Crude Drifts Lower As Volume Drops Out

Crude futures drifted lower Monday amid light volume as trading was halted for clients of MF Global, one of the market's largest commodity brokers that filed for bankruptcy Monday.

Volume was less than half of normal levels, with fewer than 300,000 contracts traded compared with the 200-day moving average of nearly 660,000, as exchanges informed clients of MF that they would be limited to liquidating positions and otherwise unable to trade until they moved their accounts to other brokerages.

Brokerage firms such as MF provide vital "clearing" services for the markets, acting as escrow agents of sorts to match orders, handle payments, and execute and settle trades. The firm counted many major hedge funds and commercial hedging clients among its customers. The chaotic process got under way shortly after the opening of the market in New York on Monday, frustrating traders with untold delays as they processed papers to move accounts and positions elsewhere.

"I'm unable to trade," one trader and client of MF said, on the condition he not be identified. "Nothing can go in or out of your account until it moves over to another clearinghouse, and that is a function of paperwork, begun during the trading day, which is not the way to do it."

Officials with CME Group, the exchange which oversees the Nymex crude future contract and other energy-related futures and options, began notifying traders of their decision shortly before MF's bankruptcy was announced. The only firms able to continue trading were those that already had other brokerage accounts open with other firms.

"This illustrates why it might be a good idea to do that," said Tim Evans, an analyst with Citi Futures Perspective.

MF filed for bankruptcy Monday morning after it failed to reach a deal to sell itself over the weekend. The firm, twisting under the weight of a $6 billion bet on distressed European sovereign credit, saw its shares plummet last week after a surprise quarterly loss and the downgrade of its credit rating to junk status.

The firm was one of the world's biggest brokers of commodity futures and derivatives, and analysts were trying to sort out how much of the day's missing volume was due to its customers' inability to trade. It was a day when trading may have been light anyway--the end of the month, ahead of a week of major news including Fed policy updates and new employment data--but still, the large amount of missing volume led some to believe MF's collapse was having a major impact on the market.

"At least half the volume has been taken out," said Carl Larry, head of research and derivatives at Blue Ocean Brokerage. "This is not a fly-by-night firm. It makes a big difference here."

Still, to the extent the market was still moving, volatility was low and prices were little changed. Light, sweet crude for December delivery settled down 13 cents, or 0.1%, at $93.19 a barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange settled down 35 cents, or 0.3%, to $109.56 a barrel.

Analysts said the primary driver of prices in the market Monday appeared to be currency concerns, as Japan intervened to weaken the yen, which strengthened the dollar and undercut the value of crude. Oil falls as the dollar rises, because the dollar-denominated commodity becomes more expensive for holders of other currencies. Crude futures were also following U.S. stocks, which moved lower as well.

"It's a little bit of giveback after last week's big rally," said Tom Bentz, the director of BNP Paribas Prime Brokerage Inc. "There was optimism built into prices last week. Not a whole lot has changed; the market is just taking a little bit of a breather and pulling back a little bit."

Front-month November reformulated gasoline blendstock, or RBOB, settled down 3.93 cents, or 1.5%, to $2.6429 a gallon. November heating oil settled down 1.63 cents, or 0.5%, to $3.0429 a gallon. Monday was the last day of trading for the current month contract for both products.

Copyright (c) 2012 Dow Jones & Company, Inc.


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