Oil’s Dramatic Open Leaves Traders Puzzled After WTI Crashes

(Bloomberg) -- After a wave of selling over the last week it was little surprise when US crude futures opened lower on Thursday, but few traders were braced for the 7.2% plunge that unfolded in the first dramatic minutes of trading.

West Texas Intermediate plummeted by almost $5 a barrel for a few seconds shortly after the open in Asia at 6 a.m. in Singapore, then recovered. When trading kicked off a couple of hours later in global benchmark Brent, it failed to respond in kind, merely shedding a little more than $1 a barrel.

Puzzled traders and analysts suggested a myriad of possible factors but none was definitive: speculators abandoning bullish bets; a possible fat-finger trade; algorithmic selling; and even a giant options position earlier this week that now looks to be loss-making were all touted as explanations.

“My first thought was that it must have been a fat finger,” said Warren Patterson, head of commodities strategy at ING. “But it could just have been someone closing out, and that kind of volume is going to be felt at that time.”

Another seasoned market watcher in Singapore, Vandana Hari, talked of “panic selling.”

The rapid swoon and swift retracement is the latest wild swing in a tumultuous six-week period in the global oil market, with prices surging on OPEC+ supply cuts only to be dragged back down by concerns that slower global growth and US banking worries will eviscerate demand and sap risk appetite.

The bizarre drop came in early Asian hours, often some of the thinnest trading moments. Still, the timing was unusual. Normally, sharp moves happen right at the open, exemplified by the surge that followed the recent OPEC+ reduction. This time, however, it took a few minutes before prices shifted substantially.

In the fifth minute of the session, more than 3,000 June futures contracts changed hands. Over that span, prices suddenly plunged by more than $3 to hit a nadir of $63.64 a barrel, the lowest intraday level since late 2021. Just three minutes later, WTI futures were back at $66 a barrel, and it then took little more than three hours for prices to eventually turn higher on the day.

The scale of the move will raise fresh questions about the health of liquidity in the market, particularly given the move was concentrated in WTI, while Brent remained insulated. Thinner volumes and outsized price moves have been a key feature in commodities markets, when elevated margins reduced activity.

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