Glad We Have Stop Losses
Crude oil futures for August rallied to a high of $146.73 early Tuesday morning and then imploded to fall -$10.50 to a low of $136.23 at 11:25 AM. For a futures trader in the e-mini contract that represents a $5,250 gain or loss depending on whether you were long or short at the time and did not have any stop losses in place. The majority of the drop took only about 90 minutes and was clearly liquidation by a major player. Over 8,000 contracts on the full size futures were sold during the drop.
There were rumors swirling in the market about a hedge fund in trouble as well as a large bank liquidating positions to offset losses in financial positions. With debt instruments falling sharply as the Fannie and Freddie situation deteriorates, anyone long that debt could be in serious pain and need to raise cash quickly. There was also a train of thought that some hedge funds were preparing for an equity market rebound by converting oil to cash ahead of the big bank earnings on Thursday.
There was also a rumor that Iran had made a secret offer to settle the nuclear problem. According to TradeTheNews.com an unnamed Iranian official denied the rumor calling it a psychological war. Readers of this column know I think Iran is ratcheting up the war talk and showing video of missile tests to keep the upward pressure on oil prices. In normal times they have a hard time selling their oil and having the price over $140 for light crude also helps them sell their low quality crude for higher prices. If Iran comes out tomorrow with some new ploy to agitate the market we will know for sure this is the case.
Another news item exerting downward pressure was news from OPEC that they cut their demand growth estimates for 2008 for the 4th time this year and saying that demand growth would continue to decline in 2009 as well.
Petrobras said production was back at full capacity and would remain there throughout the rest of the 5-day strike. Initial production declines were minimal and Petrobras quickly resolved the issues.
Traders bought the dip at support at $136-$137 to end the day with a drop of only $6.50 but it was the second largest dollar drop ever in the crude futures. Those futures expire next Monday the 21st so this could also have been some expiration induced rolling of contracts. The key here will be to see if support at $136 holds or will this turn into a major correction.
Keep those stops in place if you want to play in this futures market. It can get ugly in a heartbeat.