Nearing record high of $112 a barrel, oil prices plunge

Oil prices fell sharply today, pulling back at least temporarily from record levels as investors feared that the financial crisis that forced the sale of Bear Stearns Cos is a sign of deep economic troubles. Oil’s steep decline — falling $4.17 to $106.04 a barrel on the New York Mercantile Exchange — came hours after futures rose to a new trading high of $111.80 on the Federal Reserve’s surprise Sunday move to lower a key interest rate by a quarter point. In the past several months, Fed rate cuts have fuelled rallies in oil prices.

The mass selling today — despite the Fed’s Sunday rate cut, the prospect of another cut at the Fed’s regular Tuesday meeting, and the fact that the dollar dropped to new lows against the euro today — may be a sign that the oil market’s momentum has turned negative, analysts say. “People are saying, well, things are a lot worse than we thought,” said Phil Flynn, an analyst at Alaron Trading Corp in Chicago.

Since oil moved above $100 a barrel last month, a growing chorus of analysts have argued that oil prices are in a bubble. Several forecasters have lowered demand growth predictions for this year, while supplies have grown. “Oil market fundamentals do not support prices at these levels,” said Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC in Stamford, Connecticut, in a research note.

But it remains unclear whether Monday’s price plunge marks the beginning of a longer decline, or a brief profit-taking retrenchment.