Amid a sell-off, oil market may have to stop believing its PR

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Did record oil prices just get talked to death -- or at least into a short-term coma?

Crude oil futures slumped 3.4% today, the biggest decline in two months, after weeks of headlines suggesting that energy prices were in an unstoppable upward spiral.

‘We do know that oil has been the most talked about thing recently, and that things often top or bottom when their moves have attracted a lot of attention,’ said Brent Luce, a portfolio manager at investment firm CapitalWorks in Cleveland.

Even by their own wacky standards, commodity markets in general had a wild session -- and the end result had to give consumers a reason to be hopeful, and bullish speculators a reason to fear. Gold, silver, copper, wheat and other commodities followed oil sharply lower.

Oil futures in New York shot as high $133.12 a barrel early in the session, then quickly sank to $126.11 before finishing the day at $126.62, down $4.41 from Wednesday. It was the biggest one-day drop for crude since March 19.

Traders said the market initially reacted bullishly to the government’s weekly data on oil inventories, which showed a decline in supplies. But William O’Neill, a veteran commodities analyst at Logic Advisors in Upper Saddle River, N.J., said the supply shortfall was quickly explained away by delays in Gulf Coast tanker off-loadings because of fog. So supplies there are expected to rebound soon, he said.

Meanwhile, the government said U.S. gasoline demand averaged 9.3 million barrels a day in the four weeks ended May 23, down 0.4% from the same period last year -- another sign that record prices are crimping consumption (surprise!).

‘It’s gotten to the point where people aren’t driving,’ said Phil Gotthelf, a commodities expert and head of Equidex Brokerage Group in Closter, N.J.

A rally in the dollar against other currencies also undercut commodities today, because a stronger dollar would be anti-inflationary, giving speculators less reason to buy commodities as inflation hedges.

Finally, there was a political element to the sell-off in oil: Amid rising ire in Washington about the role investors and speculators are playing in helping to drive crude to record heights, the Commodity Futures Trading Commission disclosed that it has been investigating that aspect of the market since December -- raising the possibility of regulatory action to curb trading activity. (See story here.)

Whatever you may think of the global long-term supply and demand situation for oil, in the short run the market just looks to have gotten way too excited about itself, O’Neill and Gotthelf said.

‘I’ve advised people to cull their long positions or get entirely out of the market,’ O’Neill said.

Gotthelf, who said he has been shorting some commodities recently, said veteran market players know all too well what can happen when bull markets reach wretched excess.

Historically, ‘The most spectacular trends in commodities are the price implosions,’ he said.