Tuesday, July 15, 2008

Oil has Become a Volatile Place

From MarketBeat:
When measured in percentage terms, this decline in crude oil is dramatic, but not ridiculous. In dollar terms, it’s pretty darned significant, more so because of the violent nature of the reversal, as crude had rallied earlier in the day before turning around for various reasons.

Some analysts were linking the decline in crude to remarks from Federal Reserve Chairman Ben Bernanke, and others pointed to economic data, rumors of fund managers dumping positions, and worries about Wednesday’s data on oil inventories. The August crude contract hit a high of $146.73 today, and was lately at $137.89 on the New York Mercantile Exchange.

But the overarching explanation for the activity today is the volatile market itself. Traders note that open interest (that’s outstanding positions) has steadily declined since the beginning of the year, resulting in wilder gyrations than in the past. Furthermore, the sharp decline triggered so-called stop orders, where fund managers automatically sell contracts after the price breaches a particular level. Several traders reported seeing activity of this type, exacerbating the declines....MORE