Rapid plunge in oil futures leaves traders guessing

Discussion in 'Peak Oil' started by Quigley_Sharps, Sep 18, 2012.

  1. Quigley_Sharps

    Quigley_Sharps The Badministrator Administrator Founding Member

    (Reuters) - Four minutes of hectic high volume activity that sheared $4 off the price of oil late Monday left traders, analysts and U.S.regulators looking for the cause of one of the fastest and most furious energy market routs in recent years.
    In the absence of any major headline news that could have explained the drop, which hit both international benchmark Brent crude and U.S. oil futures, many traders and analysts speculated that the dramatic drop could have been caused by an incorrectly entered trade -- a "fat finger error" -- or a high frequency trading program gone wrong.
    Another potential cause -- rumors of a possible release of oil by the United States from its strategic reserve to bring down prices -- appeared to have been countered by quick government denials of such a move.
    Federal regulator the Commodity Futures Trading Commission(CFTC) is "looking into" the quick price drop, said commissioner Scott O'Malia, and has contacted exchange operators the CME Group and the IntercontinentalExchange Inc .
    ICE's front-month November Brent crude, which had opened at $116.67 a barrel, at one point plunged $5.17 a barrel to $111.50. It fell by $3.60 a barrel in a three-minute period between 1:52 p.m. EDT and 1:55 p.m. (1752-1755 GMT). From nearly one minute to the next, volume of trading spiked.
    Between 1:51 and 1:52 p.m. EDT, 151 lots of front-month October U.S. crude traded on the New York Mercantile Exchange, which is owned by CME Group, according to Reuters data. Three minutes later, volume spiked above 13,000 lots within a minute, more than 100 times higher than minutes before.
    U.S. crude futures plunged in that time, although not as sharply London's Brent market. Brent began to recover after a sharp 3-minute drop, with Brent crude settling at $113.79 a barrel, off $2.87 on the day, having dropped as low as $111.50. U.S. crude settled at $96.62 a barrel, off the low of $94.65.
    Volatility is common in oil trading, and headlines that suggest a significant change in oil supply balances -- whether due to refinery outages, rising oil production or falling oil demand -- can sometimes quickly move oil prices within seconds.
    "All of a sudden it just dropped, then it snapped right back up. Then you had 50-to-75-cent moves, so you saw guys just stay away from it. From there it was just a barrage of rumors," said John Woods president of JJ Woods & Associates, a brokerage on the floor of the New York Mercantile Exchange (NYMEX).
    "Everybody was asking the same thing: What the hell is going on here?"
    Rapid and sharp price moves over a very short period of time with no clear cause -- such as the one seen on Monday -- remain relatively rare.
    During intra-day trading on May 5, 2011, U.S. oil futures plunged by as much as $13 a barrel and closed down by $10 a barrel. Many traders then blamed waves of computer-driven selling by banks and hedge funds for much of the drop, in the absence of any major news that could have explained it otherwise.
    The CME Group said it had not experienced any technical failures and that it would not cancel any oil market trades that occurred during the price drop. The exchange said that energy markets including crude, gasoline and heating oil futures "saw a coordinated sell-off of a prolonged duration of 30 minutes" beginning around 1:50 p.m. in New York.
    The Intercontinental Exchange, whose ICE platform is the biggest venue for trading Brent Futures, declined comment.
    Traders and energy analysts offered several speculative explanations for the brusk fall, but none could immediately be substantiated, including a "fat finger" incident by a major crude trader. Reuters was not able to identify any potential culprit.
    Another explanation was a sell off led by algorithms programmed into super-computers, which many large hedge funds and banks use for oil trading, which could have been triggered by technical factors and then exacerbated by a lack of liquidity due to traders off for the Rosh Hashana holiday.
    Other potential causes for the drop were mostly dismissed. The White House said it had made no decision on whether it could release barrels from the U.S. Strategic Petroleum Reserve, a possibility that has been closely watched by traders in recent weeks, after a Gulf Coast hurricane reduced U.S. oil production and amid threats of more supply disruptions from sanctions-prone Iran.
    An SPR release remains an option "on the table," the White House said on Monday, but no decision has been made and it had no further announcement after crude prices fell in the afternoon.
    One veteran energy markets risk manager said the abrupt crude price fall in the course of just seconds in New York trading on Monday afternoon was "the fastest move I've ever seen."
    "I think it was too fast to be anything but HFT (high-frequency trading) or other algos (algorithmic traders). We just don't know right now, but that's my gut feeling," said John Gretzinger at INTL-FCStone in Kansas City.
    (This story fixes the spelling of sheared in first paragraph and changes rapid and rapid to rapid and sharp in paragraph 11)
    (Reporting by Joshua Schneyer, additional reporting by Robert Gibbons, Jeanine Prezioso, David Sheppard, Eileen Houlihan, Edward McAllister and Matthew Robinson; Editing by Bob Burgdorfer)
  2. Quigley_Sharps

    Quigley_Sharps The Badministrator Administrator Founding Member

    Someone in the know please explain this to me? Its about supply and demand still right?
  3. TheEconomist

    TheEconomist Creighton Bluejay

    What I am thinking is that there might be some form of market manipulation going on if this wasn't a trading error.

    This is from the CFA Institute:

    "Market manipulation includes practices that distort security prices or trading volume with the intent to deceive people or entities that rely on information in the market. Market manipulation damages the interests of all investors by disrupting the smooth functioning of financial markets and lowering investor confidence. Although market manipulation may be less likely to occur in mature financial markets than in emerging markets, cross-border investing increasingly exposes all global investors to the potential for such practices.
    Market manipulation includes 1) the dissemination of false or misleading information and 2) transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments. The development of new products and technologies increases the incentives, means, and opportunities for market manipulation.

    Transaction-Based Manipulation
    Transaction-based manipulation involves instances where the member or candidate knew or should have known that his or her actions could very well affect the pricing of a security. This includes, but is not limited to, the following:
    transactions that artificially affect prices or volume to give the impression of activity or price movement in a financial instrument, which represent a diversion from the expectations of a fair and efficient market; and
    securing a controlling, dominant position in a financial instrument to exploit and manipulate the price of a related derivative and/or the underlying asset.
    Standard II(B) is not intended to preclude transactions undertaken on legitimate trading strategies based on perceived market inefficiencies. The intent of the action is critical to determining whether it is a violation of this standard.

    (Creating Artificial Price Volatility): Matthew Murphy is an analyst at Divisadero Securities & Co., which has a significant number of hedge funds among its most important brokerage clients. Some of the hedge funds hold short positions on Wirewolf Semiconductor. Two trading days before the publication of the quarter- end report, Murphy alerts his sales force that he is about to issue a research report on Wirewolf that will include the following opinion:
    quarterly revenues are likely to fall short of managements guidance, earnings will be as much as 5 cents per share (or more than 10 percent) below
    consensus, and
    Wirewolfs highly respected chief financial officer may be about to join another company.
    Knowing that Wirewolf has already entered its declared quarter-end quiet period before reporting earnings (and thus would be reluctant to respond to rumors), Murphy times the release of his research report specifically to sensationalize the negative aspects of the message in order to create significant downward pressure on Wirewolfs stockto the distinct advantage of Divisaderos hedge fund clients. The reports conclusions are based on speculation, not on fact. The next day, the research report is broadcast to all of Divisaderos clients and to the usual newswire services.
    Before Wirewolf s investor-relations department can assess the damage on the final trading day of the quarter and refute Murphys report, its stock opens trading sharply lower, allowing Divisaderos clients to cover their short positions at substantial gains.
    Comment: Murphy violated Standard II(B) by aiming to create artificial price volatility designed to have a material impact on the price of an issu- ers stock. Moreover, by lacking an adequate basis for the recommendation, Murphy also violated Standard V(A)Diligence and Reasonable Basis."
  4. Minuteman

    Minuteman Chaplain Moderator Founding Member

    The price of oil is affected more by the Wall Street speculators than anything any oil company could ever do to influence it. The price goes up when they think the supply might go down and the opposite when they bet on supply increasing. Supply and demand drives it but the speculators manipulate it. It is a world wide commodity and no single company, country, or speculator can influence the price to any significant degree. This wild ride only resulted in a $4 drop in price. When it is over $100 a barrel, 4 bucks is chump change.
    ghrit and TheEconomist like this.
  5. DarkLight

    DarkLight Live Long and Prosper - On Hiatus

    No Quig, it hasn't been about supply and demand for decades. The closest it's been to that is during the summer driving season when they know there will be a demand for it and they simply raise the price because they can.
    The supply never really drops during the summer months and the BS about refining capacity dropping during that time is manufactured. But I have a feeling you already knew that. :)
    Quigley_Sharps likes this.
  6. TheEconomist

    TheEconomist Creighton Bluejay

    Actually it all started when they began using this thing called:
    Supply chain management!
  7. gasman28110

    gasman28110 Monkey+

    Actually the dollar is worth less, there for the price of oil goes up. COME ON QE3 CAN'T WAIT TO SEE HOW LOW WE CAN GO.
  8. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

    Not QE3 it's QEAdNauseum because they (the fed) keep boosting the money supply nailing us with the hidden tax (inflation). As the dollar gets weaker the prices we pay for gas goes up (not including speculation factors). Our worthless dollar is worth less :)

    When the world wakes up and figures out that Fiat Currency is just 'Money by Force' and not backed by anything well, expect runs on the banks, store to get out of worthless paper and into tangibles like toilet paper, cans of tuna, baked beans and veggies.

    We do not have money any more. It's just a piece of paper that says 'You must accept this as money'

    Give me some pre 1965 silver coinage, now there is money. Anything else is just the ability of the issuer to FORCE you to accept it. Along with the power (military force) to allow you to force your will upon others to accept it too!


    The term fiat money has been defined variously as:
    • any money declared by a government to be legal tender.[5]
    • state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.[6]
    • money without intrinsic value.[7][8]
    While gold or silver-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of gold or silver, fiat money's value is unrelated to the value of any physical quantity. Even a coin containing valuable metal may be considered fiat currency if its face value is higher than its market value as metal.
    oldawg likes this.
  9. Cruisin Sloth

    Cruisin Sloth Special & Slow

    So slowly [We've] been pulling RIFF'S RSPs out .
    If fiat dyes , my investments are toast AGAIN.

  10. gasman28110

    gasman28110 Monkey+

    That would be true sir.
  11. Fusion Cell

    Fusion Cell Monkey++

    There is nothing to guess here. Oil production has increased massively from shale oil. Production will continue to increase. Prices will drop slowly because it is expensive to extract, but getting cheaper.

    WTI crude is now $85 a barrel. Brent is $109. I predict oil will trade in it's current range +/- 15% for the next two years.
  12. Seawolf1090

    Seawolf1090 Retired Curmudgeonly IT Monkey Founding Member

    Just yesterday a couple local stations here have regular E10 gas at $3.27 a gallon - lowest price in quite some time! Need to get my Hurricane Supply built back up - need to refill four 5Gal cans and treat with Marine Stabil
    We've dropped from $3.79 to $3.27 in less than two months! Gotta love it. Hope it keeps dropping, but I know it's only temporary......
  13. UGRev

    UGRev Get on with it!

  14. ghrit

    ghrit Bad company Administrator Founding Member

    The Act provides for waivers, as it should. Good on the maritime industry for standing up for the people rather than their own interests. (Looks like a gesture, since there's enough properly flagged shipping available, but still --)
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