns energy specialist Scott Shelton of TC ICAP.
However, this doesn’t concern Dilmaghani, who follows one simple rule: “I do not hold anything overnight.”
- Key Points:
- Escalating geopolitical tensions have caused a surge in oil prices, attracting day traders and retail investors.
- Increased trading activity brings liquidity to the futures market but threatens to fuel more volatility.
- Investors need to tread cautiously as prices may tank if Middle East conflicts do not impact crude supplies.
Overall, the oil market’s current state offers both opportunities and risks. As always, traders and investors must navigate this complex landscape carefully, understanding the potential implications of their decisions.
