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Automated sell orders had huge influence on price. NEW YORK -- Last week's dip in oil prices, which were down nearly $13 a barrel to less than $110 a barrel at one point, was due to a number of negative factors that individually would have been absorbed by the commodities market, but cumulatively triggered the decline, according to a Reuters report.
The news organization interviewed two dozen fund managers, bankers and traders and found no one direct cause for the price plunge. "It was a domino effect," Dominic Cagliotti, a New York-based oil options broker, told Reuters.
Affecting the price were: "prominent cheerleaders" turning bearish, a bit of economic data, cheap money from the U.S. Federal Reserve ending by July and a lessening of political risk. However, the way computers turned readjustment of positions in the market may have had more influence, according to the report.
Automated sell orders that were generated as oil prices fell through price points that were pre-programmed in supercomputers pushed a bullish long position in oil, Reuters said.
Machine-led trading probably caused the rise in the total number of open positions in the oil market -- a number that would typically fall in a selloff, the news organization reported. While panicky funds selling oil en masse normally would cause total "open interest" numbers to shrink, as exiting investors closed out contracts, some machines, following the market trend, may have gone further, by dumping long positions and quickly amassing sizable short positions instead, Reuters reported.
"Computers don't care. Momentum just increases until nobody wants to stand in front of it," Peter Donovan, a floor trader for Vantage on the New York Mercantile Exchange, told Reuters.
Some of last week's downturn in prices appears to have been a product of the wisdom of crowd computing than of widespread human panic, Reuters reported.
"We believe the magnitude of the correction appears in large part to have been exacerbated by algorithmic traders unwinding positions," Credit Suisse analysts wrote.
High frequency trading and algorithmic trading accounts for about half of all the volume in oil markets, the news organization noted.
In Texas, the oil industry was stunned by the sudden drop, which played havoc with their pricing models. "It was nuts. Our risk management guys were tearing up their spreadsheets," a major U.S. independent refiner, told Reuters.