Energy

Oil went through a flash crash overnight, putting an already fragile market on edge

Key Points
  • At about 11:17 pm ET, U.S. West Texas Intermediate crude was trading at $45.36. By 11:31 pm ET, it had plunged 3 percent to a low of $43.76, the lowest price since Nov. 15.
  • Analysts and traders say this week's sell-off is due to oil futures breaking through a number of key technical levels, forcing market participants to liquidate their positions
  • They blamed margin calls and computer trading for the sudden drop overnight.
Oil marooned near five-month lows
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Oil marooned near five-month lows

Oil prices plunged below $44 a barrel overnight in a matter of minutes, putting the market on edge as futures tested yet another key technical level. Traders blamed forced margin calls and computer trading for the so-called flash crash but were not quite sure what caused the drop.

At about 11:17 p.m. ET, U.S. West Texas Intermediate crude was trading at $45.36. By 11:31 p.m. ET, it had plunged 3 percent to a low of $43.76, the lowest price since Nov. 15. Futures then rebounded slightly back above $44 and stayed there for awhile until rallying back above $45 by 4 a.m. ET.

U.S. West Texas Intermediate crude futures 2-day performance

The flash crash was frightening to traders who bet on higher oil prices, "but it looks to be anomalous even in a market that is technically very weak and searching for strong fundamentals," said Tom Kloza, global head of energy analysis at Oil Price Information Service.

"So for now, it looks to be more of a brief nightmare than a template for the next couple of days," he told CNBC in an email.

Futures have plunged through a number of key levels this week. The sudden drop brought it within striking distance of another "major support zone" at $42.70, which Seaport Global Securities flagged on Thursday.

A close below $44 a barrel could trigger technical targets in the neighborhood of $40.50 a barrel, Kloza said.

John Kilduff, founding partner at energy hedge fund Again Capital, said the overnight plunge looks like forced margin-call selling. Kilduff added that he would not be surprised to hear that a hedge fund "blew up," meaning it was forced to sell its positions.

International benchmark also extended losses overnight, dropping to $46.64 a barrel after breaking below $50 on Thursday for the first time in six weeks.

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OPEC hasn't taken crude oil exports off the markets: Analyst

More important than Brent falling below $50 a barrel is the drop in both Brent and WTI below their 200-day moving averages, according to Matt Smith, director of commodity research at tanker tracking firm ClipperData.

"Breaking through that sort of long-term trend line has really just forced this waterfall of sell orders to come in, and that's why once we broke those levels we saw a huge sell-off overnight," he told CNBC Asia.

Traders say so-called sell stops — or trades set to execute once an asset reaches a certain price level — sparked sharp declines first on Tuesday afternoon and again on Thursday.

Yesterday's close triggered a liquidation in long positions — or bets that oil prices will rise — which accelerated when U.S. crude breached $45 a barrel, said Andy Lipow, president of Lipow Oil Associates. The extension of the liquidation can be seen in the rise in trading volume for WTI's front-month contract to over 340,000, he said.

Traders tell CNBC there were no major headlines pushing prices below key technical levels, though a disappointing report on U.S. crude stockpiles and news of higher output in Libya has weighed on market sentiment this week.

Oil prices rebounded strongly to end Friday's session about 1.5 percent higher, mostly on signs that Russia is inclined to extend oil production cuts through the second half of 2017. Russia is the largest contributor to a deal among a group of non-OPEC crude exporters to remove more than a half million barrels a day from the market.

The sharp sell-off and subsequent bounce "probably marks a near-term bottom for now," Kilduff said.