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Flash Crash Takes a Bite of Natural Gas
By EconMatters
After infecting the stock market last May and hit the precious metals market, silver in particular, primarily due to raised margin requirement, flash crash has now taken a bite of the natural gas market as well.
FT.com reported that the Nymex (New York Mercantile Exchange) floor had been closed for more than five hours on the evening of Wednesday, June 9 when July natural gas dropped 8.1%, to $4.510 per mmbtu (See Chart). The fall also triggered a 20-second trading pause for the August Henry Hub futures contract.
Natural gas is one of the very few commodities that actually moves more inline with supply and demand fundamentals since it is trapped within the producing region and is not even affected by dollar currency movement that much. Therefore, while there are many geopolitical factors that could explain certain wild swings in crude oil, pretty much none of them could be applied to natural gas.
More curiously, coincidence or not, this flash crash took place in the confluence of the following market events this week, which most likely should encourage the long natural gas trade:
- The International Energy Agency (IEA) said on Monday June 6 that it expects global gas demand to overtake coal before 2030, and come close to oil around 2035, and that global gas demand to grow by an average of 2% a year, which will end the current gas glut by 2015, by when demand would begin to outstrip supply.
- On Thursday, June 9, Exxon Mobile announced that it bought two privately held natural gas company--Phillips Resources and related company TWP Inc.--for $1.69 billion last week, adding about 317,000 acres for exploration in the Marcellus shale basin.
According to FT, Nymex owner CME Group said the sudden price drop was due to “news of one of the largest oil and natural gas discoveries in the Gulf of Mexico.” It is true that the flash crash happened hours after the news that Exxon Mobile has made two big new oil discoveries and a natural gas find in the deepwater Gulf of Mexico. Nevertheless, it will probably take a year or more before the new gas discovery comes into production, and traders typically look things at a time horizon of a few months, instead of something so far removed.
At the same time, some market players blamed the overnight drop on computer algo trading, while other says it is a 'fat finger'..... again (probably the same one from last May?), and that there could be another round of inquiry or investigation by the Commodity Futures Trading Commission (CFTC) and the Exchange.
Henry Hub price has risen 15% in the past month, close to a one-year high of $5 per mBtu, on warmer than usual weather and prospects for future LNG exports. While fat finger or computerized trading may very well be the cause behind the sudden crash, it looks more like technical profit taking by some big player(s).
Natural gas prices in the U.S. have been stuck in a rut due to ample supplies from the shale gas boom, as a result, many players have increased their short positions on natural gas. According to CFTC, as of May 30, commercial participants, who accounted for 64.7% of open interest, held net short positions, while non-commercial participants, who accounted for 24.5% of open interest, also increased their increased their short positions by 7.1%.
That means, if the same player(s) change their positions, instead of a flash crash, we probably will see a natural gas prices spike by short squeeze. This is just one characteristic of a modern day commodity paper palace where a majority of the trades does not take physical delivery.
For now, natural gas for July delivery has recovered and settled up 1.8%, at $4.757 a million British thermal units by Friday, June 10. Futues rose 1.1% for the week.
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The feedback loop of the algo was really something to behold. But what is Congress getting upset with now? Bitcoin. It never ends.
This event cannot be considered a "fat finger flash crash". You can analyze how it went parabolic upwards and then crashed by following the trading.
Weather forecasts can have instant repurcussions in natgas. Particularly unexpected changes.
There is plenty of natgas, so fluctuations in immediate or perceived demand rule the day and the moment when forecasts arrive.
Yeah, right. This drop had nothing to do with the strange trading pattern noted by Nanex and posted by TD. Strange that NG also saw a new high within 24 hours of the 8% crash. Thank you for posting for now I know that EconMatters postings should be regarded as totally irrelevant.
The algos simply look at who's long/short and take(with brute force) the other side forcing the most people to loose money
Any1 (who's not grand master) ever tried to play chess against a computer ? well try than you'll know what are your chances against the market algos
Maybe the point should be that it is a "makeshit" market with no floor under it. Only manipulation controls real price.
Nat gas again eh? Last time it was the anomalous technical charts, algos going berserk. I know that here in the Pacific Northwest the hydro system is full to overflowing and they are releasing water from the Columbia River system at a record rate, so much so that many windmills have been idled, perhaps since electric generation is one of the largest uses for gas that is also being impacted by the excess water related electrical generation. Utilities here have raised household rates 21% in two years lowering demand, at the same time they are generating more hydro power than they can sell.
Why the need of labelling each move a flash crash? NatGas just move 0,30 from the close, and as huge as this move may seem to some newbies, if you stick around watching this market you will see that this is more often than you think, even as 2010/2011 has been pretty quite times on natgas market.
Just another confirmation that the game is rigged. When you control the printing press, you control the world, and if you don't you eventually will.
This is a test. How self serving are you? Will the elite destroy everything and everybody so they can have the spoils? Are they buying you? By acting like them in our daily mundane lives we choose.
Did you read any of the extensive coverage on this topic posted on Zero Hedge, which also broke the story?
What's your point?
Whether ZH broke the story with 'extensive coverage' is irrelevant to this post as it is the first commentary I did regarding this odd event.
If you have something to say, you know where to reach me.
The point is that there is a totally different explanation for the flash crash if one actually analyzes the trade pattern that invoked it that has nothing to do with goalseeked news by the mainstream media (which attempts to neutralize the impact of a broken market with some makeshift story) to validate an 8% drop that was recovered within seconds.
You can read more of what really happened here, here and here.
To be clear, I did research various sources, including zh coverage, before writing this post, and I believe the post, although partly quoted mainstream media, basically rebutted the claimed causes, while pointing to possible market manipulation, albeit from a diffeent perspective than the tading pattern.
At the end of the day, big players can pretty much muscle almost any markets to whichever way that suits their need$, algo and fat finger notwithstanding.
Many thanks TD for so eloquently illustrating just how deep in their ass some have planted their heads.
Psssssst.
I have inside information that says the original "Flash Crash" was actually caused by the mutual fund manager, Waddell and Reed, when they set off a computerized algorithm to sell 75,000 E-mini futures contracts.
Shhhhhhh. This is top secret. We're through the looking glass here people.
TD : I find this dialogue surrealist. You invite this guy to post at ZH which you run without checking out if he is up to speed in an area where you having top expertise?
Hey, At Roland Garros they have qualifying rounds for those not in the top 100 ATP ranking...just saying... Besides he doesn't even read what you have posted on same subject...lèse majesté!
Great Point that should not be forgotten. 'Broken Market' is what we have. As the hedge funds say now, "Risk Off".
Perhaps his point is that there might be something in that ZH article on NG you would find important?