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Oil Three-Minute Slide Vexes Vitol as Traders Remain Stumped

September 20, 2012

Oil Three-Minute Slide Vexes Vitol as Traders Remain Stumped

Traders work on the floor of the New York Mercantile Exchange in New York. Photographer: Scott Eells/Bloomberg

Oil’s three-minute plunge yesterday has left traders and analysts from Vitol Group to Commerzbank AG perplexed about the cause.

Crude futures tumbled almost $4 a barrel between 1:51 p.m. and 1:54 p.m. on the New York Mercantile Exchange yesterday, driving prices to their biggest one-day decline in two months. David Fransen, chief executive officer of Vitol’s Geneva unit, said today he didn’t know what was behind the drop. Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, described the decline as “mysterious.”

West Texas Intermediate for October settlement settled 2.4 percent lower yesterday at $96.62 a barrel after trading in a range of almost $5 on the Nymex. The contract fell 47 cents to $96.15 as of 10:22 a.m. local time. Brent slid 2.5 percent in the previous session to $113.79 on the ICE Futures Europe exchange in London and extended its decline to $113.60 today.

“It is difficult not to view this sell-off as technical trading or high-frequency trading on dope,” Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland, said in a note today. “With some market participants on holiday for Rosh Hashanah we can speculate that there were probably some resting stop orders below $115 a barrel which could have helped trigger the move, which then accelerated,” he said, refering to Brent crude futures.

The drop came amid speculation that the U.S. is planning to tap its Strategic Petroleum Reserve. President Barack Obama’s administration hasn’t changed its position, and “all options remain on the table,” Jay Carney, a government spokesman, said in an e-mail yesterday. Saudi Arabia is taking action to reduce the price of oil by pumping about 10 million barrels a day, a Persian Gulf official with knowledge of the matter said today.

SPR Release

“There were persistent concerns about a potential strategic oil-reserve release that dominated the market yesterday,”Myrto Sokou, an analyst at Sucden Financial Ltd. in London, said in a note today.

The speed and magnitude of the price drop may draw the attention of regulators concerned about high-frequency trading and the influence of speculators on commodity markets, according to Weinberg. The U.S. Commodity Futures Trading Commission in Washington said yesterday it will look into the decline.

High-frequency trading uses complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues. It came under regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

‘Raises Antennas’

“When price and volume move so fast and so dramatically, it raises our antennas immediately,” CFTC Commissioner Bart Chilton said. “We need to get a quick visual on what happened and why. In this sort of circumstance, I always want to know what the cheetah traders, the high-frequency traders, were doing.”

Commissioner Scott O’Malia said the CFTC is contacting CME Group Inc., owner of the Nymex, and IntercontinentalExchange Inc. to find out more.

The price decline may have been a reaction to the European Central Bank’s decision not to buy as many bonds as anticipated in its efforts to shore up the euro, Fransen said at a presentation to the British-Swiss Chamber of Commerce in Geneva today. Sudden, unexpected movements can also be caused by algorithmic trading, he said.

‘Profit-Taking Strategy’

About 7 percent of the trading volume on WTI was during the slump, or 20,785 lots, Nymex data show. The decline coincided with yesterday’s expiry of the options for the October contract, which settle three days before the futures.

“The fact that the selloff occurred on both exchanges implies that this was no technical glitch, but rather a profit- taking strategy by major market participants that were worried about a price correction,” analysts led byDavid Wech at JBC Energy GmbH, a Vienna-based researcher, said today in a note.

“Markets in the past have seen much bigger changes that could not be attributed to any single specific factor,” such as Brent’s decline on May 5, 2011, when it dropped $10.39 a barrel, the biggest single-day decline in 20 years, JBC said.

To contact the reporters on this story: Lananh Nguyen in London at lnguyen35@bloomberg.net; Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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