BS:Why did oil prices drop 10% in one day? Reuters finds no smoking gun
By Rosland Gammon on May 18, 2011 in Best Practices, Energy | Utilities | Mining, Featured, Rosland Gammon
These oil workers were photographed by Flickr user kylemac.
During my Bloomberg days on the GA desk, stock drops meant finding someone who could tell us why. But when oil dropped by 10 percent on May 5, there was no clear-cut answer. Never before had crude oil fallen so far in a single day. So Joshua Schneyer at Reuters went on a hunt. He writes:
“In interviews with more than two dozen fund managers, bankers and traders, no clear cause emerged for the plunge in price. Market players were unable to identify any single bank or fund orchestrating a massive sale to liquidate positions, not even an errant trade that triggered panic selling, as seen in the equities flash crash last May.
Rather, the picture pieced together from interviews on Thursday and Friday is one of a richly priced commodities market — raw goods have been on a five-month winning tear over all other major investment classes — hit by a flurry of negative factors that individually could be absorbed but cumulatively triggered a maelstrom.”
From there, Josh gives us some information on how the oil market is supposed to work and what happened to affect that smooth-running machine.
These oil barrels were photographed by Flickr user L.C.Nottaasen in Norway.
Today’s Tip: When covering markets, if there’s no cataclysmic economic event to explain a drop, look into some of the more esoteric reasons and follow the money, Josh says.
“In a busy real-time newsroom, we like Occam’s Razor, which assures us the simplest explanation for something is often the correct one,” Josh says. “But when the reasons aren’t clear, there’s a temptation to chalk up price moves to profit-taking, or ’short-covering,’ or mounting signals that the economy is improving/weakening. In reality, there’s ALWAYS more to discover and write about if you have the time and the sources to talk with.”
Josh says the team of reporters making calls considered a hedge fund failure, a rogue trader incident, haywire computer algorithms, a big rebalancing of macro funds as U.S. quantitative easing winds down, and other scenarios. They talked to people in a position to hit buy or sell, and the brokers and bankers who act as middlemen. All of the sources had different theories and were curious about what or who had set off the rout, he says.
“It’s sometimes tempting to think there’s one firm behind an unusual market move, a few masterminds, and a bunch of other suckers. Admittedly, that would make compelling copy, and sometimes it really happens,” he says. “But we didn’t walk away from this story thinking that. Nobody single-handedly ‘goosed’ oil that day.”
