Gasoline slump drags oil prices to second big drop

By Gene Ramos and Matthew Robinson

NEW YORK | Wed May 11, 2011 4:03pm EDT

NEW YORK (Reuters) - Oil prices tumbled over 4 percent on Wednesday after an unexpected rise in gasoline stocks amid slowing demand sent prices into a tailspin, triggering a five-minute halt in trade and fuelling the second big commodities sell-off in a week.

The momentum of gasoline's biggest fall in over two years washed across the oil complex and hit everything from silver to copper to the euro. Early losses stemming from weak Chinese industrial output data and gains in the dollar tied to Greek debt woes spiraled through the day, setting off sell-stops.

The abrupt tumble drove oil volatility to its highest close since mid-March as traders struggled to figure out where markets might find equilibrium after diving more than $13 a barrel from their peak just last week.

"We are going to see more volatility until we get a few days of a range," said Carl Larry, Director of Energy Derivatives and Research, Blue Ocean Brokerage in New York.

"We had looked like we were going to move higher, but today's sweeping downdraft has taken all nascent ideas of certainty out of the market."

Unlike last Thursday's precipitous fall that was concentrated in the crude oil market, activity was focused on gasoline, which fell after the first rise in stocks in 12 weeks and as traders reckoned it less likely that flooding would affect refineries bordering the Mississippi River.

Trading of crude and refined products halted after gasoline futures dropped 25 cents, the limit down, tripping a five-minute circuit breaker aimed to calm feverish markets. It was the first time the breakers had been hit since the financial crisis in September 2008.

Gasoline fell further after trade resumed, breaking techical levels. Total volume reached a record 240,000 lots.

Brent crude settled down $5.06 to $112.57 a barrel. U.S. crude fell $5.67 to $98.21 a barrel, after touching as low as $97.50 a barrel.

U.S. gasoline futures suffered the biggest daily drop since September 2008, with the June contract settling at $3.1228 a gallon, losing 25.69 cents, or 7.6 percent. It was the biggest loss in dollar terms since September 2008.

Rising fuel costs this year have fueled calls by U.S. lawmakers to cut down on speculation in oil markets.

Those calls grew louder on Wednesday, even as prices fell, with a group of 17 U.S. senators calling on regulators to immediately crack down on "rampant oil speculation" by hastening planned rules to limit concentration.

STRONG VOLUME, HIGH VOLATILITY

Trading volumes, which have spiked amid the frenzied trade seen over the past week, surged again. Brent trading exceeded 770,000 lots in late U.S. activity, about 72 percent over the 30-day moving average, while trading on U.S. crude futures was about 40 percent over that average.

Oil market volatility rose sharply after the release of inventory data from the U.S. Energy Information Administration, sending the CBOE's oil volatility index out of narrow 2.20 trading range to hit a high of 43.8 percent.

In addition to the surprise build in gasoline inventories, the first rise in stocks after 11 consecutive declines, the EIA report showed a large rise in crude oil stockpiles as gasoline demand continued to trail year-ago levels.

Early pressure on prices came after data showed China's industrial output growth eased much more than expected in April, suggesting the world's second-biggest economy is cooling. Consumer inflation eased modestly to 5.3 percent in April from a 32-month high in March of 5.4 percent.

Crude plunged more than $16 a barrel last week -- down 10 percent on Thursday alone -- with investors weighing factors from the death of Osama bin Laden to the impact of higher fuel and commodity costs on the economies of consumer nations to monetary policy in major economies.

CME Group Inc, which owns the NYMEX, increased margins on Monday amid soaring volatility, and ICE Clear Europe followed suit on Wednesday, creating more downward pressure on prices.

http://www.reuters.com/article/2011/05/ ... me=topNews