New Micro Crude Futures Offer Lower-Cost Ticket into Oil Patch

CME Group is now listing Micro WTI Crude Oil futures. Approved account owners can now trade them on the thinkorswim® platform. Here’s what you need to know. field: New Micro Crude Oil futures
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Key Takeaways

  • Crude oil is the most actively traded commodity, and most energy companies are correlated to oil prices

  • CME Group’s new Micro WTI Crude Oil futures are one-tenth the size of the exchange’s standard Crude Oil contracts

  • Micro Crude futures can help investors gain portfolio flexibility and exposure to the oil markets at lower cost

Among commodities, crude oil is the undisputed heavyweight champ. The world’s most actively traded commodity is in the news every day and affects everyone in one way or another. Does that mean trading crude oil futures is only for the biggest and baddest? Not at all. Retail futures traders are gaining opportunities to take a crack at crude without having to pony up big bucks for ringside seats.

On July 12, 2021, CME Group launched Micro WTI Crude Oil futures (available on the thinkorswim® platform under ticker /MCL). These micro contracts are linked to the exchange’s benchmark WTI Crude Oil futures contract (/CL) but require less money up front. Similar to CME Group’s micro contracts based on bitcoin (/MBT) and the S&P 500 Index (/MES), Micro WTI Crude Oil futures pose smaller and potentially more cost-effective opportunities for futures newcomers to gain exposure to crude oil. Of course, micro futures aren’t suitable for everyone and still have the same risks as the full-size contracts.

The recovery from the COVID-19 pandemic illustrates the importance of oil and other commodities in the global economy. In an uncertain environment, alternative investments, such as Micro Crude futures, could help qualified investors navigate risks and protect or diversify their portfolios, according to Adam Hickerson, senior manager, Futures & Forex, at TD Ameritrade.

“Crude oil is at the epicenter of the global energy marketplace,” Hickerson said. “Most energy companies are highly correlated to oil prices, which can be volatile. For qualified retail investors, Micro Crude futures offer additional flexibility to gain exposure into the crude oil market, for hedging or for speculation, at a fraction of the cost of traditional futures contracts.”

Here are a few basics on CME Group’s new Micro WTI Crude futures and how Micro Crude futures could be applied to investing or trading strategy.

Micro Crude Futures Require Lower Margin than Full-Size Oil Futures Contracts

Futures contracts, which are agreements to buy or sell a predetermined amount of a commodity or financial product on a specified date, are typically highly leveraged—meaning a relatively small amount of money can control a relatively large amount of underlying value (often referred to as “notional” value). Oil futures, like other commodity futures contracts, are traded by using a margin requirement, which is cash that is set aside as a good faith deposit.

One CME standard WTI Crude Oil futures contract (/CL) specifies 1,000 barrels of oil (WTI stands for West Texas Intermediate grade crude, the U.S. benchmark). Micro WTI Crude Oil futures (/MCL) are one-tenth the size of the standard contract and represent 100 barrels of oil. This means the Micro contract’s margin requirement is also one-tenth that of its larger counterpart. As of July 13, 2021, the initial margin requirement for one standard WTI Crude Oil futures contract was $7,950, and the margin requirement for a Micro Crude Oil futures contract was $795, which is around 9% of the notional value.

Remember, if you’re considering trading futures, make sure you understand the basics of futures margin. Regardless of how large a position is, remember that with more leverage comes risk. Leverage can magnify profits and losses, which means an investor or trader could lose much more than the initial amount deposited.

Oil Grabs Headlines and the Liquidity Pool Is Deep

Crude oil prices recently surged to the highest levels in seven years, and energy companies were among the top performers in the S&P 500 during the first half of 2021. Those are just a couple recent examples of why oil is often in the news and why the oil market generates among the highest, if not the highest, trading volume of any commodity.

Trading volume is an important indicator of liquidity, reflecting whether a market has ample buyers and sellers and that orders are executed quickly and efficiently. In CME’s standard WTI Crude Oil futures contract, for example, slightly over 1 million contracts changed hands each day during the first half of this year.

CME’s Micro futures based on the S&P 500 Index and other equity benchmarks have grown rapidly in recent years, reflecting in part the “growing acceptance of futures and expanding demand from retail traders and others for smaller contracts and more choices,” Hickerson said.

Futures Can Help Provide More Capital Efficiency

Because futures are leveraged, traders can open positions that don’t tie up a lot of capital for long periods of time. Smaller products like Micro Crude can make it less expensive for retail traders and investors to take positions in the oil market, and they can gain futures exposure while avoiding pricier contracts.

“Similar capital efficiency plays can be applied to Micro Crude futures,” Hickerson explained. For example, suppose you hold shares of a major oil and gas exploration company or oil field services provider you want to keep for the long haul, but are concerned about short-term events, like a drop in oil prices, that might hurt the value of your holdings. A hedging strategy based on Micro Crude futures may offer the potential to ride out such events without having to part with the underlying assets.

Hedging is just one way in which qualified traders can use Micro Crude Oil futures—and other futures. Interested in learning more? Consider watching the video below.

Futures and futures options trading involves substantial risk, and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products.

Futures and futures options trading services provided by TD Ameritrade Futures & Forex LLC, member NFA. Trading privileges subject to review and approval. Not all clients will qualify.

Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).

Bruce Blythe is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.


Key Takeaways

  • Crude oil is the most actively traded commodity, and most energy companies are correlated to oil prices

  • CME Group’s new Micro WTI Crude Oil futures are one-tenth the size of the exchange’s standard Crude Oil contracts

  • Micro Crude futures can help investors gain portfolio flexibility and exposure to the oil markets at lower cost

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