Could Retail Traders Move the Price of Oil? The Short Answer Is Yes. - Barron's

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The market for oil is far more liquid than for shares of individual small-cap companies.

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GameStop was in many ways the perfect stock for retail traders looking to show their power and teach Wall Street a lesson. The market for the stock was small enough to be affected by an influx of new money, and short interest was so high that shares were vulnerable to a squeeze.

Retail investors have since turned their eyes on bigger targets, with mixed results. A bet on silver paid off initially but quickly fizzled out. Now, some analysts are considering what other assets might be vulnerable to a coordinated spree of buying or selling by retail investors.

RBC Capital Markets analyst Michael Tran took a look at whether the oil market could be on the list.

Tran notes that prices of oil futures, like those for all commodities, are driven by a market for physical goods, Supply and demand are the key. Although oil futures briefly fell below $0 last April, they quickly reverted back to a more reasonable price as actual oil changed hands between producers and refiners.

But Tran doesn’t think the oil market is invulnerable. “The oil market is too big to squeeze, right? Think again,” he writes.

While trading volume for GameStop stock is generally much lower than for oil, last week’s action in the shares revealed that retail traders can push volumes to enormous levels with coordinated action.

And while oil trading is much more liquid than the market for individual small-cap stocks, “the notional dollars that fueled the GameStop (GME) and AMC Entertainment Holdings (AMC) price move rivaled that of the WTI benchmark,” Tran writes, referring to futures for West Texas Intermediate crude.

“Daily volumes weighted by price suggests $15.9 billion worth of spot WTI trades daily over the past year, which compares to $609 million and $224 million for GME and AMC. However, $20 billion in trading has underpinned WTI contracts relative to $18.9 billion for GME and $7.2 billion for AMC over the past week.”

While the average volume may not match the oil market “it is often the pace or the velocity of the capital flow that can be most influential to near-term price action,” he says. Still, a short squeeze may not be in the offing: Short interest is relatively low in the oil market, and is actually below historical averages.

RBC also looked at whether retail traders seem interested. The early evidence seems to show that they’re not.

The firm analyzed millions of posts on Reddit over the past month and found only 136 that referenced the oil market. Other measures of social- media sentiment also showed relatively low interest, and mixed views about the asset, indicating that there isn’t much momentum for a big push to move the price.

Oil traders, for now, can watch the GameStop trade with fascination, but perhaps not fear.

Write to Avi Salzman at avi.salzman@barrons.com

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