Oil ‘tourists’ pile into market amid biggest rally in two years

NEW YORK – Mr Reza Dilmaghani mostly trades equities, but, for the past week, he has been dipping in and out of the oil market, lured by crude’s biggest weekly rally in nearly two years. 

“This week has been great,” said Mr Dilmaghani, a Phoenix-based day trader who has been trying to capitalise on the market’s short-term direction. “Ever since we reached US$67, it’s been going up quite steadily and orderly,” he said. “When it’s orderly, it’s great.” 

He is not the only so-called oil “tourist” flocking to the market as war risk sends futures surging. With Iran’s attack on Israel sending oil prices skyrocketing by more than US$6 a barrel in the past week, retail investors are piling into oil-linked products.

Volumes in the United States Oil Fund (USO) – the largest exchange-traded product tracking the price of oil – surged in the week of Sept 30 to their highest levels since Russia invaded Ukraine in 2022.  Similarly, CME Group’s Micro WTI futures – which trade on retail investment sites – posted the biggest daily volume since January in the same week. The company’s weekly options, which traders use to hedge short-term risk in prices, saw open interest jump to a record of almost 80,000 contracts.

While that is bringing much-needed liquidity into a futures market that has sidelined commercial players, it is also threatening to fuel more volatility. Opportunistic traders that pop quickly in and out of the market during major world events have had a significant impact on oil prices in recent years. In 2020, as demand concerns sent prices spiralling lower, a massive incursion of retail investors into the market contributed to US oil briefly turning negative. 

The jump in USO volumes in the week of Sept 30 “coincided with higher-than-usual crude oil volatility”, said Mr John Love, chief executive of USCF Investments, which manages USO. 

One measure of volatility jumped to the highest level in two years. 

That creates risk for more traditional traders. Retail investors piling into the market on the back of escalating geopolitical tensions are helping to boost prices higher than fundamentals justify. If the conflict in the Middle East does not actually impact crude supplies, the market could tank, according to energy specialist Scott Shelton from TP ICAP. 

That does not worry Mr Dilmaghani, for one simple reason: “I do not hold anything overnight.” BLOOMBERG