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The next oil shock: a stunning plunge in prices?

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Oil prices amazed nearly everyone with how high they went.

Could the next shock be how low they soon might go?

Crude futures in New York fell today for the sixth time in seven sessions, losing $3.51 to $124.44 a barrel, the lowest closing price since June 4.

The government’s report of a larger-than-expected weekly rise in gasoline inventories helped spark the sell-off. Later, the Federal Reserve’s report on regional economic trends indicated the pace of activity had ‘slowed somewhat since the last report’ on June 11. And that last report wasn’t exactly brimming with optimism.

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Oil is down 14.4% from its record closing high of $145.29 on July 3. But given how many times traders and analysts were wrong in calling the peak over the last year -- $90, $100, $120, $130 -- there’s a natural reluctance to believe this time it’s for real.

‘We’ve see this movie before,’ said John Kilduff, senior vice president of risk management at trading firm MF Global Inc. in New York.

Still, he said, ‘Things are a little different this time because of the economy.’

Gasoline demand is shrinking in the U.S. as consumers retrench. Business conditions have deteriorated in Europe. Even in China economic growth has slowed this year.

Record energy costs ‘are destroying demand’ for oil, said Peter Beutel, head of energy consulting firm Cameron Hanover Inc. in New Canaan, Conn. ‘Prices are way too high.’

He say it’s still conceivable that oil could quickly run to $170 a barrel if a major hurricane hit oil and gas fields in the Gulf of Mexico, or if Israel or the U.S. attacked Iran. But barring a catastrophe, Beutel says, there’s nothing stopping oil from retreating back to $80 just based on economic fundamentals.

And the mad rush to $145, as speculators poured into the market since March, could ensure that the current sell-off also turns into a mad rush to exit the market, some analysts say.

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Why? Because speculators are only interested in playing the price trend, whichever way it’s going, said Larry Young, senior trader at Infinity Futures in Chicago. ‘You can make money just as well on the short side when the price is retreating,’ he notes.

The next big test for chart-watching traders is the $121-a-barrel level, Kilduff said. If the price breaks through that mark, look out below, he says.

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