Why did crude oil fall so sharply today?

The sharp decline in the price of crude oil today was simply a "technical" adjustment related to the way commodities futures contracts are traded. Commodities futures trade on a monthly basis, with the "front month" getting most of the action and all of the press. The front month is the the first monthly contract that has more than a full month left before it matures. Once a month, the front month runs down to only a month left in the contract, at which point trading "rolls over" to the next month. November was the front month for crude oil through yesterday. Today was the first day of trading the December contract as the front month. There is always tremendous volatility as traders close out positions in the old front month and re-open positions in the new front month. Sometimes they open positions in the new front month in advance of the first day of trading as the new front month, but the pace of that roll-over is never precisely predictable.

Also, some traders are opening "long" positions to bet on rising prices while other traders are opening "short" positions to bet on declining prices. So, part of the decline may simply mean there are more short positions being opened than long positions.

It always takes a couple of days for the volatility driven by the roll-over process to settle down. None of this has anything to do with fundamentals or supply or demand or geopolitical considerations. It is simply a "technical" logistical anomaly.

OTOH, there may also have been traders who recently bought the December contract expecting that it might rise when it bacame the front month due to concern that OPEC might cut production quotas, but then the price declined when those traders dumped the contract today when they realized that their bet had failed, at least for the short-term.

Another factor in the decline is the simple fact that traders realize that the U.S. economy is in a recession and that there is downwards pressure on demand now.

-- Jack Krupansky