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Gasoline Futures- Flash Crash du Jour

The "flash crash" phenomenon seems to be going around.

Last week marked the anniversary of the first flash crash -- May 6, 2010. That was the day some high frequency trading (HFT) algorithms went haywire, sending a slew of large-cap stocks like Procter & Gamble (PG:NYSE) down 30% in the space of minutes.

This year, crude oil experienced its own flash crash on Thursday, May 5, as the futures dropped $10 per barrel in a single day. The move crushed a number of large commodity trading funds, with losses ranging from $300 million to $500 million.

And prior to crude oil's big drop, there was the violent reversal in silver, kicked off by margin hikes and a rush for the exits. These convulsions appear to have spread all across the commodity complex.

On Wednesday of this week, it was time for yet another flash crash du jour -- this time in gasoline futures. Via The Wall Street Journal:

At 12:06 p.m. Eastern time Wednesday, gasoline prices fell to the 25-cent daily limit set by commodities-exchange operator CME Group Inc. That triggered a five-minute trading halt for gasoline, crude oil and heating oil.

Trading resumed with a 50-cent limit for gasoline. Prices stabilized, but gasoline ended down 25.69 cents. On a percentage basis, the decline was the steepest in more than two years.

The catalyst? A U.S. Department of Energy report showing an unexpected buildup of gasoline stockpiles. With supply tightness less than expected, gas prices (at least in the futures) went into freefall.

Refiners were hit by the move, as the "crack spread" -- a measure of price difference between crude oil costs and refined product -- narrowed sharply. (For refiners, the wider the spread the better, as it increases profit margins on what they sell.)

Sitting opposite of refiners were airline stocks, the prices of which jumped sharply as the crack spread came in. For airlines, less supply tightness means lower fueling costs. (That can make a big difference: Jeff Smisek, the CEO of United, says his airline spends $25,000 per minute on jet fuel.)

And what does this mean for markets? On a broader level, it's a mixed bag.

On the positive side: If the price of gasoline stays low, that relief should slowly make its way into consumer's wallets (via lower prices at the pump). Corporate profit margins would also catch a break, as transport costs are a meaningful expense for so many companies.

On the negative side: For some time now, crude oil and the stock market have walked hand in hand. Equity prices and crude oil prices have been correlated to the upside, with higher oil indicating a "risk on" willingness to speculate.

Furthermore, the energy and commodities bull market has been a staple for many money managers, including pension funds. A further retreat there could lead to pain, and possible blow-ups.

In an even darker assessment, various Middle East oil producers have leveraged themselves to higher-priced crude.

Saudi Arabia, to cite the biggest example, has dug deep into its pockets in a hope to quell unrest. The Saudis have pledged countless billions to keep the population calm, and those promises are stretching budgets. It is estimated that the Saudis may need an average oil price of $100 per barrel just to keep from running into the red.

Rex Tillerson, the CEO of Exxon, thinks that is much too high. Said Tillerson to the Senate Finance Committee this week:

When we look at it, it's going to be somewhere in the $60 to $70 range if you said: "If I had access to the next marketable barrel, what would it cost?"

Exxon, of course, has political motivation of its own to talk down the oil price. With consumers and politicians blaming the oil majors for price gouging, it is in Tillerson's interest to shift the blame to speculative interests (while continuing to rake in huge profits).

Still, we have reached a funny place when it comes to crude oil and other commodities. Further price declines threaten the financial health of many market players, and potentially even large producers like Saudi Arabia. Yet further hikes in price put us near a "tipping point," where the cost of raw materials slows down the global economy.

With the U.S. dollar in a surprise uptrend, this leaves commodity speculators -- many of them leveraged long -- caught in the middle. It is no longer safe to assume that commodity prices can only go in one direction, up, or that buyers will always overwhelm sellers. For that reason we can probably expect more commodity-related "flash crash" instances in future.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.