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Commodities Slide Further; How Low Can They Go?

Commodities continue to fall fast.

Commodities traders at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
Commodities traders at the New York Mercantile Exchange.

High volatility and less liquidity are contributing to another sharp sell-off as energy and metals retest — or break below — last week's lows.

Oil prices are holding above $95 for now, but gasoline continues to drive the energy market down. Many technical traders expect WTI oil futures will dip to $94 or lower by the end of the week.

RBOB gasoline futures have slid another 2 percentThursday morning, ahead of another margin hike from the CME Group at the close of trading.

Silver is leading the sell-off once again. After rising to new 31-year highs for most of April, silver futures are set to post the biggest two week decline in 25 years, plunging more than 5 percent this morning. Technically, traders say silver—which traded near $50 an ounce two and a half weeks ago—could break below $31 before the weekend.

"Traders, brokerage firms, and exchanges are making a collective reassessment of the risk in the market and their models used to quantify this risk,” says trader John Netto of M3 Capital. “As a result, traders and hedge funds are unwinding positions further in oil, silver, copper and other markets to reflect this."

Energy, metals and other commodities are highly correlated and many traders are having to deleverage positions — increasing their selling — to manage risk.

For energy traders, "the higher volatility also means that the new money coming into oil has to trade in smaller size due to the increase in 'value at risk,'" says Petromatrix analyst Olivier Jakob. "Large speculators that have accumulated record length in crude and that might want to save whatever profit they have in the books by selling their length will be met by buyers that can only trade on smaller clips due to the increase in the 'value at risk.'"

Fearing the risks are too high right now — especially in the face of increased margin rates — traders are heading for the exits and commodity prices head further south.

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