China continues its slide with a 9 percent decline taking US equity markets with it as the Dow and S and P are locked due to the 5 percent circuit breaker being tripped going into the New York open. The illiquidity of the markets is making for the single worst day in stock market history from a percentage and actual price movement perspectives. This is the exact danger that is evident in the markets when machines are igniting price discovery in this manner. The circuit breakers for the US equity markets will produce a trading halt if certain percentage declines are achieved. For the pre open a 5 % decline will force a market halt, which we saw this morning with the major US indices. For the US session, 7%, 13%, and then 20% circuit breakers are in effect. Currently the market has rebounded sharply to stave off the decline yet remains very vulnerable with the S and P hovering around 1900.
What does all of this mean for the energies? The crude is down to 7 year lows as demand for fuel is being questioned with the rout in equity markets. The question really is how much lower can the perceived lack of demand, real or not, drive the price action. Considering the Fed National Activity index released this morning showed July to have been a robust economic month for the US, it would seem that this selling based on China demand may certainly be overdone. Yet it is difficult to take a long stand in the face of these historic moves. From a purely fundamental standpoint, the data would suggest that the WTI crude and the refined products should be relatively stung buys somewhere in this depressed level. However, the nature of the market when sitting on the lows is to continue testing those lows until there is a strong failure indicating a key reversal. That obviously has not occurred just yet but a technical trigger of this nature coupled with some stability in the global equity picture is most likely what will be needed to turn around this bearish sentiment.
The same observation could be made for natural gas. The commodity squeeze in general is more to blame for the lower pricing than the actual particular fundamentals for the given contract. Natural gas inventories have been bullish featuring fewer supplies than anticipated for 6 out of the past 7 weeks yet we are significantly lower currently. It does feel as if the launch higher if the same technical criteria and general market stability were to be achieved could be significant.