Rapid Crude Oil Sell-off: What's Going On?

Yesterday afternoon, oil prices fell by more than $4 per barrel. Benchmark crude fell 2.4 percent – down $2.38 – and closed at $96.62. That's the most crude has fallen at one time since July 23.

Investors are confused as to why this is happening...it doesn't make much sense given the overall market conditions and QE3 outlook.

According to Izabella Kaminska with Financial Times, there are three plausible explanations as to why oil has fallen so drastically this week in lieu of big gains last week: fat fingers, SPR talk and general illiquidity due to the Jewish New Year.

Traders speculated whether an “errant trade or another rumor about a release of oil from the Strategic Petroleum Reserve was to blame.”

Is the ECB responsible for yesterday's big dip? The following report from Reuters suggests that may very well be the case:

(Reuters) – The ECB could cut its main interest rate, put its deposit rate into negative territory and offer banks a new round of ultra-cheap funding, policymaker Luc Coene said on Monday, adding Spain’s borrowing costs would soar again without a support programme. 

ECB Governing Council member Coene said it was “very unlikely” that the ECB would ever engage in outright quantitative easing but that the central bank had a number of other options to ease monetary policy.

“You could further lower interest rates, you can also try to extend the LTROS to some extent, you can also do some LTRO with private credit claims as collateral,” he said during a seminar organised by the European Economics and Financial Centre.

Still, it's rather interesting that negative interest rates would have such adverse effects on crude prices specifically; much more-so than any other market.

Emad Mostaque from Religare Capital believes that “Brent in particular moved to a level of backwardation not justified by any supply disruption with the back end of the curve over $20 below the front end compared, for example, to the Libyan disruption last year, when the whole curve moved up.”

Additionally, Mostaque asserts that this sort of volatility is no longer surprising in today's “dysfunctional market structure.”

Perhaps someone who is fully up to speed on how those negative interest rates would affect the market and had enough power to directly influence the market in such a way is behind the sliding price...

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