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REFILE-WRAPUP 1-Rapid plunge in oil futures leaves traders guessing
September 17, 2012 / 11:18 PM / 5 years ago

REFILE-WRAPUP 1-Rapid plunge in oil futures leaves traders guessing

* Oil drops $4 a barrel in a quick burst of selling
    * White House denies rumor of release from SPR
    * CFTC "looking into" oil market's tumble

    By Joshua Schneyer and Jeanine Prezioso
    Sept 17 (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.   
        
    CME SAYS NO TECHNICAL GLITCH
    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.

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