Three Weeks Of Energy Gaines Wiped Out In A Minute

On September 18, 2012 by TradingDesk

The major story Monday was a rapid plunge in energy prices that wiped out 3 weeks of gains in less than 1 minute, and left the market asking “what just happened?” There were not any major supply announcements (despite lots of rumors of a Strategic Petroleum Reserve release) and the CFTC said they would not be cancelling any trades, suggesting it was not a “fat finger” or other mistaken trade that caused the wild swing.

It may simply be that the market has been trading on very light volume for several weeks, and we had a very high amount of “noncommercial” (speculative) interest in the market, as is shown in the 1st chart below.

So, it appears that when a big volume order hit in a very short period of time, the market just wasn’t able to handle it right away, although it did recover in a few minutes. The 2nd chart shows the day’s trading broken down into one minute increments. As you can see, the HO contract dropped 8 cents in 1 minute, only to bounce back over the next 2 minutes. The speed of that move suggests that high-frequency trading algorithms were involved, although it’s impossible at this point to say if they were the cause.

What we do know is that the bounce following the selloff sets up strong chart support, at $2.86 for RBOB, $3.09 for HO and $94 for WTI. With tensions building in the middle east, it seems that breaking below these levels is unlikely, but if yesterday’s move prompts the “hot money” speculative interest to head for the exits, all bets are off.

CLICK HERE for a PDF of this morning’s charts


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