A confluence of events drove oil prices to an all-time high of $135 last week. At the time, I identified this move as a potential market top. Since then, there has been another confluence of events that seems to have spurred a run for the exits by traders. This confirms to me that last week’s high does represent a market top.
Today's headlines are fomenting the decline: Increased production from Saudi Arabia and Kuwait; quantifiable declines in demand in U.S. gasoline and diesel fuel demand in the United States, and an impressive rally in the dollar have generated profit-taking and reduced concerns over the sufficiency of supplies. There was almost a herd mentality that emerged last week that prices would proceed inexorably higher, and that is almost always a bad sign on Wall Street.
In my research note after the price record was set, I remarked that my inner contrarian was restless. The parabolic move higher in crude oil prices was punctuated by a revelation from the International Energy Agency that investments in future supplies was not keeping up with expected demand. The remarks were ill-timed and extremely premature, but the market surged on the suggestion.
Today, the market has ignored a substantial decline in U.S. crude oil inventories. Margin requirements are being raised once again by the New York Mercantile Exchange, and the ICE exchange has apparently agreed to U.S. government oversight of its crude oil futures trading.
This regulatory move comes on the heels of significant congressional action that seeks to re-regulate energy trading. The heat is clearly on, and this may be causing some investors to get out of the way of further onslaught.
While the landscape is littered with analysts who have tried to call a top in oil over the past several years, this time it may be for real. Consumers confounded the market with their resiliency at the pump, until now. The breaking point has been visited upon the consumer, and the reaction is real.
The market remains vulnerable to myriad supply disruption possibilities, but with the dollar rebound, a decent upward revision in U.S. GDP, and a seeming bottom in place for the equity markets, the attraction of the energy markets and commodities looks to have ebbed.
John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.