Stock markets have gotten their second wind today as the price of crude oil has suddenly plunged more than $5/barrel, briefly dipping below $120/barrel. The Dow momentarily moved into positive territory for the day.
If crude oil continues to drop, it will likely create a stock market rally and possibly bring the U.S. economy back from the brink of a recession. However, with a recovery, the global supply shortfall in oil will eventually lead crude and other commodity prices to rebound just as rapidly as they fell.
Last night, when crude oil rose $1 at the open in the face of Edouard, but then didn't move higher, it appeared to me that this was a sign of crude oil weakness. In a downtrend, even bullish news is often quickly dismissed, and this was a good example of that phenomenon manifesting itself. Instead of prices rallying higher, traders will use these events as opportunities to enter the downtrend and sell into the rallies. I think that's what we're seeing today. All of the news was bullish, but traders have used it as an opportunity to sell the market instead.There may be even more bearish news ahead for the price of crude oil. Negotiators announced this morning that they may be close to a break-through in negotiations that could bring peace to Nigeria, and restore 1,000,000 barrels a day to the world crude oil market. If that occurs, we could soon see crude oil prices well below $100.
