Oil down sharply following bearish inventory report

Prices had been moving steadily higher so far in 2009, as concerns over instability in the Middle East between Israel and Hamas, as well as concerns over the Russian/Ukranian situation, which has halted gas deliveries to Europe from Russia through the Ukraine.

While geopolitical influences will always impact oil prices, today we are seeing clear signs that the recent rally was perhaps a bit over done, and traders are now going to start to focus on the actual fundamentals of the market, and not focus so much on speculation over what may or may not happen. And the bottom line is that demand is just not as strong as analysts were expecting.

Not all traders were too optimistic about the market before today's report anyways. As Joseph Lazzaro pointed out in an article earlier today, some traders have started to look to store oil at sea and are waiting until prices bounce back a bit before bringing their precious crude to market. You can read more about traders hoarding their oil at sea in Joseph's story about the bearish implications of such actions.

What should we expect to see in the days to come? According to senior Mark Pervan, senior commodity strategist with ANZ Bank, the recent run up in price was too extreme and Mr. Pervan stated that he would not be surprised if we saw prices drop by roughly another 10% in the days to come to get down closer to $40 a barrel.

In the short term, a lot is going to depend on how things play out in the ever turbulent Middle East as well as the Russian/Ukranian standoff, but these are just short term catalysts to the market. In the long run, it is going to take a lot more to get prices moving higher. The overall global economy still remains very weak, and until that starts to turn around, prices should remain relatively stagnant down around the $40 to $45 level.

Even the most optimistic analysts don't expect to see things start to improve until the latter part of 2009. Let's hope that they are right!

For an idea of how oil has been trading lately, let's close with a current chart:



Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor's Observer.