It's been quite a week for oil investors. The price of crude oil fell 11% between Monday and Thursday, down from an 18-month high on Monday. The situation was exacerbated on Thursday, when, in the wake of the steepest intraday market sell-off on record, prices fell 3% to close at $76.44 per barrel. While the meltdown and partial rebound were dramatic, the dip was an even more so for oil investors given that prices had already taken a hit for the week. Still, some analysts say the price drop is temporary and it would be unwise to read too much into it.
"I think what happens is that you have so many electronic, algorithmic programmed trades, and the market tanked, and that triggered a lot of programs clued into crude. There was no news. You had thin liquidity, and you had a major, major panic, so that just spilled over," says Stephen Schork, president of the Schork Group and editor of energy industry newsletter The Schork Report.
Even if it was a bizarre fluke, many analysts and economists say it's high time that oil prices fall back down to Earth. Some believe that the premium prices crude has been commanding could be detrimental to the world economy. In March, for example, the International Energy Agency warned that the overheated oil market could threaten any sort of recovery.
"Oil at $85 per barrel just doesn't make any sense in this economy," says Schork. "Mind you, oil in the $70s is still too expensive. Oil should be closer to $65 per barrel than $75 per barrel." Schork estimates that a $65 per barrel price for crude loosely translates to gasoline at $2.60 to $2.75 per gallon. That's rather cheap, Schork says, but given that there are 15 million unemployed Americans, it's likely in line with the general economy.
Trying to Read the Texas Tea Leaves
Still, it's not clear whether lower prices will last. Early Friday afternoon, oil prices were down $1.74 at $75.37 even though they initially rose in early trading. At least one analyst thinks the oil prices could be poised to bounce back, regardless of the free fall in Thursday's session.
"Hard sell-offs usually end in about three days," says Mark Schultz, chief analyst of Northstar Commodity. "You should see some stability start to form."
The broader commodities market, on the other hand, could be taking its cue from stocks, even if there isn't normally a correlation between the markets. Assuming trading stabilizes in Friday's session, the commodities market could follow suit, says Schultz. If stock trading is volatile, Schultz says he wouldn't be surprised to see another late-day sell off on Friday.
"If there is more downside pressure on the stock market, then I think commodities will decline," says Schultz.
In Thursday's trading, commodities took a hard hit -- the CRB Commodity Index fell 2%, and well before the afternoon panic, wheat and corn prices in Chicago trading were down, largely on concerns about the U.S. dollar.
Right now, though, Schultz says one of his primary concerns is beef -- if European markets don't stabilize, demand for beef will likely decline given the inflated prices.
"Supply is tight in the meat sector. Prices are at high levels right now, and if the global economy starts hurting, then you'd see declines in demand and high prices," says Schultz.
Investing Like Warren Buffett
Learn from one of the world's best investors.View Course »