Crude-oil futures plummeted to near $80 a barrel today in morning trading as investors sold oil, alongside other commodities, to negate declines in equities. Current prices are at their lowest levels in six weeks and many are wondering if the slide, prompted by the Federal Reserve’s decision to extend debt maturities, will last. There is a sense among some investors that the efforts by the Fed, while driving up inflation, are unlikely to boost the economy or the demand for energy.
Even with slightly abbreviated domestic demand, there remain international factors and supply limitations that will potentially keep oil from falling beneath a certain level. Chinese manufacturing data does show slightly slower growth, but with an economy still expanding by over 9 percent per year, the drop off in oil seems dramatic in relation to the levels in the report. Many analysts agree that the price of oil generally trends back to around $90 a barrel, only sliding below it or above it for short periods. Given the sharp depletion in the current price of oil and the bargain buying oil looks as though it could be appealing on either a long or short term basis.
The knee jerk reaction to the changes caused an immediate and dramatic decline. A reversal, at least in some capacity, can be expected at a certain point when investors become unwilling to sell for less than they paid and bargain buyers snap up oil and its weakened levels.
The oil sector is trading at a close to 30 percent discount to its net asset value and its difficult to maintain those levels considering, unlike many other commodities, oil is in finite supply and is relied upon as the world’s most popular energy source. Today’s comment from the Federal Open Market Committee regarding the “significant downside risks,” of the U.S. economy spooked equities and in effect, in order to meet margin levels, investors also sold off commodities.
The current levels though appear too attractive for investors to stay away for long.