The oil market has been extremely volatile as it faces a liquidity crunch and geopolitical tensions on multiple fronts. For investors, higher prices isn't always a good thing. Big swings mean fewer people wanting to trade it. That's best exemplified in this chart, which shows Brent crude's open interest is at its lowest since 2015.
Arguably the more notable trend is that there's been a decline in open interest throughout 2021 as oil prices rose. There are two reasons for that. The first is higher margins, otherwise known as the cost of trading oil. Given that cost is linked to volatility, it's effectively been getting more expensive to hold the same number of contracts.
The second reason for the decline is dropping inventories. Traders that hold supply in oil tankers hedge using futures contracts. So when those tanker-held inventories fall, so does open interest. All in all, it means fewer people want to trade oil. Add on bigger swings and spreads, and it creates a very illiquid trading environment.
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