One of the beauties of the crude oil market specifically, and commodity markets in general, is that active traders and investors only have one equation to analyze: supply versus demand. It’s a matter of looking at how much product is out there and how much of the supply consumers want right now. That isn’t to say that there are not complex dynamics around each of those two inputs, but it all boils down to simple economics 101. There are no earnings misses, no stock splits, no executive scandals, no rebalancing (as in ETFs)… just supply and demand. 

But complex dynamics and forces – whether manmade or otherwise – have the power to alter both supply and demand. Take, for example, the pandemic-induced drop in demand for crude oil, which turned out to be temporary and has almost fully recovered. There are also seasonal demand swings for crude, clearly exemplified by the well-known “summer driving season.” You can see this seasonal price action and the impact of the summer driving season in the chart below.

In April of 2020, in response to the lockdown-induced decrease in demand, OPEC+ announced the biggest production cut in its history, or almost 10 million fewer barrels per day. (However, they eventually landed on cuts of about 5.8 million barrels per day.) One year later, as economies started to emerge from the pandemic lockdowns, demand and WTI futures prices were both up, prompting OPEC+ to commit to gradually curbing those output cuts. The number of barrels being put back in the market would be decided upon at future meetings, as Saudi Arabia has previously encouraged allied partners to remain cautious on production policy while warning against complacency as it tries to manage a full price recovery in the oil market.

Then on July 12, CME Group launched Micro WTI Crude Oil futures, which are one-tenth the size of the standard contract. A trader could more finely tune their opinion that a deal between the two OPEC members was inevitable given the demand pressures. The smaller-sized contract allowed easily established short positions with reasonable stops to be placed above the highs of the new range, which was anywhere from $2 to $4 away, depending on where someone placed their short trade entry. That translated into $2,000 to $4,000 risk in the standard contract and $1,000 to $2,000 in the E-Mini Crude Oil futures contract. With the Micro, however, it would only be $200 to $400 of risk.

As many expected, a deal was eventually reached within OPEC that would ramp up production by 400,000 barrels a day each month beginning in August of this year and fully phase out the pandemic-fueled cuts by September 2022. On the news of the expanded supply – coupled with new threats to demand from the Delta COVID-19 variant – crude quickly sank 7.28% in just one day. The possibility of that kind of one-day move is exactly what caused many traders to fear looking into a well-researched crude oil trade. The new CME Group Micro WTI Crude Oil futures contract offers a more precise way to participate in these markets.