In an unforeseen turn of events, US crude futures experienced a significant decrease in value at the beginning of Thursday trading. Market participants were taken aback as West Texas Intermediate (WTI) prices witnessed a staggering 7.2% decline within the initial minutes of trading activity.
The WTI experienced a near-$5 per barrel drop in value shortly after the market opened at 6 a.m. in Singapore. However, despite the sudden decline, prices quickly rebounded. Interestingly, the global benchmark Brent did not follow suit, losing just over $1 a barrel in value.
The Search for Explanations Amidst US Crude Oil Market Confusion
Market experts and traders proposed various theories to explain the abrupt drop in WTI prices, yet no single factor emerged as definitive. Speculators abandoning bullish bets, a potential fat-finger trade, algorithmic selling, and a large options position earlier in the week resulting in losses were among the explanations put forward.
Warren Patterson, Head of Commodities Strategy at ING, initially believed a fat-finger trade might be the culprit, but later conceded that “it could just have been someone closing out, and that kind of volume is going to be felt at that time.” Vandana Hari, another seasoned market analyst based in Singapore, attributed the event to “panic selling.”
Turbulent Times in the Global Oil Market
The rapid decline and swift recovery in WTI prices added to the series of erratic fluctuations witnessed in the global oil market over the past six weeks. Prices initially soared due to OPEC+ supply cuts, only to be dragged down by concerns over slowing global growth, US banking issues, and the potential impact on oil demand and risk appetite.
The unexpected drop in WTI prices occurred during early Asian trading hours, typically characterized by low trading volumes. However, the event’s timing was peculiar, as substantial price movements typically occur immediately after the market opens. This time, prices remained stable for a few minutes before experiencing a dramatic drop.
Analyzing Liquidity and Market Health
In the fifth minute of trading, over 3,000 June futures contracts exchanged hands, causing prices to plummet by more than $3 and reaching an intraday low of $63.64 a barrel – the lowest level since late 2021. A mere three minutes later, WTI futures recovered to $66 a barrel and continued to rise throughout the day.
The extent of the price movement raises concerns about US crude oil market liquidity, mainly as the fluctuations were exclusive to WTI, while Brent remained relatively stable. In addition, reduced trading activity due to elevated margins has resulted in thinner volumes and pronounced price swings in commodities markets, prompting further questions about overall market health.