Micro Crude Futures Offer Lower-Cost Oil Trading

March 20, 2023 Beginner
Micro WTI Crude Oil futures offer smaller-sized contracts, allowing traders the opportunity to get precise exposure to the oil market but with a reduced financial commitment.

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. Qualified retail futures traders can gain exposure to crude without having to pony up big bucks for ringside seats.

The CME Group launched Micro WTI Crude Oil (/MCL) futures in 2021. These micro contracts are linked to the exchange's benchmark WTI Crude Oil (/CL) futures contract but require less money up front. Like 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 they still carry the same risks as 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 /MCL, could help qualified investors navigate risks and protect or diversify their portfolios.

Crude oil is at the epicenter of the global energy marketplace because most energy companies are highly correlated to oil prices, which can be volatile. For qualified retail investors, /MCL contracts offer additional flexibility to gain exposure in 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 the CME Group's Micro WTI Crude Oil futures and how they might be applied to an 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 get you exposure to 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 set aside as a good faith deposit.

One CME standard WTI Crude Oil (/CL) futures contract represents 1,000 barrels of oil (WTI stands for West Texas Intermediate grade crude, the U.S. benchmark). Micro WTI Crude Oil (/MCL) futures are one-tenth the size of the standard contract and represent 100 barrels of oil. This means the /MCL contract's margin requirement is also one-tenth that of its larger counterpart. During December 2022, the initial margin requirement for one standard /CL futures contract was $7,700, and the margin requirement for a /MCL contract was $770.

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

Trading oil futures

Crude oil prices can be volatile because of global conflicts, economic conditions, issues in drilling and transportation, and other factors, which is 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 more than 825,000 contracts changed hands each day in 2022.

CME's micro futures based on the S&P 500 index and other equity benchmarks have grown rapidly in recent years, reflecting the growing acceptance of futures and expanding demand from retail traders and others for smaller contracts and more choices.

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 /MCL 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 /MCL futures. 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 you're concerned that a drop in oil prices or other short-term events 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. However, it's important to remember that any trading strategy comes with risk; taking the opposite hedge position in this scenario can limit the potential portfolio gains a trader would have realized, should the market go against the hedge. Additionally, a short hedging position can present unlimited risk, so approach cautiously, as with any trade.

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

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

Futures, futures options, and forex trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.

Trading on margin increases your level of market risk. Your downside financial risk is not limited to the amount of equity in your account. Charles Schwab Futures and Forex LLC may liquidate any or all of your positions at any time if your account equity drops below required margin levels. Charles Schwab Futures and Forex LLC may increase its "house" maintenance margin requirements at any time and is not required to provide you with advance notice. You are not entitled to an extension of time on any type of margin call.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Charles Schwab Futures and Forex LLC (NFA Member) and Charles Schwab & Co., Inc. (Member FINRA/SIPC) are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.